Everytime I watch TV or read the newspapers, people are crying out for the banks to open the LOAN faucet to "save" the economy. Isn't bank overlending that got us into this mess in the first place. More lending now is like throwing more water on a drowning man. Yes?
Should Banks Lend More
- Thread starter Rockslinger
- Start date
Rockslinger said:
Yes, but what's happened is that instead of turning down the lending faucet, they've turned it off altogether, and that suffocates the economy.
The problem was never lending, it was lending excessively and to the wrong people, creating a bubble. And then not recognizing the risk by packaging all these substandard credits as investment worthy.
Without the lending, this recession will be extended. To get back on track, we are going to need banks to step back from their frightened corners.
Barca said:
That is exactly what I told my bank manager when I applied for the $10,000 line of credit (to finance my SC addiction). She asked about employment. I said I am currently "between projects" (she wrote "unemployed"). Then she asked where I was born and asked to see my citizen card (Canadian) and passport (Canadian). It was like pulling teeth.
If the bank lends me the $10,000, I'll spend it on dancers and they will take the money and buy cellphones, computers, shoes, cars, condos, etc. to stimulate the economy.
Unfortunately, as I understand it, our economy is based on credit and being able to obtain loans, mortgages, financing etc.
As Barca stated, the mess wasn't necessarily caused by loaning people money who couldn't afford to pay it back, but the shady way the high risk mortgages were packaged as investments and sold off to the rest of the world. I think if they had kept the risk within the US borders, we'd all be better off and they'd be the worst hit.
The thing I can't figure out about the whole mess is: who actually made the money from these mortgages? The builder? The seller? SOMEONE made some cash...
As Barca stated, the mess wasn't necessarily caused by loaning people money who couldn't afford to pay it back, but the shady way the high risk mortgages were packaged as investments and sold off to the rest of the world. I think if they had kept the risk within the US borders, we'd all be better off and they'd be the worst hit.
The thing I can't figure out about the whole mess is: who actually made the money from these mortgages? The builder? The seller? SOMEONE made some cash...
Rockslinger said:
Unfortunately, the banks are not interested in helping overcome the recession, they are interested in maintaining the health of their balance sheets.
What Central Banks do to try to stimulate banks to lend is to lower the interest rates but what has happened is that banks are so gunshy right now (all over the world) that instead of passing on the interest rates savings, they are keeping the spread and maintaining a tight credit environment.
There is talk in the US of congress forcing banks to start loosening their approvals if they are to qualify for the bailout money. Which would make sense to me.
Businesses of all sizes use lines of credit and short-term loans to make payroll and purchase goods for their business (e.g. a retailer buying stock to sell). Without these kinds of loans and credit our there will be a lot of damage to our economy. Imagine your company saying it can't pay you this week.
.Barca said:
Why can't the Central Bank (or an affiliate) lend the $10,000 directly to me? I will definitely spend it to stimulate the economy.
Rockslinger said:
Central Banks are not created to service the consumer. They have a different function, to be the monetary authority of the jurisdiction they govern. They oversee the stability of the currency and manage the money supply.
Even in Socialist or Communist countries, Central Banks aren't the ones that service the public, they still have public face banks.
At the end of the day Banks will eventually start lending again...it's just that everyone is on edge right now. But banks make their money through their Personal and Commercial (P&C) Banking operations and so eventually they will have to otherwise it will affect their profits. It's a matter of when.
For me, I always recommend to clients that they establish credit and credit lines during GOOD TIMES, but not use them so that during bad times, they have credit lines already setup and don't have to worry about going through an approval process.
Rockslinger said:
People want money, not loans. Jobs don't dish out any cash, currently. Heavy regulations are coming.
I personally think, it was done to keep men from getting sex. So it's the last month of Orwell.
Soon plenty of sex, plenty of cash, lots of jobs.....lots of real estate. Good times coming in 2013.
And when they come, don't make any mistakes so you can ride the next downturn.
Gyaos.
Barca said:
During the good times, I would receive all these unsolicited credit cards. Man, this approval process is dehumanizing and demeaning. I mean I had to prove that I am a Canadian citizen and have a Canadian passport.
Rockslinger said:
Ouch, are they asking to hold one of your testicles as collateral as well? LOL!
When this is all over with, people need to have 3 things.
1 Mastercard
1 Visa
1 Credit Line.
Nothing more. But nothing less in my opinion.
Most of us have far too many credit cards and not enough in terms of credit lines. Remember that interest rates on credit lines are substantially less than credit cards and can be linked directly to your bank account and your debit card.
Serpent said:
The loan manager's antenna went up when I said that I was "between projects" and I noticed she wrote "unemployed". Then she asked if I was a U.S. citizen because, apparently, banks have some kind of reporting obligation to the IRS for U.S. citizens living abroad. I said I am a Canadian citizen and she asked for some kind of proof (so I showed her the red Maple Leaf on my chest and the hockey scar just above my left upper lip).
Rockslinger said:
The banks need to open the purse strings to business to stimulate the economy.
Whenever the Banks have a large increase in loan defaults the have to write the loans off the books. This lowers their capital. They have capital standards which they have to maintain. Politicians are telling them to open up the purse, while a government agency is telling them to increase their capital adequacy levels.
Poor bankers caught in the middle (This is a sarcastic remark as I do not think there is much sympathy for bankers right now)
They also tend to fire loan officers who write a lot of non-performing loans
To be honest if I were a loan officer I would not lend to someone "between projects" who wanted to stimulate the economy at the peeler palace. I would tend to think the chances of default were significant and that is not in the loan officers interest (ie I might get fired if I wrote a lot of these loans)
tboy said:
The mess was caused by both poor lending practices and by the securtization of low quality loan sold as investment grade packages
Loan officers in the US were inceented by commissions based upon volume, not the quality of the loan.
Many of these loans had teaser rates which reset after 2-3 years, the loan officers and the borrower both knew they could not afford the loan at the higher rate unless, the borrowers income increased or the asset value increased. Niether happened
The securitization of the loans was fuelled by the desire to gain higher yields.
The asset managers who bought these pieces of junk should have investigated further.
Where did the money go?
Most of it evaporated from investment portfolios of mutual funds and pension plans around the world. Imagine your MF manager bought an investment in mortages bought for 10MM paying a yield of 6-7%. (At the time it appeard to be a good investment as the seller indicated they were quality mortgages) The mortages start to default, the interest payments stop being paid and the fund manager has to write the value of investment down to say $2 -5 MM
Ths causes the net asset value of the fund to drop. Investors in the fund say "WTF I am pulling my $"
The fund manager must then sell stocks or bonds at lower and lower prices to get the cash for the investor. Hense the stock market crash
The investment bankers who sold the junk did make a lot of money on volume (not a 100% sure of the amount but my guess is 1-2% of the orginal security value) If they were not holding any of the junk when the music stopped they made out like bandits. Since Bear Sterns and Lehman went tits up, they must have had a ton of the junk on thier books
