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Alan Zemek

'Disintermediation' affords opportunity for small cities

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As I watched Congress last week congratulating itself on passing the financial regulation reform bill, I could not help but recall the scene in the 1942 film classic, Casablanca, where French police captain Renault skims off his personal kick back from the gaming tables, and then proceeds to raid the joint with loud and public protestations that he is "Shocked! Shocked! To learn that illegal gambling is going on at Rick's Café Americain!"

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After years of ignoring the risks of a wild-west frontier attitude by unregulated non-bank financial institutions on Wall Street that mistook recklessness for acumen, Congress is now closing the casino because they are "Shocked! Shocked!" To learn that there is gambling going on at Wall Street's investment banks.

Casablanca was rushed into production in the early days of World War II in the midst of an international crisis and is today generally regarded as one of the greatest movies ever made.

It was also about this time, while America was still sitting on the sidelines as the rest of the world was falling apart and desperately wanted the U.S. to intervene in Europe, that Winston Churchill famously remarked that "You can always count on the Americans to do the right thing. - After they have tried everything else."

So now that we have tried "everything else" maybe we will get some reasonable regulations to curb the most egregious practices of predatory lending, recklessness, and consumer abuses that have become the norm of the business of financial intermediation for too many years.

But although it is popular to heap derision on Congress and blame the banks for the economic mess we are in, not all of it is deserved, or aimed in the right direction. In many cases, your local banker didn't do it. Many traditional commercial banks, usually conservatively run and highly regulated, were not even involved with the extraordinary recklessness by what became known as the "shadow banks."

The real culprit in this drama is a villain known as "Disintermediation." In many ways, the process of disintermediation has produced amazing opportunities and consumer benefits. Today a consumer looking to buy a new car can go online, get multiple price quotes from competing dealers, and even create a custom order, including paint color, options, and styling, for exactly the car they would like and send the order directly to the factory without ever stepping foot into a dealer's showroom, or make personal contact with a salesperson.

This is just one example of disintermediation.

In most cases, the process of disintermediation has meant more information more choices, and a better, more knowledgeable consumer. This is exactly what you want in a competitive market economy.

But for the financial services industry, breaking the close personal links between borrower and lender proved to be a complete disaster. (I write about the shadow banking system and explain disintermediation in my new book Generation Busted: How America Went Broke in the Age of Prosperity).

As time goes by, I think what we have experienced in the last few years will not be referred to as the "The Great Housing Bubble," but become more accurately described as "The Great Disintermediation Bubble" as future historians and economists come to appreciate how radically and fundamentally the structure of the economy has been transformed in just a decade.

Example: China's economy is now the largest energy consumer on the planet. Where energy technology, oil prices, and climate change are concerned, China is now an 800 pound gorilla in the middle of the room.

Disintermediation means millions of jobs lost in the last recession are never coming back. But it also means new and exciting opportunities for a new model of economic growth and development, even in small towns like Park Rapids.

Disintermediation means talented ambitious and creative people no longer have to live where they work. They can now work where they live. Talent and money is more mobile than ever.

For many smaller towns and communities this presents a whole new opportunity, to build an economy and work force not around smokestacks, but around a small town quality of life.

And here in Park Rapids, the race is on.

Alan J. Zemek is a Park Rapids area developer and author of "Generation Busted: How America Went Broke in the Age of Prosperity.".You can follow his blog, or comment on this article on his website: www.generationbusted. com.

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