Government and banks are collaborating on many Halliburton/Blackwater style public/private partnerships:
- The mortgage lending industry is largely influenced by Fannie May and Freddie Mac, which exist under the implication of a bailout, which means they have an undisciplined appetite for risk. They also have not been required in the past to disclose financials like regular firms are required to. Subsidized loans are the fountainhead of "credit as a right" policies intended to help the poor take on debt that would not otherwise be affordable.
- There has been a tremendous increase in education lending, which has helped to fuel the education bubble. But unlike credit card debt, student loans are not discharged if the borrower is forced to declare bankruptcy. Our politicians have rallied to have more and more of this lending occur, which has resulted in no price pressure on universities (which is why the US has the highest priced secondary education in the world). Banks love it because they get to live in a world where bankruptcy laws intended to protect consumers don't exist.
- These are all part of the "too big to fail" policy of US regulators.
When governments have a stake in particular prices (such as the price of a loaf of bread, a home, or a college education) the market starts to distort, and supply and demand no longer help guide investment. When a bank has purchased massive amounts of Mortgage backed securities under the impression that they are low risk, and the price changes, the bank cares a lot about certain prices. The corruption is what happens when the government starts to care and starts to build policies to shelter banks from market price movement.
Wall Street has not been tamed. For a while the game was to collude to structure risk so that every ounce of leverage benefitted the banks and the systemic risk was unhedged. Now the game is to engage in "credit as a right" policies that couple the bank's outcome to a government policy goal, with profits coming from barriers to entry and lack of competition moreso than from successful portfolio management or efficiency.
Without the strict discipline of total failure to guide bank behavior, it is without question that myriad perverse incentives exist and are being exploited. Greed is not the issue, it's much simpler than that. It's corruption. Regulators are equally at fault.
- The mortgage lending industry is largely influenced by Fannie May and Freddie Mac, which exist under the implication of a bailout, which means they have an undisciplined appetite for risk. They also have not been required in the past to disclose financials like regular firms are required to. Subsidized loans are the fountainhead of "credit as a right" policies intended to help the poor take on debt that would not otherwise be affordable.
- There has been a tremendous increase in education lending, which has helped to fuel the education bubble. But unlike credit card debt, student loans are not discharged if the borrower is forced to declare bankruptcy. Our politicians have rallied to have more and more of this lending occur, which has resulted in no price pressure on universities (which is why the US has the highest priced secondary education in the world). Banks love it because they get to live in a world where bankruptcy laws intended to protect consumers don't exist.
- These are all part of the "too big to fail" policy of US regulators.
When governments have a stake in particular prices (such as the price of a loaf of bread, a home, or a college education) the market starts to distort, and supply and demand no longer help guide investment. When a bank has purchased massive amounts of Mortgage backed securities under the impression that they are low risk, and the price changes, the bank cares a lot about certain prices. The corruption is what happens when the government starts to care and starts to build policies to shelter banks from market price movement.
Wall Street has not been tamed. For a while the game was to collude to structure risk so that every ounce of leverage benefitted the banks and the systemic risk was unhedged. Now the game is to engage in "credit as a right" policies that couple the bank's outcome to a government policy goal, with profits coming from barriers to entry and lack of competition moreso than from successful portfolio management or efficiency.
Without the strict discipline of total failure to guide bank behavior, it is without question that myriad perverse incentives exist and are being exploited. Greed is not the issue, it's much simpler than that. It's corruption. Regulators are equally at fault.