I was going to call a moratorium on economic posts here, since they’re hard to write, hard to read, and bloody boring, but I can’t let the latest round of blame-gaming go by without at least a cursory commentary.
I’ve seen numerous posts on sites both left and right finger-pointing at the other side. There’s the obvious leftist view that “this proves that capitalism doesn’t work” to the rightist view “Carter and Clinton caused this”
The first view asks you to view this as emblematic of what happens when you de-regulate, leave supply-and-demand control the price of assets and the second asks you to view the banks as pawns of government who will do what you tell them.
My view? Neither is correct. For a start, governments, central banks and regulation tweak the market on an almost daily basis. The Market is monstrously complicated, and simply taking the view that it “doesn’t work” ignores the legion ways in which it does.
As for Carter and Clinton implementing legislation that “forces” banks to lend to borrowers who can’t afford it, let me tell you something now, from a former insiders perspective; if a bank doesn’t want to give you money, a bank doesn’t give you money. Q, E & D. If they don’t want to give you money – even if the numbers stack up in your favour, they won’t. All they have to have – legally – is a reason not to. And it’s pretty damn easy to find a reason, regardless of any legislation that may be in place, to knock someone back if you are so inclined.
And even if you threaten to fine them, they’ll still knock it back, because it costs them too much in bad-debt provisions not to.
I’ve been involved in implementing lending policies and procedures at three different financial institutions, and the one thing I took away from all three was a sense of wonder at how different people assess the same application, even when they’ve got the same policies and procedures to work off.
On the flip-side, if a financial institution wants to lend, it will find a way. Low doc and No-doc loans are the perfect example. Low-Doc loans and their bastard son the No-Doc loan basically allow you to specify how much you earn on a declaration that is used as “proof” that you can afford to re-pay a loan. Now, I’ve worked in a setting where I had the say on whether these loans went through, and when I was declining “too many”, it was pointed out to me that the policy was to approve No-Doc loans that had a signed declaration regardless of whether I had reason to think the borrower could not afford it
Low-Doc and No-Doc loans were originally formulated for business owners – particularly those in the first few years where it is difficult, if not impossible, to provide evidence that you can repay a loan. (My attitude on this, incidentally, is that whilst your accountant is showing you new and interesting ways of writing off almost every cent of your profit as a business loss they should inform you that if you tell the taxman your profit is $1.87 a year, it’s going to be damn difficult to get a loan at a decent interest rate)
Fine and dandy, but the problems started when financial institutions realised that the declaration itself (If it could not be proved that the financial institution told the borrower what to write on the form – and good luck with that) renders the clause in the Consumer Credit Code useless that tells a financial institution that they cannot lend to people they have reason to suspect cannot afford to borrow.
In short, you can’t tell a bank what to do for more than five minutes without them finding a way to circumvent that legislation. And because they are such big, powerful entities and (technically) own so many assets, they have the power to bring the economy to its knees.
And you know what? Yes, this is a crisis. But I’ll tell you what it isn’t:
Or, realistically, any one persons fault.
To suggest that one man, or even one administration, has that much power over entities that we know can bring the economy of the world to a teetering precipice is idiotic. No one piece of legislation has lead to this crisis. All of them have, by not wanting to acknowledge the fact that the measures they’ve taken have been insufficient.
1 day ago