The neighborhood bank isn't a bank in the traditional sense any more.

We are saving the banks so people can incur more debt? Is that what I am hearing President Obama saying? Sounds as if he is in the thrall of the economic theorists who reside in the cloudy confines of the netherworld where doctrine trumps reality – a place the President feels comfortable. Community organizers, law professors and Chicagoland ward heelers can't claim a brush with the practical nitty-gritty of running a business. Yet they emote certitude in direct proportion to how little they actually know.

The business of America ain't GM and it ain't banks. The business of America is actually small business, 90% of whom do less than $1 million in annual sales. The little guys and the slightly bigger guys make the economy go around, not the Federal Reserve and certainly not New York central banks. Add in that 80% of the economy is consumer and retail driven and the fatal flaw in the Obama policy to pump up banks becomes apparent.

The proper course of action is to cut taxes sharply – personal and corporate – to create a layer of discretionary income so people can buy something besides necessities. Until retail gets moving, no one is moving very far soon. The second policy should be to crank up homebuilding. One house under construction requires over 40 sub-contractors and vendors, the small businesses the American economy is all about. Money spun off to them goes directly into hiring, which stimulates retail and the capitalist merry-go-round spins again.

I addressed our state association of bankers election eve before Obama inherited the save the banks scheme from the previous administration. I saw trouble ahead then since banks don't really lend money to the small business sector anyway – haven't since the 1989-1994 savings and loan bust. Banks like to charge fees, extend ATM credit to kids and buy deposits online they can leverage 10 to 1 or more to wheel and deal like the Big Apple investment banks who borrow millions every day to invest in hedge funds, commodities and currencies.

The neighborhood bank isn't a bank in the traditional sense any more. They are service centers for checking accounts and selling home equity loans for fees. Not so long ago the branch manager was a loan officer who knew his or her customers. Clients could obtain a 90-day note, renew it for 90 days and then amortize it if they couldn't pay it all back. At each stage the bank made money on interest payments, formerly their main source of income. And customers used to keep a nice nest-egg in the local bank augmented by compound interest. There are no 90-day notes and no compound interest anymore. No matter how much "stimulus money" comes to your bank, lending it out – as Obama thinks – is low on the list of priorities.

If the banks undergo a religious conversion and go back to being banks by lending to their customers, then we create another round of high consumer debt, the problem that needs curing today. You can't borrow your way out of recession, but you can spend your way out, as proven over and over in the past. That's not likely to happen anyway. Instead the economy will trudge along waiting for the banks to supply liquidity until deflation hammers in the nails as homebuilding and retail sales go paws up.