After the recent events in Los Angeles, the isolation and hopelessness of the inner city began to find a resonance in the economic fears of the rest of America.

When the stories of devastated businesses were told, many average Americans realized that the emergency aid going to Los Angeles was not a reward to rioters, but help to people much like themselves.

Some suddenly recognized that the common problem was a shared economic isolation. There's also an awareness that the American economy is structured so that the elite benefit disproportionately.

Unequal Access

Of all the messages coming out of Los Angeles, the one that got through to Washington was the need to increase lending to the inner city, which has not had equal access to the capital required for economic growth.

Most of us would agree that the stock market's rise to new highs has little to do with the fortunes of the inner city or, for that matter, our nation's overall economic health. Wall Street has always been tied to the fortunes of the largest and most powerful corporations.

But in the past, capital came from entrepreneurs who had taken the risks and reaped the rewards for creating much of our nation's new wealth.

But today's diversified economy is in danger.

Capital for our largest corporations comes from savings that used to serve the broader economy. This asset-allocation shift is due to an institution that was not a factor just three decades ago: the fiduciary controlled pension plan.

Our tax structure has created a revolutionary change in our financial system.

Pension capital represents household savings that used to be recycled through our banking system for the economic development of thousands of communities.

But these savings are no longer invested in our communities. Pension capital is almost exclusively tied to Wall Street an the capital markets.

So now we have a new concentration of wealth and a new concentration of investment management in the institutional investor.

Tip of the Iceberg

The inner city is only the most extreme example of a community isolated from the economic benefits of Wall Street. The message of Los Angeles was received loud and clear because it represented a larger pattern and a larger problem.

The exclusion of minority communities from the advantages of investment capital is but a symptom of a newly flawed financial structure in which investment capital has been "redlined" out of major segments of our economy.

Restoring the Link

Only when American savings again benefit the total economy will countless communities have a chance to end their economic isolation.

I propose to connect America's largest pool of savings to real investments in economic development. This is not social investing, but rather a practical way to restore the historical role that original lending has played in economic development.

We still have a unique, decentralized financial distribution network capable of harnessing capital to stimulate economic growth. In order to stimulate economic development we need merely return a portion of our pension capital to the banking network.

An economic-development relationship between the pension and banking sectors would also reduce bank capital costs. What is preventing Federal Reserve monetary policy from stimulating the economy is not lack of loan demand but the high cost of capital and the resulting high real interest rates on loans.

Modern portfolio theory suggests that a market portfolio is the optimum mix for any investor. But the "market" contemplated by this theory has never taken into account the original lending needs of our economy.

Only when pension assets are diversified to include the entire economy can the asset allocation be considered optimum, for the pension plan and for society.

And this is where bank loan capabilities fit in - namely, as the bridge connecting pension capital with original lending for the building of factories and the creation of jobs.

Failure to diversify is risky, not only for pension funds but for the American economy. By law, in fact, pension investments must be diversified; whole segments of the economy must not be excluded from the advantages of fiduciary investments.

Los Angeles has already convinced America of the need for increased community lending and investment. But attempts to meet that need will fail if we don't recognize that our financial structure has radically changed in the last 30 years.

Lending and investments ultimately come out of savings, and funds approaching $4 trillion in American savings are held in pension and 401(k) plans.

Our policies toward pension investment will count as much as the Community Reinvestment Act in giving the American people the economic tools to build a better future. Mr. Whitehouse, who helped develop the 401(k) savings plan, was until recently at Chase Manhattan Bank as secretary of the board's employee benefit review committee.

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