For four years, the Bush White House, the Obama White House, and the Federal Reserve have allowed banks to pretend that their bad mortgage debt is worth a lot more than it is.
Their theory is that the economy can’t be healthy unless the banks are healthy. So everyone pretends that the banks are healthy.
The economy can’t grow, though, under a blanket of bad bubble-era private-sector debt.
And years of low-to-no growth hurt . . . guess who?
The banks, as seen in their plunging stock values in the past two weeks.
Guess what else hurts banks?
The government’s policy of borrowing hundreds of billions of dollars directly, not to ease a transition into a healthier economy via temporary safety-net spending and infrastructure investment, but to allow state and local governments to pretend that their unaffordable public-sector employee benefits are affordable without the revenue from a financial and housing bubble (that fantasy is what a big chunk of “stimulus” stimulated).
The more money Washington wastes, the less it will have for future bank bailouts.
Investors know this.
The financial industry can’t escape paying for its bubble-era mistakes. But Washington has decided to go the long way in letting the free markets work, and has taken everyone else along for the ride.
— Nicole Gelinas is a contributing editor to the Manhattan Institute’s City Journal.
Years ago I worked for a semi-retired lawyer who didn't have enough income to operate a business, but couldn't face the reality of retirement. When there wasn't enough money in his bank account to cover all the checks he wrote, I would balance the checkbook against the bank statement, take the checkbook into his office and point out the negative balance. Without saying a word, he would take his pen and turn the minus sign on the checkbook balance into a plus sign, close the checkbook and return it to me. I thought he was was an old man sinking slowly into senility when, in truth, he was using the same "accounting procedure" Washington uses to make a negative financial situation appear positive.
Reply to this commentLinkReport AbuseI hope you wrote and cashed your paychecks first!
Reply to this commentLinkReport AbuseGood analogy. The adults must continue to quietly regain control or we'll all face a very uncomfortable future.
Reply to this commentLinkReport AbuseThis is another utterly ignorant article from Ms Gelinas.
Is she truly unaware of the impact the Credit Reinvestment Act and pressure to prove banks weren't "redlining" mortgage applications in poor black neighborhoods combined with Fannie Mae and Freddie Mac rushing to take every one of these loans into its portfolio?
It wasn't the banks who sought to ignore lending standards, but the politicians who demanded it. All while demanding "mark-to-market" accounting which INFLATED the risk of default. Contrary to Ms Gelinas claims, the vast majority of mortgage holders never miss their payment. While the default rates ARE high in historical terms, we're talking 10-15%---meaning 85-90% of homeowners are doing just fine in terms of paying their mortgage on-time. The pockets where default rates are highest across the industry tend to be those same folks that Democrats insisted banks waive lending standards to accommodate.
Ms. Gelinas prefers to blame the banks but despite bank misdemeanors the felonies are all governmental.
Which may surprise a RINO but not a conservative.
Reply to this commentLinkReport AbuseI think you are missing the point of the article ...
to begin with the "banks" talked about in the article are not the ones that made the "bad" home loans. Almost no lender of mortgages is on the hook for their loans. They sell them off to Fannie, Freddie and the like and wash their hands of the securitized risk. It is those risky bonds that are held by the largest institutions that is the issue being discussed.
The original point of TARP ,thus its name Troubled Asset Relief Program, was to take these assets off the books of the banks to allow them to start fresh. Since TARP didn't actually do that we still have alot of these toxic bonds sitting on the banks books when they should be sitting in a Treasury account. So instead of being a "money maker", as it is today, TARP would be a source of continuing losses for the Government which I've got to imagine would not be good for Obama in 2012.
Reply to this commentLinkReport AbuseIt is simply not true. All major players in the mortgage industry have big default mortgage portfolios----Fannie and Freddie don't just take any loan; they have fairly stringent standards for what they take.
A big part of the problem is the paper on these loans changed hands many, many times---indeed, the bankruptcy process has shown how difficult it is for banks to even demonstrate THEY hold the paper.
Moreover, regulations have changed significantly and continue to do so. It is generally necessary to go back to the original note terms, assess how they match TODAY's regulatory requirements, then disposition the loan.
It is never a simple transfer to Fannie or Freddie, which, by the way, CONTINUE to be bailed out.
TARP didn't result in any assets getting straightened out because Democrats will not allow the normal foreclosure and bankruptcy processes to occur. This has cost banks a lot more than TARP supposedly did for them. It has also delayed recovery in the real estate markets for years.
Reply to this commentLinkReport AbuseIn general I agree with your comments - there is a huge amount of confusion in the way that mortgage debt was passed around and the fight against resolution in bankruptcy and foreclosure has had an unhealthy delaying effect. There is one point that I object to, though - the statement that Fannie and Freddie "have fairly stringent standards". For a period of time Fannie and Freddie threw those standards out the window - which got the bubble started. The fact that they reinstituted some standards after things got rolling doesn't get them off the hook.
Reply to this commentLinkReport AbuseYour repsonse might be better received if you knew what CRA stands for (community reinvestment act).
Reply to this commentLinkReport AbuseRegardless of who is at fault, the article is accurate. The banks are not healthy, and the legal assault on them by Fannie, Freddie, the state AG's, etc to repurchase mortgages is only putting more pressure on the banks.
Reply to this commentLinkReport AbuseI think Teflon and Dorsai are both partly right. First, the govt DID encourage banks to make bad loans. The GSEs (Fannie, Freddie) encouraged this by buying these subprime loans. This started the bubble. Soon mortgages were being sold, and packaged, with and without GSE involvement - they were sold to other banks, investors, etc. This burgeoning secondary market created demand for new mortgages, triggering looser money for home purchasers, and then a real estate bubble.
My opinion (I live in Petaluma CA) is that the bubble has not completely popped or deflated. We have been trying to dig ourselves out of the housing market mess by using the same basic tool that got us into this mess: easy money/low lending standards.
We are NOT solving the housing bubbble problem - we are dragging it out.
The GSEs have only INCREASED their share of the residential mortgage market, not decreased. The market is more dependent on them (now fully a gobt entity), not less. In some neighborhoods, Fannie owns a majority of the houses - not just the mortgages, but the houses themselves.
I see the real estate dragging on for at least 5 more years. Maybe 1 or 2 years of decline, but little or no price growth for another 3-4 years. Please note, this is commentary on the NATIONAL housing market - an average. Some neighborhoods will continue to crash hard (mostly new growth in the desert states), others are already recovering (mostly stable or desirable large/ish cities).
That's my $0.02!
Reply to this commentLinkReport AbuseSorry, almost all false.
The banks dealt with their direct mortgage exposure long since. They wrote off over 3% of their loan book every year, added to reserves, let loans run off into cash, brought SIVs back on the balance sheet and sold off individual bonds and whole business units. They are not currently in difficulties due to any accounting practice or anything remotely like it.
Instead they face a pack of trial lawyers who want to loot them on the excuse of losses to others in the crisis, not their own. Which is basically just a game of whack the unpopular pinata.
Actual loan write offs, while still elevated, have fallen back to 2% of the loan book per year, down a third from their peak. Credit card loss rates matter as much as mortgages in that, BTW.
What the banks need from policy is a moratorium on everyone on earth beating the snot out of them. They've been robbed every which way from Sunday by deadbeats and lawyers; in Europe even governments are getting into the "default and screw your creditors, then blame them and whine" racket.
As for bank owners "eventually" needing to "pay", um, bank owners have already endured the loss of 85 to 95% of their pre crisis capital. You can't put any more weight on that mule's back; he's dead Jim.
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