Brian The Dog on 13/10/2008 at 08:26
Due to what RBJ said on inter-bank lending (the interest rates the banks charge each other, above a base rate, has been rocketing recently as the banks are very wary that someone might go bust and take their money with them), we are having some major part-nationalisation happening (
http://news.bbc.co.uk/1/hi/business/7666570.stm) here in the UK.
Just to put this in context, the banks involved are not investment banks, but high-street banks. HBOS is the UK's biggest mortgage lender, and RBS (which also owns NatWest, incidentally) is the 2nd biggest bank in the UK, and the 13th biggest company in the world.
I'm not too knowledgable about economics and finance, but I guess the UK government doesn't want a repeat of what happened in Iceland. But then, we haven't lent five times our GDP...
PS - Robert Peston at the BBC has become something of a major commentator on the whole affair, being the BBC's economics editor. His (
http://www.bbc.co.uk/blogs/thereporters/robertpeston/) blog is one of the most visited sites on the BBC.
infinity on 13/10/2008 at 09:38
Now's the time to buy folks.
Whenever there is a significant downturn everyone runs for the hills, quick to critisize capitalism and big business. You weren't critisizing capitalism for the past 20 extremely prosperous years were you? People must understand that the market has ups and downs. This is not the end of the financial world. Many assets that are being marked as having ZERO value actually have quite a bit of value, and people are just now realizing this.
Or maybe my optimism is in the wrong place and I should really buy a farm in the mountains somewhere and become a hermit.
Rogue Keeper on 13/10/2008 at 09:52
Quote Posted by infinity
You weren't critisizing capitalism for the past 20 extremely prosperous years were you?
How "weren't"? Where you have been in past 20 years?
Last thing we need now are smartass Austrian School followers giving us lessons about macroeconomic periods of growth and recession. They should blame their monetarist Chicago cousins for this crap.
Also, when people are in depression, you don't dare to cheer them up with colorful balloons and cherry lollipops or they turn MAD at you!
Therefore : SELL! SELL! SELL!
fett on 13/10/2008 at 13:02
Er...most every American with two brain cells to bang together has been bemoaning corporate greed and worrying about this for roughly twenty years. So yeah.
Swiss Mercenary on 14/10/2008 at 04:54
Quote Posted by infinity
Now's the time to buy folks.
That's what Mr. Harper recommended for Canadians to do last week.
Anyone who followed his sage advice lost 20% of their money.
BEAR on 31/10/2008 at 14:22
I know this thread kind petered out, but this was an interesting article so I figured I would post it.
(
http://executivesuite.blogs.nytimes.com/2008/10/30/peeking-under-the-kimono-a-big-banker-speaks-out/)
And here is his rebuttal to various comments posted with some links.
(
http://executivesuite.blogs.nytimes.com/2008/10/30/peeking-under-the-kimono-a-big-banker-speaks-out/?em&apage=3#comment-3785)
And for those who can't be arsed to read either:
Quote:
Big banks like the one I work for typically have an aversion to lending to companies whose sales and profitability trends are deteriorating, even in tough times like these. Thus, very credit-worthy businesses are having their lines cut back or closed down. Not only are banks not making new loans, they are systematically withdrawing from the loan commitments they already have in place.
Why do the big banks act like this? Because they don’t have a personal relationship with their small business customers. Instead, over the years, they have come to rely on impersonal credit scoring.
Quote:
If we make the bailout funds available to the community bankers, I promise they will know what to do with the money. They will lend it and they will make prudent lending decisions, based on direct and comprehensive knowledge of the borrower. So what are we waiting for?
And in his comment:
Quote:
For those who don’t believe that the government issued ‘guidance’ to the banks ‘asking’ them to curtail loans in the subprime market and warning them of the risks, read these attachments. They are from the Federal Register, 2005 and 2006. Other warnings go back as far as 1999. They are referred to in these guidance letters. Clear as day. I dare you to dispute this further.
(
http://edocket.access.gpo.gov/2005/05-24562.htm)
(
http://edocket.access.gpo.gov/2006/06-8480.htm)
Banks do NOT LISTEN. They will not make more loans unless the deal they strike with the feds specifically requires them to and tells them how to do it. They didn’t voluntarily listen to the regulators back then and they won’t voluntarily listen to the regulators now.
I've heard this sentiment from elsewhere before, but this seemed to lay it out well. I'd be interested to get RBJ's opinion on this, since to a layperson like me, any economic jargon is going to sound informed.
heywood on 31/10/2008 at 19:01
The leaders of our financial system are talking out of both sides of their mouths. Examples:
On one hand, we're telling banks how stupid they were to expose themselves to risky loans and operate at high leverage ratios. And on the other hand, we're trying to push them into loaning money to other banks and businesses, particularly to those with lower credit ratings that may be on the verge of failing. We've complained about investors (and banks) lacking confidence in the creditworthiness of borrowers. But we're also acting to prop up banks and business which should rightfully be insolvent, thereby making it more difficult to determine who is credit worthy.
On one hand, we've encouraged the remaining investment banks to become bank holding companies and take deposits, thereby subjecting themselves to the 10% reserve requirement. In order for these banks to build their reserves and for other banks to maintain theirs in the face of people pulling money out, they need to "hoard cash". On the other hand, we're bitching about how banks are hoarding cash. And the bailout bill allows Bernanke to drop reserve requirements if he choses, thereby recreating the leverage problems all over again.
On one hand, we're complaining about how banks failed to accurately value risky assets. And on the other hand, we're acting to prop up these assets and not allowing the market to establish their true value.
In short, at the same time we're scolding banks for being irresponsible lenders, we're desperately encouraging them please to get back to lending irresponsibly. Oh, and to all those Americans who are carrying way too much private debt, you better start spending more because it's good for the economy. :thumb:
And while all this is going on, mortgage defaults and declining home values are working in a feedback loop to create more and more bad debt. And the government is doing nothing to stop that. The Treasury can throw all the money they want at banks, but the credit crunch won't be over until the housing market bottoms out. It's as if their solution to fixing a leaky swimming pool is to pour more water in the top.
Finally, I'm amazed that after two decades of expansionist monetary policy, which has produced at least 4 major asset bubbles, the leaders of our financial system are still fighting to expand the money supply.
On a positive note, I read a good interview with Anna Schwartz a couple weeks ago in the WSJ and was pleased to see at least one economist with access to policy makers holds similar views.
BEAR on 1/11/2008 at 04:56
Quote Posted by heywood
On one hand, we're telling banks how stupid they were to expose themselves to risky loans and operate at high leverage ratios. And on the other hand, we're trying to push them into loaning money to other banks and businesses, particularly to those with lower credit ratings that may be on the verge of failing. We've complained about investors (and banks) lacking confidence in the creditworthiness of borrowers. But we're also acting to prop up banks and business which should rightfully be insolvent, thereby making it more difficult to determine who is credit worthy.
Yeah, we're telling them to stop with the risky mortgage stuff and get to the real business they need to do, lending money to each other and small businesses that actually need the money and will put it to good use.
What is the question here again?
Quote Posted by heywood
In short, at the same time we're scolding banks for being irresponsible lenders, we're desperately encouraging them please to get back to lending irresponsibly. Oh, and to all those Americans who are carrying way too much private debt, you better start spending more because it's good for the economy.
What? Who is pressuring the banks to make irresponsible loans? Regular loans (that support our economy) are not what got us in this mess. And what got us into the biggest mess was (as RBJ pointed out), banks NOT lending money to eachother.
I'm really not quite sure what you are talking about. I mean, I know what you are talking about but you compare a good thing to a bad thing and propose not doing the bad thing and doing the good thing instead is talking out both sides of your mouth, which makes no sense at all.
heywood on 1/11/2008 at 16:29
What started this mess was a housing bubble, fueled by the availability of easy money. The credit crisis is just the inevitable result of the bubble bursting, and the solution is not more easy money.
The primary reason why interbank lending slowed last month is because banks didn't know whether other banks were going to remain solvent when they seemed to be failing left and right. The secondary reason is that they're trying to reduce their leverage and increase their own capital reserves because they're afraid of failing too. Throwing money at banks in the hope they will lend it won't work if the banks don't know who is a safe borrower and need the cash themselves.
You said the banks should stop the risky mortgage lending but they should continue with "regular" lending to each other. But what if the other bank who wants to borrow from you has a balance sheet of unknown value full of bad mortgages and their derivatives, and is on the verge of failing? You can't see their balance sheet and the FDIC isn't in the business of rating a bank's creditworthiness, so you really don't know whether that loan is risky or not. Lending to businesses may be a safer bet. At least you have a better idea of what their assets are worth. But still, how safe is a loan to a cash poor business with a shrinking share value in a contracting economy? In other words, how do banks know what a "regular" (ie. safe) loan is in the current situation? It's probably better to be safe and use any positive cash flow to strengthen your own balance sheet, boost your share price, and prevent a run on your deposits.
Also, the banks know they are still vulnerable because the root of the problem is still there. Mortgage defaults continue, leading to more foreclosures, which drive housing prices lower, which cause more mortgage defaults, and so on in a feedback loop that continues to generate more and more bad debt. So banks who are heavily invested in mortgages and derivatives still don't really know the value of their own assets. Nobody can really know the value of banks' assets when the housing market is in the middle of a collapse.
Bernanke and Paulson are still stuck on trying to pump cash into the banking system thinking the credit crisis is a money supply/liquidity problem. But if banks are behaving responsibly, no matter how much cash you give them, they're not going to lend if they don't have confidence in their borrowers and can't assess the value of their own assets or their borrower's assets. And if you compel them to lend, you're forcing them to accept more risk and contributing to the insolvency problem. The way I see it, the bailout plan is just throwing good money after bad.
What the government should be doing instead is trying to stop the generation of more bad debt by breaking the feedback loop in the housing market. This crisis started in the housing market and it will end there, once the bottom has been reached. Only then will the banks be able to properly value their assets. The question is whether the government will act to help stabilize housing prices or just let it collapse on its own.
