…led the mortgage market collapse. What a shocker.
Wall Street banks are not blameless for the financial crisis. But they were only responding to the incentives set up by the federal government. Ignoring this history will help no one.
Well, a lot of statists would like us to ignore it, so they can avoid justice.
I’ve been saying this for years, Rand, but its simply unpossible to get a statist/leftist to admit it.
Fanny and Freddy, the Federal Reserve, mandatory deposit insurance, accounting rules, prudential “oversight”, legal tender laws, ratings agency regulation, the list goes on and on. All of these subvert the natural discipline imposed by market forces and replaces them with seemingly deliberately defective government “oversight”.
Yeah, GAAP was right up there with Fanny and Freddy. Those nasty rules about debits and credits, who needs ’em.
Some of the items in your list are not like the others Einstein.
Banks have their own accounting rules, which allow them to valuate some assets at nominal value instead of marking them to market. This is essentially a legalised form of fraud.
And has absolutely nothing to do with the collapse. When the federal government tells you to make loans to people who can’t pay the money back, and then provides insurance to guarantee you don’t lose money when it turns out… they can’t pay the money back, whether or not you’ve marked assets to market doesn’t matter. Except to people who want to create their own narrative and blame the whole mess on the banks.
Huh? All the things I mentioned are forms of government intervention and all contributed to the mess we’re in. They provided the incentives the banks responded to. And of course, the banks themselves lobbied for this environment.
While we’re at it I might also mention the Community Reinvestment Act, federal student loan programs, corporate governance laws that limit effective oversight by shareholders, pension fund regulation etc etc.
Fannie And Freddy led the mortgage market collapse. Federal student loan programs didn’t have anything to do with the mortgage market collapse.
Or… “contributed to the mess we’re in.”
I don’t fully understand why you’re troubled by that. But you sure seem hell bent on adding things in that aren’t relevant. I’m sure you can provide a treatise on how legal tender laws are at the bottom of it all, but please don’t.
…or to people who don’t quite have the balls to go that far but who are more comfortable with creating lists of irrelevant factors for the purpose of seeding fud.
You’re not usually this rude or this ill-informed Curt.
OK, you don’t blame the banks (entirely). Do you agree that if big banks hadn’t been so greedy, the crash wouldn’t have happened?
Deposit insurance should not be mandatory. But depositors should never be led to believe their account is insured when it is not. An insurer would be MAD to provide coverage without rules to manage the risk the insurance is needed. As for the accounting rules used, depositors and insurers need to be able to know what standard the bank uses.
I disagree. Deposit insurance should be mandatory however it should be provided by private insurers vice the FDIC. Think about it, what better way to keep banks in check, lending standards would go up (as long as FM was not there to scarf up crap mortgages). The FDIC doesn’t deter banks from questionable lending but a for profit insurance company sure would
@Curt:
You brought it on yourself, here’s a wall of text just for you. 🙂
I do blame the banks, but they’re in bed with the politicians who aided and abetted them through a long list of legislative measures. And more or less pushed them in wrong directions too. Exactly how far let themselves be pushed depends on their own ethics and degree of understanding of the situation.
Take mandatory, centralised deposit insurance. Since the cost of bail-outs is borne by the banking system as a whole, after the fact, with each bank paying a pro-rated amount based on market share, each bank is exposed to everybody else’s risks regardless of their own risks. That means that if they don’t engage in risky behaviour themselves, they will only have the risks and not the rewards. This punishes prudent behaviour and rewards reckless lending.
This scheme makes the banking system as a whole unstable, but to make things worse governments have arrogated unto themselves (or their proxies the central banks) the power to oversee banking operations. This sounds prudent, which is no coincidence because it is meant to sound prudent. But in actual fact central banks allow commercial banks to break what was once considered the golden rule of banking: short with short and long with long. Long term loans were supposed to be funded with long term deposits, but nowadays a certain proportion of even checking accounts is used to fund mortgages. This means that no single bank can withstand a bank run anymore. Some oversight.
In fact, it would appear that this oversight isn’t merely sloppy, but deliberately defective. It is the minimal amount of oversight that will keep people with pitchforks at bay. Regulatory capture at its finest.
Then there’s central banking which artificially keeps interest rates low, which encourages more reckless borrowing by consumers, businesses and governments and reckless lending by banks. It also discourages prudent saving by consumers. In order to be able to do this, central banks need legal tender laws, because you can print money while you can’t print gold.
Then there are accounting rules which allowed banks to valuate Greek and Irish government debt at nominal value, while it was actually almost worthless. This meant banks artificially met already insufficient government mandated capital adequacy ratios, especially in the light of the enormous mismatch in term between assets and liabilities.
It is a miracle things even lasted this long without collapsing, even without Fanny and Freddie.
Now imagine what would happen if people like the Mises Institute had their way:
Mandatory deposit insurance, government prudential oversight and legal tender laws would be abolished and shareholder rights would no longer be infringed by law. No sane person would then entrust their money to a bank that didn’t publish weekly, detailed and audited balance sheets. No sane person would accept the ridiculously low capital adequacy ratios or the mismatch between checking accounts and short term savings on the one hand and long term mortgages on the other. No shareholder would accept such behaviour by board of directors either and shareholders would be able to punish it with dismissal. If central banks didn’t keep interest rates low, there would be less borrowing. Governments would be forced to live within their means, silly people could no longer borrow $75k for degrees in gardening or interpretative dance and banks would have to shrink enormously.
But if we want better banks, we’ll need better politicians. But unfortunately, if we want better politicians, we’ll need better voters. Yes, bankers bear a lot of guilt, and the higher up in the hierarchy the more guilty they are. But the list of principal culprits is far, far longer. It includes such luminaries as Alexander Hamilton, Lincoln and FDR and lesser gods like Barney Frank and Chris Dodd, and Messrs Sarbanes and Oxley. In the end the problem is human nature, greed. Or more precisely, profit motive without a respect for property rights.
Do you agree that if big banks hadn’t been so greedy, the crash wouldn’t have happened?
I’ll take all that as a “yes”. And we’ll leave the “problem=human nature=greed” for another day.
You could take it as a long-winded yes, but my point is we can’t fix the behaviour without changing the laws that created the incentives for it. And that appears to have been Rand’s point too.
I’m just a humble banker and financier with some twenty years experience, so I may not know as much about finance as a journalist, but I would have written it as “But they were only responding to the incentives set up at their encouragement by their friends in the federal government.”
The culpability in this mess is broad and deep. Trying to pin it on one particular actor to make a political point is silly.
But they were only responding to the incentives set up at their encouragement by their friends in the federal government.
That would be meaningful if the twenty-year process could be modeled as such:
[Fed to Banks] “You need to make more loans to people who can’t pay the money back.”
[Banks to Fed] “OK, but you need to provide insurance against our losses.”
[Fed to Banks] “OK.”
But that’s not an accurate model. This is:
[Fed to Banks] “You need to make more loans to people who can’t pay the money back.”
[Banks to Fed] “OK, but you need to provide insurance against our losses.”
[Fed to Banks] “Fuggettaboutit. And we like acorns.”
[Insert 20 years]
[Banks to Fed] “This is becoming unsustainable, and we now understand your taste for acorns. You better give us some insurance or you won’t like the result.”
[Fed to Banks] “OK. But there’s this company called Countrywide. One of you needs to buy it.”
[Banks to Fed] “OK. But you’re still not going to like the result. Neither are we, but you created this mess. And the people are going to blame you when it implodes.”
[Fed to Banks] “You are really naive if you think we can’t create our own narrative. Greedy banks are evil has a nice ring to it.”