The famed bank robber Willie Sutton was reported to have said, "I robbed banks because that's where the money is." The quote has survived, because although it's not a fair way to make money, it is accurate. Robbers and villains have been using this tactic since banks were invented.
On 11 Jan 08, the city of Cleveland, OH, made history by suing 21 banks for losses that some city residents have suffered in the subprime crisis. The basis of the lawsuit is that, by providing money to borrowers that was not subsequently paid back, the banks created a "public nuisance," harming the entire city. And Cleveland is not targeting just the banks that made the loans, but also the investment banks who bought the mortgages in bulk (a standard practice) and don't even have lending arms. In an attempt to justify the suits, Cleveland's mayor Frank Jackson equated home loans to drugs -- implying that banks were no better than drug dealers. If you listen carefully, you can hear bright, financially minded people asking "Who is John Galt?"
I grew up in Cleveland and spent most of my first 25 years living and (more often) dying with the Browns, Indians and Cavs. I love the city, I started my business in Cleveland, and most of my family and friends still live there.
But my love for Cleveland is not blind. The taxes in Ohio and Cleveland have been on the rise for the past 40 years, and they helped drive my business out of town to Austin, TX. The property values dropped, the manufacturing jobs left and little new came to town. There was the famed "brain drain" where smart people left town for other cities that would feed their entrepreneurial spirit. (For more info on this, read Richard Florida's The Rise of the Creative Class.)
Certainly, some aspects of Cleveland's decline were out of its control. But many more weren't -- and the sad state of that once-great city must be placed firmly at the feet of its astonishingly poor political leaders. Indeed, Mayor Jackson is only one of a long list of career Cleveland politicos that exhibit little, if any, economic sensibility.
Yet even by Cleveland's standards, this lawsuit is breathtaking. Sure, the Mayor is just playing politics by pandering to his citizens and telling them that their woes are not at all their fault. (And indeed many are not.) But apparently no thought has been given to the broader ramifications of the theory the Mayor is advancing here. Under his logic, a depositor in a local Savings and Loan would be liable for facilitating that institutions failed loans. Apparently, the Mayor believes that local mortgage lenders really wanted to pay tens of millions of dollars in exchange for a host of foreclosure actions, and that institutions like Bank of America really wanted to purchase billions of dollars in mortgage securities that they anticipated having to write down later. Anyone who knows the first thing about mortgage lending knows that no lender wants to foreclose on a property.
More significantly, from now on, what bank in its right mind would want to lend money in Cleveland? Indeed, one can soon imagine the day when this Mayor or his successor will seek to sue these very same banks for refusing to lend to Cleveland residents. And who loses? Middle-class Cleveland residents who can no longer access loans. Mayor Jackson may earn short-term political points with his constituents by equating mortgages to drugs, but in future years, those same constituents might miss having access to home ownership.
Mayor Jackson is going after the banks because they have money, not because they are at fault. Ignorance of economics has consequences, and when the ignorant happen also to be political leaders, the consequences can be severe. Just look at Cleveland.