Sunday, November 16, 2008

Fundamentals and Accountability

Much was said during the banking conference about banks and government and GSE’s and Wall Street and rating agencies and the Fed and borrowers and business and greed. The commentary and focus were rather intriguing. Not only did we hear from those in banking and financial planning, but we also heard from the students, and therefore have some sense of how students are integrating the teaching they receive, the leadership that is provided and the news that they consume into an understanding of our present monetary system.

There was a good bit of talk about solutions, greed and accountability. I was struck by the clarity of the propaganda on display.

The government, the FED and GSEs were the heroes. The government made cheap housing available; the GSEs provided long term financing which enabled Savings and Loan operations, and later banks, to keep loaning money to enable the American dream of home ownership. The Fed provided the cash.

The rating agencies were bad because Wall Street was a client and so the agencies received revenue from Wall Street firms. To make matters worse, the agencies were facing increasing competition, and therefore they succumbed to issuing inaccurate ratings for fear of losing business.

Wall Street, of course, is just greedy.

But the real bad guys were the borrowers and businesses who “borrowed money they knew they could not repay.”

Lucky for us, the Government is “working hard” to save us.

Maybe there is a different way of looking at this environment…

Maybe the government imposed regulations that created a regulatory minefield, which worked against the free market. Perhaps positive law like the CRA and its predecessors, forcing banks to loan in increasingly unsustainable ways, is a root cause of the crisis. Could it be that cheap money issued buy the FED causes bubbles, which uniformly create financial disasters, which in turn bankrupt the small banks and hardworking people? While at the same time the FED issues more of the same dollar poison that caused the problem, in order to save the favored banks and businesses?

Is it possible that moral hazard created by the FDIC and the GSEs, like Fannie Mae and Freddie Mac, exacerbated the effect of the poor lending policies? Is it possible that a bank is more willing to transact loans that it knows will be immediately moved off its books, transferring the obligation onto the balance sheets of the GSEs; which actually means transferring onto the balance sheet of the US taxpayer…? Are these genuine moral hazards?

Regarding the rating agencies, supply and demand is a terrible scapegoat to enlist as a cover for ethics violations. If the trusted rating agencies were issuing bad assessments, this is to be blamed on ethics violations, i.e. lies and dishonest business practices, not competition and loss of revenue.

And finally the bad ole borrower… Here he is in an environment that is designed to keep him in debt, and which conveys that the banks are conservative in their lending practices in order to keep from making bad loans and losing money, and which is filled with propaganda that completely deceives him with regard to how money and the system work. Of course Mr. Borrower is not to be completely excused for making bad economic calculations, even though much of the information he receives is secretly rooted in fraud. However, he was drawn into bad transactions through a government policy which all but demanded that banks make loans with no money down, with no proof of income, with no rigorous appraisals, etc. The system set many people up for failure so that now they have neither home nor credit capable of purchasing a home when they may be able to in the future.

In certain obvious cases, such as in describing the lending policies of a small bank which was recently confiscated by the bank regulators, the banks are acknowledged to have made a few bad choices, BUT!! the system works and the government came in and saved the day and not one depositor lost a dime!!

This, of course, raises many questions, but two should be considered now. Why is the government either “saving” or taking over a bank? Why not leave the bank to be purchased on the free market, at a discount reflective of its supposedly poor management? (Is its management poor in fact, or only according to some exaggerated policy superimposed by government?) In addition, it should be noted that the ONLY way for the depositors to “not lose a dime” is for the government to devalue everyone else’s paper money enough to transfer a certain number of fiat dollars back into the hands of the “saved” accounts of the “saved” depositors.

In any case, the only entity that was uniformly instructed to act ethically, consider fundamentals, meet obligations, not over extend, make good decisions, was the small business and the individual borrower. Everyone else was above reproach and not guilty of failure or subject to criticism.

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