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Donkeys led by donkeys So… the global economy has been tanking in no small measure because certain states provided perverse incentives and pushed lenders to offer vast quantities of money to people who had no realistic probability of ever paying it back… and the solution to get us out of this whole mess is to twist banks arms into making loans they would rather not make.
The Lib Dem members of the Coalition favour a more interventionist approach to banking. Having been bailed out by the taxpayer, they argue, the banks have an obligation to lend. The Tories regard it as contradictory to try to control banks while encouraging them to build up their balance sheets.
No shit, Sherlock. The lunatics have taken over the asylum.
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What? Governments are trying to manipulate the banks for political gain? Well, I never! Who’d have thought it? I’m shocked, I am shocked!
I guess I’ll emigrate to Antarctica- You never hear of that continent having banking scandals!
If you live in a universe where anything is possible, then there are no such things as economic laws that punish those who ignore them.
If something is important politically, then wanting it to happen is enough to make it work.
If something should go wrong, its the doubters that are responsible, not the true believers who would have made it work if not for all the negative waves.
Extra credit for catching the reference to “Kelly’s Heroes”.
Politicians learn that the government (whatever government) just prints up money in a big building at the intersection over there, somewhere, or just sends electronic messages to banks to create money.
They have no respect for money after that. They do retain a simple amazement that you can take this stuff, money, and get nice dinners and fancy apartments with it. At least, they can for a while longer.
The banks were not trying to do the “sub-prime” market a favour when they started lending to them. It was no coincidence that a flurry of home-secured loans started appearing during a rising housing market – the banks were hoping those with poor credit scores would default on their loans so that they could strip them of their now very valuable homes.
But the market tanked, and the “marks” started declaring themselves bankrupt left, right and centre. Billions of pounds of imaginary money evaporated overnight. As they had hoped to shaft, they themselves were shafted.
They had come a long way from the days of the suited bank managers who had to be persuaded to lend you money. Their motivations were low-risk and mutual advantage. Remind me again why bailing out such vicious banks was a good idea?
Seems like we’d be better off with such high-risk loan sharks off the market to me….
The banks were not trying to do the “sub-prime” market a favour when they started lending to them. It was no coincidence that a flurry of home-secured loans started appearing during a rising housing market – the banks were hoping those with poor credit scores would default on their loans so that they could strip them of their now very valuable homes.
But the market tanked, and the “marks” started declaring themselves bankrupt left, right and centre. Billions of pounds of imaginary money evaporated overnight. As they had hoped to shaft, they themselves were shafted.
They had come a long way from the days of the suited bank managers who had to be persuaded to lend you money, and whose motivations were low-risk and mutual advantage.
Remind me again why bailing out such vicious banks was a good idea? Seems like we’d be better off with such high-risk loan sharks off the market to me….
the banks were hoping those with poor credit scores would default on their loans so that they could strip them of their now very valuable homes
Wot?
In what universe?
Banks are in the business of banking, and most of them know it. There may be sharks out there, but they are sharks in the banking business, not real estate.
They don’t want my house, they want my money.
They don’t want my house, they want my money.
Maybe in your case.
But come on. The banks lend to people with a proven poor history with credit, and secure that loan on an asset that has increased in value 50% in 5 years. What exactly do you think they are after? Believe it or not banks have whole departments devoted to the sale of seized assets.
Credit ratings don’t just serve to protect the banks from high-risk investments, they serve to protect the incompetent from their own lack of financial acumen. Ignoring them is not philanthropy.
Worse, it is not just loans the banks would rather not make, but that the effect of regulation since the crash effectively forbids them from making. They’ve been forced to lend money to the government instead of businesses in the meantime.
Garet Garrett in his essay, The Revolution Was, about The New Deal: . . . the New Deal’s most brilliant feat; and certainly not the least remarkable fact about it was the skill with which criticism was played into making its fight on false and baited ground. Each step as it occurred was defended, and therefore attacked, on ground of monetary policy, whereas the ultimate meaning was not there at all.
Consider first the logical sequence of the nine steps; consider secondly that if national recovery had been the end in view many alternative steps were possible, whereas from the point of view of revolutionary technique these nine were the imperative steps and the order in which they were taken was the necessary order. Then ask if it could have happened that way by chance.
Not even a New Dealer any longer maintains that the four steps directly involving gold, namely,
the seizure of it, the repudiation of the government’s gold contracts, then the confiscation of the
gold, and lastly the devaluation of the dollar, were necessary merely as measures toward
national recovery . . .
I have the distinct awareness that we are simply watching the same con game to theft and power.
And that it is probably naive to see the state and banks as opposing rather than colluding interests.
As I have already posted over on Tim Worstall’s blog, the government has borrowed nearly all the money available for lending and so there won’t be more to lend until the government pays some of it back (or goes in for even more rounds of printing money).
Best regards
Ah but Perry, you are missing the point. It’s OK for the banks to lend to those who can’t pay back because this is in the interests of the greater good…
According to Cable: “I don’t think the banks get it,” he said yesterday. “We are very worried about their behaviour. They are not acting in the national interest.”
“We are very worried about their behaviour. They are not acting in the national interest.”
Are you serious? A man who claims to be a liberal actually said that?
From the Wikipedia article on Vince Cable:
So his ‘liberal’ pedigree (as in the old and British sense of liberal, and the erstwhile UK Liberal Party) is limited to his early years; since then, I think ‘socialist’ might be more appropriate.
Best regards
Telling banks (by various THREATS) to lend more money – and telling them who to lend it to (why just “small business enterprises” why not “give the money to short bald men whose first name is Vincent and whose family name is Cable” – by the way I am short and bald myself).
Only the worst Third World Dictators act in this way.
“But Paul the money is created by the govenrment in the first place (even in the banks that were not openly bailed out) it is not from real savings”.
Using one government intervention to justify more government interventionions is the road to Hell.
It is like saying “the credit money is, in the end, from the Federal Reserve – so of course we have the right to use both Acts of Congress, such as the Community Reinvestment Act, and the efforts of Fannie Mae and Freddie Mac to make sure the money goes into the housing market”.
And that was exactly the position of Congressman Barney Frank (Chairman of the House Banking committee) and Senator Christopher Dodd (Chairman of the Senate Banking Committee) as well as a certain Senator Barack Obama (who got more money, per year, from financial special interests than even Chris Dodd or Barney Frank did).
And the opinion of President Bush?
Who knows? He had virtually no interest (or influence) in such matters.
Nigel, unfortunately you’re wrong that “the government has borrowed nearly all the money available for lending”, at least not in the US. As Midwesterner discussed in his article here several weeks ago, US banks have over $1 trillion of excess reserves on deposit with the Fed, all of which is available for lending should the banks ever decide to do so. Rather than sucking up all available liquidity (a disintermediation argument), the government has instead simply monetized the debt (translation: printed the money). Banks are extraordinarily liquid right now; they just are (understandably) frightened to lend.
The banks allowed themselves to be “bailed out” (ie nationalised) by the government. It was then inevitable that the government would direct how they ran their operations. It was also inevitable that the government’s directions would be stupid and incompetent. (They are the government). Barclay’s and HSBC refused government aid precisely because they understood this. They may not escape being ruined by the government just the same though.
The banks in America are effectively lending money to the fed. If the fed wants the banks to lend more money to other parts of the economy it can lower the interest it is paying to the banks.
Laird writes:
I was writing about Mr Vince Cable and his pronouncements with respect to UK bank lending; that is the subject of the main post on Tim Worstall’s blog, to which I linked. It is also the subject of the quote and linked article in the main Samizdata post.
Apologies for not being much clearer in my Samizdata comment (for those who did not follow my link) and also for linking to my comment (which was less clear on the target of criticism than was Tim Worstall’s main posting).
I’m delighted that USA banks still have dollars to lend, and wish it were more so for UK banks having Sterling to lend (at tolerable interest rates).
Best regards
Jaded Libertarian:
Had the banks in the United States not lent out money to poor credit risks – they would have been sued under the Community Reinvestment Act (passed under Carter and made worse under Clinton – a very “Cloward and Piven” measure, if you do not understand what that means then find out, – indeed Mrs Cloward, Piven, turned up as an honoured guest when President Clinton singed the amended measure into law).
And, of course, Congressman Barney Frank and Senator Christopher Dodd made it perfectly clear that banks must act in a certain way – and used their influence on Fannie Mae and Freddie Mac to make sure they did (and Fannie and Freddie were backed up by the credit money of Alan Greenspan an the Federal Reserve).
This “greedy bankers caused the problem” stuff leaves out all of the above.
Take the only major American bank dominated by Republicans at high level – Wells Fargo (all the others are dominated by Democrats – although the media somehow fail to mention this).
Wells Fargo is being sued for lending money to poor people (“preditory lending”). Has Wells Fargo made a profit by foreclosing on houses?
NO.
Did high managers have some cunning plan to make a profit by tricking people into buying houses and then foreclosing on them?
TOTAL BULLSHIT
“But what about Britain?”
In Britain part of the problem was dealing in American securities – but, yes, not all of it.
The easy money policy of the Bank of England was also a central problem – but, yes, the wild antics of some banks did happen.
My name is not Tim Congdon, I am not going to say that Northern Rock (that handed out 120% home loans to anything with a pulse that came into their branches) was a “well run” institution.
Defending free enterprise does NOT mean that holding that every business is well run.
It does not even mean that the basic doctrine of fractional reserve banking itself (that loans should be larger than real savings) is a good one.
However, even by the standards of fractional reserve banking – companies like Northern Rock were nuts (not “well run” etc, Tim Congdon). They should have gone into normal bankruptcy when they could not pay their obligations.
No corrupt “lender of last resort” principle and no government take over (or forced “sale”) either.
But no – even Northern Rock did not have a cunning plan to make lots of money by foreclosing on people.
The words “cunning” and “Northern Rock” do not really go together.
I did look up “Cloward and Piven”, Paul – quite an eye opener.
What the Wikipedia article fails to point out is that Richard Clowed was, and his wife Francis Fox Piven is, a Marxist.
That puts things like the “motor voter law” (how many illegal immigrants can we get on the voting rolls) into perspective – as it does with the basic “Cloward and Piven” approach to welfare spending.
It is not really about “helping the poor” (at least – not in the way people might think) it is about “collapsing the system” bankrupting the United States (via entitlements and so on) so that a new system can be created in its place.
This is why mainstream Democats (and mainstream bankers) are wildly misguided to try and make deals with these people.
They are Communist Revolutionaries – please note (top people at Bank of America, J.P. Morgan Chase and so on) THEY WANT YOU DEAD. The whole objective is to not only bankrupt the United States – it is to BLAME THE BANKRUPTCY ON EVIL RICH GUYS LIKE YOU.
Remember when Comrade Barack Obama told you “I am the only one standing between you and the people with pitchforks”. Actually he is one of the people HANDING OUT THE PITCHFORKS.
The people who turn up at your homes screaming that they are going to kill your children (and when you call the cops they somehow never turn up – at least if it is Chicago).
Who do you think trained these people?
And do you really think giving their masters millions of Dollars is for ever going to keep them from cutting your family up.
They will bleed you dry – and then they will kill you (and your families).
Nor has Barack Obama changed since his days training ACORN activists and so on.
When do you think was the last time that Barack Obama made a speech at a far left conference in which Van Jones (the founder of the Revolutionary Communist group “STORM”) also made a speech – indeed basically introduced Obama’s speech (which was delivered by technology – he was there in spirit but not in body).
How many years ago?
Actually it was last weekend – at the Netroots Conference in Las Vagas, Nevada.
Comrade Barack is still Comrade Barack.
No matter how many millions of Dollars you give him, he will still turn on you (when the time is right).
In case anyone thinks the above comment is extreme – please remember (out of many examples) the following….
The Weather Underground leaders did NOT just want to rob people – they wanted to kill them also (they got a kick out of the whole idea of killing – see Mrs Ayers’ reaction to the Charles Manson “Family” killing orgy). Or the FBI record of the leaders gleefully discussing the murder of tens of millions of Americans – in a future socialist state.
They have NOT changed – see, for example, their subsidy of the Gaza “”Freedom Flotilia” terrorists.
These people (Bill Ayers, Mrs Ayres, Jeff Jones) are leading respected figures on the left – all of whom have been worked with and been friends of Barack Obama (for example Jeff Jones helped write the Stimulus Bill in 2009 – so the relationship is hardly just a matter of going to the same Marxist conferences when Comrade Barack was at Columbia, being taught by Cloward and Piven).
We are NOT dealing with Robert Owen style socialists here.
Paul, as I see it you are fairly much spot on in your thinking. I think there may be more various subtle permutations that have been added to the mix. Such as, say, the top bankers in the US are also very much the people of influence near, and/or that run the Fed. There is a lot of cross over. Many of these people share the same mentality groomed into them through their “education” process.
So while the bankers and the government may seem to be opposed, they are actually playing opposite sides of the same coin. Not all. But enough.
And, indeed, now that a left-left wing government is in place in the US, well, how long does it take to overturn a boat if everyone rushes to the port side?
With continued excessive deficit spending, it’s not like there is a whole lot of credit available for the rest of us to borrow on…
John B. – I accept the bankers are trapped.
They depend on the flow of credit money from the Federal Reserve.
However, these are (mostly) healthy men with a lot of personal savings.
Remember the young man who helped design the original TARP program (under Bush)?
He went off to a rural area (turning his back on both Wall Street and Washington) and now works for a living.
True his lifestyle is nothing like it was – but he is not on the bread line either (and I much prefer where he lives to the places he used to live).
The top bankers have the same choice – you can still walk away people.
You have personal savings and you have good health (I have neither).
You can take your familiy to a small town in a wonderful part of the country and work for a living.
You just need to have some SELF RESPECT.
Not make endless deals (in order to keep the subsidy flow going).
You will lose things (I do not deny that) – the private jet (and so on) will be gone.
But you will NOT end up living like me.
And both you and your families will in many ways be better off than you are now.
You will not have to worry that your children are being taught to hate you (as a evil “capitalist”) in their elite school or university – because you will not be able to afford to send your children to such places.
They will be with you – helping out on the farm (or the bakery, or the gas station, or the book shop – or…..) and you will be teaching them to read and write (and mathematics and history and …..) after you have finished work.
If you wife loves the trappings of wealth more than she loves you, then you married the wrong women.
And you have got to save your children – before they are either killed by the “activists” or become activists themselves.
Of course there would still be banks in a less statist society.
For example there was no Central Bank in Canada till after the report of 1935.
Not only no “deposit insurance” – but no Central (i.e. government) Bank.
Yet there were ten big branch banking enterprises (I am not going to deal with the fractional reserve issue here – because it is not relevant to this) NONE of which went bust (or needed a bailout – indeed no insitution existed to bail them out) during the Great Depression.
Yet banking was a much smaller percentage of the economy than it now is – it employed fewer people at lower wages.
Even in the United States as recently as 1980 finance and banking was a tiny fraction of the size of the economy it is now.
Banking is a matter of investing people’s savings in productive things (farming, mining, manufacturing, service industries and so on) if it become an end in its self (feeding on itself till it ends up vanishing up its own….) then, well that is a system that can not last.
Bankers (etc) – a sane financial services industry (even if still one based on fractional reserve ideas) is going to employ only a small fraction of the people it now employs (so you are NOT likely to be one of the people still employed).
Also the people it does employ will, mostly, be on a small fraction of the income they now have.
Trying to make deals with government (to keep the bubble going for ever) really is like making deals with the Devil.
Trying to keep your private jet (or whatever) will end up with you and your family losing EVERYTHING.