It’s Not Such a "Wonderful Life" This Holiday for Homeowners

It’s that time of year again.  The bird has been stuffed and consumed, gifts selected and maybe even purchased, the halls decked, wreaths and lights hung and strung, and the channel guide anxiously scanned for Christmas classics.  The 1946 film It’s a Wonderful Life, starring Jimmy Stewart, Donna Reed, and Lionel Barrymore, should resonate with particular potency this year.

The movie, set in a fictional town in upstate New York during the Depression and World War II, pits good against evil, the promise of the financial system against its proclivity to ruthlessly exploit the little guy.  In one poignant scene, George Bailey (Stewart) and his new bride Mary (Reed) quell a depositor run on the Bailey Building and Loan Association by throwing their own equity, in the form of their honeymoon cache, into the breech and by reminding depositors that their fates were intricately intertwined.  Later in the movie, George leverages the goodwill (actual goodwill, not a mere accounting entry) he and his savings and loan, the consummate good bank, had created over the years to raise enough private funds to thwart another liquidity pinch and related regulatory probe.

That may sound a little far-fetched, but U.S. financial history is suffused with good banks like Bailey Building and Loan.  The Merchants Bank of New Bedford, Massachusetts, for example, was a good bank in the sense that it helped its local community to transition from a whaling port to a textile and light manufacturing center without ever seeking a public bailout.  Chartered in 1825 and merged with a bigger bank in 1967, the Merchants Bank successfully weathered the Civil War, both World Wars, the Industrial Revolution, umpteen financial panics, 32 recessions, and the Great Depression.  Its dividends were never spectacular but always reliable.  Borrowers and depositors seem to have genuinely respected the institution, likely because its stockholders, a mix of regional business leaders and long-term investors, closely monitored the directors who, in turn, kept close tabs on the president and cashier.  The interests of the different parts of the bank were one, and one with the local community on which it depended.

But It’s a Wonderful Life reminds us that not all banks are so constituted.  The twisted old capitalist and banker Henry F. Potter (Barrymore) stoked the run on Bailey’s thrift by offering depositors 50 cents on the dollar for their “shares” (deposits).  He also caused the second, climatic crisis by stealing some of the thrift’s cash.  Unlike Bailey and good real world banks like the Merchants Bank of New Bedford, Potter saw his community as a resource to exploit for his own gain.  By eliminating the building and loan, he would (viewers learn through Bailey’s guardian angel) monopolize both the local banking and real estate markets and use his market power to grind the faces of the poor.

In a holiday Hollywood movie, Potter never had a chance (though interestingly the movie never punishes him for his actions).  The real world, however, has recently proven itself not so wonderful.  Some large banks make us pine for Potter, who for all his cruelty never received a bailout and in no way caused the Depression he tried to profit from.  Those large banks enticed people to borrow who had no business borrowing and then carried the practice to such an extreme that they caused a financial crisis of stunning severity.  The big banks then took billions in taxpayer bailouts in the form of TARP-preferred shares and secret, profitable emergency loans from the Federal Reserve.  And now some of them have the unmitigated gall to seek deficiency judgments against hardworking Americans unfortunate enough to have to sell their homes to take a new job, help aging relatives, or attend school.  The banks shield themselves from legal counterattacks by hiding behind legal doctrines like “holder in due course,” which gives preferential status to buyers of the same securitized mortgage backed assets that fomented the crisis.  It’s enough to make some people to take up urban camping!

If judges and policymakers don’t stand firm against these aggressive bank tactics, the economy will continue to suffer from weak aggregate demand and human capital immobility.  (Continued high rates of unemployment mean that many lower skilled workers will relocate to obtain employment.  Highly productive employed workers, however, are foregoing national and regional job searches for fear that they will not be able to sell their homes quickly or for anything like what they paid for them.)  If the housing market remains illiquid, and it must so long as old debts hang over the heads of millions, America will continue to turn into a Pottersville overrun by crime, pawn shops, and sundry sleazy “business” establishments.