The American Legislative Exchange Council, commonly known as ALEC, is on the defensive. Hounded by the role which their "Stand your Ground" model legislation played in the killing of Trayvon Martin, the group has announced that it is ending its Public Safety and Elections Committee:
“We are eliminating the ALEC Public Safety and Elections task force that dealt with non-economic issues, and reinvesting these resources in the task forces that focus on the economy. The remaining budgetary and economic issues will be reassigned...... “Our free-market, limited government, pro-growth policies are the reason ALEC enjoys the support of legislators on both sides of the aisle and in all 50 states. ALEC members are interested in solutions that put the American economy back on track. This is our mission, and it is what distinguishes us.”
As gratifying as it might be to declare "mission accomplished" now that the committee responsible for "stand your ground" and the voter suppression measure known as "voter id" is no more, the truth is that this is, as Lisa Graves of the
Center for Media and Democracy (CMD),
notes a "“PR maneuver” designed by ALEC “to try to distance itself from its record of extremism.” As embarrassing as ALEC links to these "social" issues are, its record of free market fundamentalism is far more damning if you can get past the jargon to the heart of the matter.
Know this.
ALEC brought us "too big to fail" as the result of the banking deregulation measures it pushed in the states.
Tearing down the Firewalls
Although most of us know the term firewall from its use in computing, its origin lies in construction. The idea is that by creating fire-proof barriers between different areas in the same building. Thus, just because my neighbor in the apartment next door decides to cook meth, it's far less likely that my apartment will burn down. Long standing prohibitions against interstate banking provide an analogue in the financial sector.
Most of us now know that the 1999 repeal of Glass-Steagall allowed the commercial banks , the kind which offer checking accounts, from engaging in investment activities. However, I would be willing to bet that most of don't know that the Riegle-Neal Interstate Banking and Branching Act of 1994 effectively repealed the ban on interstate banking. And I very much think that the argument can be made that without the 1994 repeal of the ban on interstate banking, Glass-Steagall would never have been repealed, or if it had, the impact of the housing bubble would have been greatly limited by the firewalls existing at state borders.
Let's imagine for a moment what the collapse of the housing bubble would look like if it had occurred in a world in which Glass-Steagall was repealed but the ban on intrastate banking was in place. Understand this, the housing bubble was limited to a small number of states. In most of the Midwest, there was no housing bubble. As this graphic illustrates four states were the hardest hit. (Arizona, California, Florida, and Nevada) If the ban on interstate banking had been in place the impact of mortgage defaults would have been contained to banks in these states meaning that bank accounts in South Dakota would not be placed in peril by mortgage defaults in south Florida. This is an example of that firewall thing we were talking about.
![](http://i85.photobucket.com/albums/k73/ManfromMiddletown/Housing-Map-01-650x475.png)
Where firewalls exist, the ability of crisis to spread from one a small area to others is limited because of the existence of those firewalls. Without firewalls, what you get is something typically referred to as contagion whereby bad loans in south Florida weigh down banks in the Midwest, leading to a liquidity crunch, and economic collapse if nothing is down. This is what it looks like when a bank grows "too big to fail." This wiki graphic lays it out nice.
![](http://i85.photobucket.com/albums/k73/ManfromMiddletown/800px-Subprime_Crisis_Diagram_-_X1.png)
The ban on interstate banking limited the connection between the housing and financial markets on a state by state basis. The truth of the matter is that even when the ban existed, national banks evaded it through the creation of bank holding companies which held state banks as discrete units with their own internal governance, and assets and liabilities limited to that state-based unit. Even so, this type of organization meant that bank accounts in Ohio were protected from mortgage failures in California. While this may mean that account holders in California are more likely to see their bank go under, it protects the part of the country actually creating wealth from areas in which people are turning houses into speculative investments.
Too Big to Fail
Returning to the repeal of the ban on interstate banking and Glass-Steagall, it seems highly unlikely that Glass-Steagall would have been repealed in the absence of interstate banking, precisely because the firewalls created by the latter inhibit the growth of the market imagined by the former. Moreover, its precisely because states in South Dakota or Delaware could make loans throughout the country that we have a consolidation banks, again creating "too big to fail." For example, before the bank branch in my home town in Indiana became part of Chase it went through a series of mergers only possible because of interstate banking. Back in the early 1980s, it was an Indiana subsidiary of National Bank of Detroit. (NBD) Interstate banking allowed this to be merged into the main company. In 1995, NBD merged with First Chicago to create First Chicago NBD, which in turn merged with Banc One in 1998. Finally Bank One merged with Chase in 2004. Thus, the bank at the end of this was formerly composed of dozens, if not hundreds of formerly discrete units. A crisis at any one might lead to its collapse, but would leave the rest standing. With interstate banking, and the consequent consolidation of the sector, the loss of one bank now has the same impact that if would have taken hundreds of bank failures to cause before interstate banking.
And you have huge pools of cash in deposit accounts that can be taken to the casino, excuse me, Wall Street, if only the barrier between commercial and investment banking is rescinded. Arguably, the repeal of Glass-Steagall depended on creation of interstate banking. The statistics are telling. The number of commercial banking institutions in the United States remained stable until from the creation of the FDIC in 1934 until the mid-1980s, at which point it began to collapse, falling by more than 50% between 1980 and 2010.
![](http://i85.photobucket.com/albums/k73/ManfromMiddletown/banking1.jpg)
At the same time that the number of commercial banks was collapsing, the percentage of assets held in the largest banks was skyrocketing.
![](http://i85.photobucket.com/albums/k73/ManfromMiddletown/banksize1.jpg)
(Source)
And.... control was being transferred to out of state banks, draining a number of communities across the country of the wealth they created in order to fuel the rise of a limited number of banking centers, where compensation became obscene.
![](http://i85.photobucket.com/albums/k73/ManfromMiddletown/interstatebanking1.jpg)
(Source)
OK, What's ALEC Got to Do With It
Remember how I said that the Riegle-Neal Interstate Banking and Branching Act of 1994 repealed the ban on interstate banking? Riegle-Neal is a piece of federal legislation. ALEC is a corporate lobby group that operates in state legislatures. So, again, what's ALEC got to do with it?
Well, the turn to interstate banking began in state legislatures. Because Riegle-Neal passed in 1994, the importance of a piece of ALEC model legislation the The Interstate Banking Act wasn't immediately apparent when the model legislation was leaked a year ago. However, if you do a little research, its importance becomes pretty obvious.
We know from the release of model legislation in 2011 that "The Interstate Banking Act" appeared in the 1995 ALEC Sourcebook. That's right, until 1995, ALEC periodically released not only released all of its model legislation on a periodic basis, these source books contained membership lists. They were never widely circulated, but a limited number of copies still exist in libraries throughout the country. If you read through the 1995 source book, a lot more of the context of this model bill (and others) becomes apparent.
I have to point out the love and kisses dedication from the front cover:
![](http://i85.photobucket.com/albums/k73/ManfromMiddletown/loveandkisses.jpg)
That's right. Koch Industries funded the source books which were printed by Iowans for Tax Relief (Muscatine, IA) Shits and giggles of the dedication aside, the section on ALEC's plans for the banking sector is quite disturbing. When ALEC produced these source books, each section of model bills was prefaced with an introduction that laid out the broad framework of ALEC's program for a given policy area. In reference to commercial banking, ALEC was pushing four reforms:
* Passage of legislation enabling interstate banking.
* Repeal of Glass-Steagall.
* Removal of caps on interest rates.
* Privatization of the FDIC and an end to equal insurance rates for all banks.
Except for the privatization of the FDIC, which as a federal matter was largely outside the scope of ALEC's model legislation, they got what they wanted. And we got "too big to fail."
It's important to understand that prior to the passage of Riegle-Neal in 1994 by the US Congress, a flurry of legislative activity in the states had already opened most states to limited interstate banking. The passage of Riegle-Neal simply placed a Congressional rubber stamp on what was already a fait accompli by state legislatures.
![](http://i85.photobucket.com/albums/k73/ManfromMiddletown/reigleneal.jpg)
(Source)
We know that the issue was important to ALEC as early as 1984, if not earlier, because of statements made by then Executive Director Kathleen Teague. In the October 13, 1984 edition of the National Journal she extolled the benefits of lobbying in the states, saying:
"In Congress," said Kathleen Teague, executive director of ALEC "you've got only one legislative body and they will either pass or kill your bill. In the states, if you're trying to get banking deregulation passed and you've lost in Kansas, Nebraska and Texas, it's not a total failure. You may well win in Arizona, California and New York that year. You've got 50 shots."
The issue continued to be of importance to ALEC into the 1990s. A 1996 amendment to the federal legislation limiting interstate banking allowed states to allow interstate banking of they so chose. Thus, if you wanted to, you could pursue legislation in each of the 50 states, and end up with nationwide banking by default. This is precisely what happened. Again, ALEC is an example of an organization that the internet made a whole lot less transparent. Back in the days of print distribution, ALEC regularly made available information we could only dream of getting our hands on today. For example, ALEC's
1992 Annual Report identifies the model legislation introduced and enacted in each state. (pgs. 10-11) The "Interstate Banking Act" was introduced in 4 states (HI, MA, MI, and NC) and enacted in 1 (NC) that year. Remember this is one year near the tail end of the flurry of state legislation allowing interstate banking. In that same year, at its
annual meeting, ALEC held a panel (pg. 19) which brought together a GOP staffer from the US Congress and a banking lobbyist together to discuss how to push for interstate banking.
Conclusion
This is the point at which the role of ALEC as a farm league for federal legislation and legislators becomes important to note. The beauty of ALEC is that the connections created between lobbyist and legislator when the latter was just starting their career last a lifetime. If you own and indoctrinate someone from the start, it's a lot easier control them when they run for higher office. And there is a veritable raft of legislators in the Congress with ties to ALEC from their days in state legislatures. This is one of the few areas in which ALEC is forthright about its influence, providing a list of alumni.
Currently, 9 US senators are ALEC Alumni. As are over 90 members of the US House. Remarkably, influence even extends into the Obama administration, with ALEC counting the current US ambassador to China Gary Locke as an Alumni. If nothing else, I hope that the story of ALEC's role in creating "too big to fail" banks and influence in the federal government prove a point. ALEC may be focused on state policy, but their lobbying impacts the country as a whole.
Yes, ALEC just ended the committee responsible for some of its most sensational model legislation. But..... there's plenty to object to in its "economic" agenda. Whether its the role of ALEC's commercial banking model legislation in creating "too big to fail", its support for territorial rating in insurance (AKA redlining), or the multiple bills pushing "right to work" ALEC is still working hard to screw the vast majority of Americans over for the benefit of their corporate donors. I don't want to abolish ALEC, I just want to make it small enough that we can drown it in the political cesspool it has created.