I first posted this in December of 2007, about nine months before the market collapsed in 2008. I still like it. I'm posting it again because I was just learning how to blog back then and put it in the wrong section (which some of the more savvy readers told me about months ago). Also, I'm in the process of rearranging my blog and I want this article to be more accessible (and with links), so you're seeing it again. Finally, this post makes it clear that - as I point out in my book - the market collapse should not have come as a surprise to anyone in Washington.
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Continued from the "So Much for the Invisible Hand" post ...
Let’s start with this. If I make poor financial decisions, either in a small business or by lending to free-loading in-laws, I have to suffer the consequences, right? However, if I live in the world of big finance and fat broker fees I can be stupid and greedy, and can expect a free ride. Here’s how it works (or how it's working out now).
Right now banks are in a financial storm of doubt and edginess because of the mess caused by fraud, stupidity, and the outright greed of big lending institutions. Bankers, of course, might disagree with my assessment because they see a genius every time they look in the mirror (money does that to people). Still, one institution after another reports they have to write-off billions of dollars in losses because of the sub-prime lending packages they sit on. Today they find themselves short on cash as they draw from reserves, or seek out other institutions to lend them operating funds. But investors and banks are reluctant to lend to anyone. The Wall Street Journal reports why:
The reluctance to lend money has the world’s central bankers worried that a recession, or worse, may be around the corner. This explains why the Federal Reserve has cut interest rates by one point since August (to prime the economic pump), and why the Bush administration is working with lenders (on a lousy plan) to get them to cut sub-prime borrowers some slack on their terms. And now we get this.
The Federal Reserve is offering an additional $40 billion dollars in new loans to lending institutions, and making the money available to banks that offer collateral terms that aren’t much different from the past.
Seriously. Is this how you “discipline” the market? By offering additional money with no real penalties for poor decision-making? For those of you keeping score at home this is what we have.
Isn’t this grand? You screw up and you get the opportunity to secure more loans. Imagine that. I wish my bank would find new ways to make money available to me every time I made poor financial decisions.
At the end of the day this is not only a market subsidy but a reward for bad behavior. Is this the way capitalist markets are supposed to work? I think not.
Oh, and did I mention that the dollar continues to sink around the world? And don’t anyone take a peek at consumer (and national) debt in America because it’s not pretty. And consumer confidence? It's at a two year low. No wonder the bankers are jittery. They see a financial mess around the corner and no one seems to know what's going on, or how to fix it.
- Mark
[December, 2007]
***************************************************
Continued from the "So Much for the Invisible Hand" post ...
Let’s start with this. If I make poor financial decisions, either in a small business or by lending to free-loading in-laws, I have to suffer the consequences, right? However, if I live in the world of big finance and fat broker fees I can be stupid and greedy, and can expect a free ride. Here’s how it works (or how it's working out now).
Right now banks are in a financial storm of doubt and edginess because of the mess caused by fraud, stupidity, and the outright greed of big lending institutions. Bankers, of course, might disagree with my assessment because they see a genius every time they look in the mirror (money does that to people). Still, one institution after another reports they have to write-off billions of dollars in losses because of the sub-prime lending packages they sit on. Today they find themselves short on cash as they draw from reserves, or seek out other institutions to lend them operating funds. But investors and banks are reluctant to lend to anyone. The Wall Street Journal reports why:
Financial institutions remain suspicious of each other after multiple rounds of announcements of mortgage-linked losses, and are anticipating more. They also are eager to hold onto cash to shore up their troubled balance sheets.
The reluctance to lend money has the world’s central bankers worried that a recession, or worse, may be around the corner. This explains why the Federal Reserve has cut interest rates by one point since August (to prime the economic pump), and why the Bush administration is working with lenders (on a lousy plan) to get them to cut sub-prime borrowers some slack on their terms. And now we get this.
The Federal Reserve is offering an additional $40 billion dollars in new loans to lending institutions, and making the money available to banks that offer collateral terms that aren’t much different from the past.
Seriously. Is this how you “discipline” the market? By offering additional money with no real penalties for poor decision-making? For those of you keeping score at home this is what we have.
1. Lenders, focusing on fat fees and big bonuses (from anticipated high interest rate income) decide to lend to people who really can’t afford to borrow.
2. The income from high interest rate loans don’t pan out because sub-prime markets were always tied to unrealistic contracts based on wishful thinking.
3. After the defaults begin lending institutions amazingly act surprised, wondering “What happened?”
4. Big institutions start looking for cash. They need the money to either: (1) shore up their financial situation and/or (2) lend, which will enable them to make money charging fees and interest.
5. No one wants to lend because they’re scared and, well, the banks/borrowers made stupid decisions in the past.
6. The central banks of the world decide to create a pool of money to help build confidence in financial markets; i.e. we're seeing yet another market bail out for big institutions.
Isn’t this grand? You screw up and you get the opportunity to secure more loans. Imagine that. I wish my bank would find new ways to make money available to me every time I made poor financial decisions.
At the end of the day this is not only a market subsidy but a reward for bad behavior. Is this the way capitalist markets are supposed to work? I think not.
Oh, and did I mention that the dollar continues to sink around the world? And don’t anyone take a peek at consumer (and national) debt in America because it’s not pretty. And consumer confidence? It's at a two year low. No wonder the bankers are jittery. They see a financial mess around the corner and no one seems to know what's going on, or how to fix it.
- Mark
[December, 2007]
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