I've heard some people argue that banks should be regulated like utilities if their liabilities are either explicitly or implicitly guaranteed by the government, ( taxpayers) and permitted to earn a very low utility-like stable return. Rather than banks, they maintain the capital markets, hedge funds, and private equity investors should provide credit to risky borrowers.
Any thoughts?
banks are so absolutely terrible that they have a track record of getting overleveraged and blowing up every 2-3 years.
Imagine for a second that we had government programs to bail out over-leveraged grocery stores. There have been, several grocery chains with cash-flow problems. What do you think would have happened if we threw some bail-out money to the ones that were really on the ropes?
Well, taking big gambles would become a win-win if you're a grocery store -> either the market rewards your great insight or the government bails out your great mistake. Ordinary grocery stores would have to leverage-up to stay competitive. They would be a lot more aggressive.
IMHO - the grocery industry would start to look a lot like banking.
I'd probably be more open to government intervention in the housing crisis had I been given an opportunity to enjoy the benefits of it. Instead, I feel penalized and disenfranchised from schemes that seem to help everyone except the people in my boat.
Sour grapes? Well, yes. Of course!
Re: second read
mInvestor
2/5/2012 12:02:41 PM
Generally speaking, I vote for "let market working itself out". This is one fundamental thing of our system. If governement is gettting involved too much, our system will become one just like old Russia.
I don't think we fix the problem with a seres of stop gap measures like we've been getting -- measures designed to boost political capital more than anything else.
But what happens, as has been the case in the last 10 years, that banks are so absolutely terrible that they have a track record of getting overleveraged and blowing up every 2-3 years.
I saw some data recently that showed that banks have no net equity creation over the last 30 years. I need to find the information to verify, but it may be true. They may create more risk than value. What then?
Re: second read
cat tail
2/4/2012 4:32:21 PM
That seems like such a reasonable approach. I can't understand why banks are so adverse to using a ratiuonal approach to resolving the crisis, especially when the odds of profiting from a foreclosure are so low.
I think the government should focus on governing (defense, infrastructure, et al) and leave banking to banks.
In a perfect world, I would expect the banks to rely on logic and reason to make credit decisions based on a borrower's consistency, character, collateral and capacity. Obviously, if someone has seen his income decline but is still managing to live up to his obligations, then that person is consistent, and is demonstrating good character. If his home is also in a decent area and decently maintained, then the collateral is also secure. In these situations, in my perfect world scenerio, the bank would weigh those factors against the borrowers diminished capacity, and realistically conclude that a lower interest rate is mutually beneficial.
Banks aren't doing that. But I don't think trying to force them to behave that way through legislation is the answer.
Re: second read
mInvestor
2/4/2012 11:19:45 AM
@Noreen,
What's your suggestion on this problem? Do you suggest that government stays away and let market works it out by itself (like Ashishi mentioned in his post)? I tend to agree with this approach. But on the other hand, there are folks there do need some help to just have a basic living.
A difficult situation I guess.
People who were fired or laid off from higher paying jobs but are still paying their 6% or 7% mortgages by working their tails off. These people don't qualify to refi even if their house is not underwater because they have an skewed debt-to-income ratio. And they do. But the fact is if they can make the current payments at 6%, they would be even better off if they could refi the mortgage to 4%.
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