FDIC Demonstrates the Fundamental Cause of the Financial Crisis

If there were ever any doubts about why we’re in the current financial crisis, this should destroy them: FDIC Criticizes Massachusetts Bank With No Bad Loans for Being Too Cautious:

A Massachusetts bank that has defied the odds and remained free of bad loans amid the economic crisis is now being criticized by the Federal Deposit Insurance Corp. for the cautious business practices that caused its rare success.

The secret behind East Bridgewater Savings Bank’s accomplishments is the careful approach of 62-year-old chief executive Joseph Petrucelli.

“We’re paranoid about credit quality,” he told the Boston Business Journal.

That paranoia has allowed East Bridgewater Savings Bank to stand out among a flurry a failing banks, with no delinquent loans or foreclosures on its books, the Journal reported. East Bridgewater Savings didn’t even need to set aside in money in 2008 for anticipated loan losses.

But rather than reward Petrucelli’s tactics, the FDIC recently criticized his bank for not lending enough, slapping it with a “needs to improve” rating under the Community Reinvestment Act, the Journal reported. [Emphasis added.]

So in essence, just in case it’s not perfectly clear, this bank is being punished by the FDIC for refraining from the very bad loans that have caused the present financial crisis. The impetus for the FDIC’s actions is the Community Reinvestment Act (CRA), which represents the altruist principle that people have a “right” to own a home, regardless of ability to pay, and that it’s the function of the financial services industry to “secure” this right.

The FDIC spells it out quite clearly:

“There are no apparent financial or legal impediments that would limit the bank’s ability to help meet the credit needs of its assessment area,” the FDIC wrote in the CRA evaluation.

The agency also faulted the bank, which does not have a Web site, for not promoting its loan products enough, the Journal reported.

In other words, there was nothing stopping the bank from giving out the same bad loans as every other bank, and that by its refusal to do so the bank failed “to help meet the credit needs of its assessment area.” The bank exists, according to the FDIC and the CRA, not to return a profit to its owners, which this bank has done admirably, but rather to give out loans in its market to people who otherwise could not afford them. Not only that, but the bank is to be faulted for failing to market itself aggressively enough toward this end, even though the function of marketing is to maximize profits–by which standard the bank’s marketing was successful.

The contradictions are legion here. But most important, just remember this story the next time someone says it’s Wall Street and banker greed that’s caused the crisis, and that only government can solve it.

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