Friday, January 16, 2009

How the Mighty Have Fallen!

I am watching the news and the banks are dominating the headlines. The banks keep losing money and keep asking the government for more of our tax dollars. They continue to make bad decisions and we continue to pay for it. I am not sure when society made it more acceptable to ask for welfare but in my opinion it is an epidemic that will lead to socialism and/or nationalization. Maybe it was how I was raised but I am not that old. Might be a trend that has been happening year after year and really picks up steam during recessions.

We keep assuming that if the financial industry collapses then we end up in total chaos. The assumption is that if a company or bank fail then nobody replaces them. Basic economics teaches us that if there is a demand there will be a supplier of goods or services. When the supplier is willing to supply a good or service at the price that the consumer is willing to pay then we have market equilibrium. I'm sure that banking is profitable enough for a new supplier to appear and take over the large demand that will exist if these companies fail. The government is trying to protect themselves by throwing money at the problem without any guarantees. Why do these banks continue to buy other banks if all the assets are considered toxic? Why do these private banks run to the government for help instead of restructuring and making sure these loans perform. They after all made these loans because they abandoned traditional underwriting standards in order to keep up with every other lender that was making these ridiculous loans. When sub-prime lenders rapidly pulled their programs in August of 2007 the markets downturn picked up a rapid pace. Do these CEO's automatically assume that they are going to get bailed out. What ever happened to having some pride in running a successful company instead of waiting to get fired so that they can collect on their golden parachute.

The government pumping our tax dollars has done nothing but allowed companies like AIG to continue to have extravagant parties for their terrible executives. I would love to make a million dollars to run a company into the ground but guilt will drive me crazy. We need to allow the natural business cycle to take place and not try to incorporate corporate welfare. If banks and lenders would have started to work out modifications from the beginning we would not have entered into such a mess because more families could have afforded to stay in their home and we would not see as many foreclosures flooding the market. Sure people will argue that the foreclosure rate was higher on modified loans in the first quarter of 2007 but that's because they continued to allow foreclosures to hit the market and so those with modified loans still did not have principal reductions that allowed them to see that they might be able to absorb the loss in equity. From my experience the banks have been unwilling participants and I think it is because they are dependent on getting some of our taxes. If we cut off their funding then they will do whatever it takes to keep those loans performing and we will see a decrease in foreclosures.

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