Life without Banks
I think there is a basic assumption that is wrong. Banks simply DO NOT have additional capital to lend. Any excess will easily go to loan losses as a result of the home price decline. Yes, this does further exacerbate the problem because they are now hurting the private sector for leveraged companies. But, telling a bank to lend more is like telling someone to eat all the rations on a raft lost at sea!
So, the domino has fallen from the house price bubble, to the banks residential real estate portfolio, to the private sector businesses. If we don’t stop it, it will domino into hitting the commercial loans then back the banks balance sheets and certainly cripple the banks in a Depression style insolvency.
I think the core issue needs to be addressed, but this is actually a bit hard to identify (esp. for the government). The core issue is that our financial system is flawed and that our model allows, perhaps encourages, executives to take on excessive risk for excessive short term return and compensation. Trusting a banker to act for the greater good, is a little naive on Greenspan’s part.
I think the best idea I’ve finally heard suggested is increasing capital requirements on a sliding scale based on profits. A variation of this was suggested at Davos. This stifles excessive growth and could well prevent bubbles. Bubbles are the banks worst enemies and the regulation needs to be put in place to prevent it in the real estate sector at least.
Now, the only way to fix the system is to capitalize the banks, stop the job losses, and smooth the home prices at the same time. Easier said than done, especially while not inflating one’s currency like Argentina.
Categories: Finance
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