Friday July 18, 2008 | The State of Banking

July 17, 2008 at 3:24 pm | Posted in On Air | 2 Comments

We’ll look at the current state of banking in America and our region. Wachovia recently named a new C.E.O., but their stock continues to struggle, a major bank in California has failed and the nation’s two largest mortgage lenders are in trouble. Today, we examine those topics.
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  1. I am just waiting for the inevitable call saying let homeowners take the consequences for their risky loans. Talk about cutting off your nose to spite your face! Whatever the culpability of the individual buyers, we all pay the price from the collapse of the mortgage system as well as banks. This disaster is far from over unless Congress steps in like they did for the Savings and Loan collapse.

    This is just another example of the disastrous free market fundamentalism that has been sold to us by Republicans. When will we realize that if we drastically deregulate we will continue to have these destablilizing boom and bust cycles that hurt everyone, even those who are acting responsibly. There is no way for individuals to protect themselves from these system-wide failures.

    As for who is to blame, the majority of borrowers were deliberately misled by the “experts” into loans they could not afford. Approximately 40% of those who took out subprime loans could have actually qualified for better terms but were bamboozled into taking out more risky sub prime loans. Others were not told that their rates could go up drastically. You can say they should have read the fine print but I challenge you to find anyone that actually read all the papers they signed when taking out a mortgage, let alone understood them.

    Yes some people deliberately took risks but they were a minority. Why punish them when we are also punishing the entire country?

    We need reasonable regulation if we are to have a healthy, stable economy and society. Government is the only solution in this situation to stop the bleeding and to prevent more of this insanity in the future.

  2. There is no more poisonous sentence than ‘the government is the only solution’. The government does absolutely nothing well, even things that are fundamental to all governments such as protection and arbitration. The government’s solely responsibility is to protect me from my neighbor… it goes too far when it tries to protect me from myself, ie, if I want a subprime loan, I should be able to secure one and another party should be allowed to be in the business of selling me that loan. Free markets depend entirely on trust and the markets creatively destruct players that accumulate mistrust [like subprime lenders]. To quote Adam Smith, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

    The market will correct out this problem, just like it does every other one. If government performs bailouts [of any player] it will prevent creative destruction to restore balance and promote growth. Bailouts only encourage future bad behavior. Moreover, it is blatantly unconstitutional for the government to interfere with private contracts [ie the agreement between you and your loan underwriter]. If the loan agreement is too much for a person [and the interest rate is not buried deep in it but it’s the crux of the loan and prominently on page one], there is recourse, such as having a lawyer represent your self interest. What’s a few hundred dollars in the face of a several hundred thousand contract?

    Poor Adam Smith spins in his grave to hear such talk as governments as a solution to these matters. America’s market economy is a direct result of Smith’s Wealth of Nations and we would not have become a world power with the finest economy ever seen without him. This style of economics ignited world productivity after a thousand stagnate years of mercantilism and feudal economics that failed to raise the standards. Smith’s theories gave birth to the Industrial Revolution and the quality of life we now enjoy.

    America’s problem now [which I see in Elizabeth] is that we all are capitalists when we are enjoying profits but suddenly turn fabian socialist when we are expected to take a loss.


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