Thursday, March 19, 2009

Banks Extending the Crisis pt. II

Photo by rjones0856
Someone needs to send these bankers to the principal's office and not let them out for recess any more--or perhaps expel them altogether. First the AIG bonus scandal, now we hear (yet again) that banks are deepening and extending the current crisis, despite Herculian federal efforts to pump them up with liquidity to solve the problem. Banks and their overly finicky underwriters are now making it difficult for even the most creditworthy borrowers to get loans. If the theory behind the stimulus moves is prop up the housing market by pumping liquidity into the mortgage finance market through the banks, it isn't working.

Tell me again why nationalizing these banks would be a bad idea . . . Does anyone reasonably believe that the feds would do a worse job of managing lending???


Anonymous said...

I'm going to go with "because we're not the Soviet Union." Lending is a service. Just like all goods and services, the free market is the best system devised for allocating this service. If what you are saying is true, then other banks will be willing to make the loans where the overly-cautious banks will not. Why? Because lending is how banks make money, and competition pushes borrowers to the banks that make the loans. Of course, if you think it's a good idea to allocate money, in the form of loans, based on political decision making, as opposed to price, service, etc., then by all means nationalize the banks. If you leave the financially healthy banks alone, they will soon be eating the nationalized banks' lunch.

Jason Kilborn said...

We left the healthy banks alone . . . and they ate ALL OUR LUNCH . . . and then came back looking for antacids. Sorry--this simple "markets rule" reaction doesn't fly any more.

Anonymous said...

Pardon me, but the markets were working fine, sending the bad banks swirling round the drain, until the federal government, in its wisdom, fished them out with bailout money. The fact that the public took on private-sector liabilities was a political decision, not a market decision. And you want more of that? Give me a break.

Jennifer Martin said...

I hear your doubt, Jason, about the ability of the private markets to pull us out of this one without dramatic governmental intrusions. Your point is a valid one, which will only be proven or disproven in time. The government's purchase today, finally, of toxic assets may avert nationalization. That does not mean, though, that some banks may face that fate in time.

Anonymous said...

First, I don't understand the outrage over underwriters finally doing their job and actually screening prospective borrowers. There's some good academic work that suggests that the performance of loans that were sold through securitization actually perform worse than loans kept on the bank's balance sheet. Given that securitization has all but dried up it's a natural reaction of the banks to want to improve credit quality, and contributes to the recapitilization by reducing the likelihood of default.

Next: Governments, from federal to local almost without exception, are manifestly incapable of operating profitably- deficits are the norm. Strike one. The universal response is to increase taxes and fees at a time where exactly the opposite is needed to restart economic growth. Strike Two. Third, can you imagine interacting with your mortgage lender or savings bank if they had the same standard of customer service as the DMV? Strike three you're outta here!

I can't leave before commenting on AIG. Did you see the op-ed piece in the times written by an AIG executive who received a bonus for outstanding performance, arguably at a time when AIG needed it most? And yet the populist bleat would claw his compensation back, and at worse, "saw off his head and his family's head with piano wire" to quote one angry protester cited in a recent WSJ article.

People are upset but we can't lose sight of the fact that penalizing the producers who are helping work troubled financial services business OUT of this mess is not likely to lead to short-term resolution of this crisis. That's clear to anyone who's thought it through, but it's much more fun to demonize a small group of individuals than accept the fact that we, as consumers, were overlevered.