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01/14/2008

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Yes, government regulation is the solution, as evidenced by the remakable success of the Savings and Loan industry and the quasi-governmental Fannie Mae.

The last time government regulated in response to a financial "crises" -- Sarbanes Oxley -- they managed to dethrone New York as the financial capital of the world and send billions of dollars of underwritings to London and Hong Kong instead.

First, let me just say I'm sorry to hear this. I am constantly amazed at how corporate boards allow these people to lose all this money and then walk away with no claw backs for past bonuses and severance packages that are magically unaffected by the huge losses.

Two I think we need to recognize that in some ways government was the problem here. First Greenspan's outrage easy money policies created far too much liquidity, and then government regs encouraged irresponsible lending to uncreditworthy clients. Allow me to be clear, the folks that made these loans and sold the SIV's are to blame, but more regulation ain't necessarily the answer.

Book recomendation: I just got done reading Richard Bookstabber's "A Demon of Our Own Design". In it he argues that we created too much complexity, to much coupling and that further regulation actually makes the system even more prone to failure. His view is we should back off the complexity, and allow more opporunities for brakes that will slow these liquidity events. An excellent read.

Tom, I'm sorry to hear your bad news. I've been telling my daughter "life's not fair" since the day she was born, but wow, you really got pooched--through no fault of your own. I hope that you'll be able to pull through regardless.

Pursuit, you're absolutely right. Part of the mess that the consumer mortgage business is in is the government's fault. Specifically, there are allegedly "anti-discriminatory" regulations (dreamt up by liberals, of course) that require banks to make loans to certain minority groups, even though there are fewer creditworthy borrowers among those minorities (specifically, blacks and "Hispanics") than among whites.* This means that banks are governmentally-limited in their ability to exercise proper prudence in determining whom to loan money to.

Everything's fine as long as the economic party is in full swing, but when the economic fecal matter smote the rotary oscillator, banks suffered when those who should never have gotten a mortgage in the first place defaulted. While there are plenty of whites and Asians among those who should not have gotten a loan in the first place, the racial rules increased, rather than decreased, banks' exposure to such poorly-qualified borrowers.

As usual, Conrad is correct: increased gummint meddling is not the answer.

*The liberals' assumption is that "racism" is responsible; as usual, they make evil whitey out to be responsible for minority dysfunction. However, I happen to agree with Frederick Douglass, Booker T. Washington, W.E.B. Du Bois, and Martin Luther King, Jr., all of whom argued that blacks don't need handouts but should be assessed according to their actual abilities and held to the same standards as whites. They all also fought for better education for blacks; if everyone were better educated about economics--heck, even basic math--there might be fewer people who borrowed their way into foreclosure.

P.S.: Greed on the part of some borrowers, as well as a lack of scruples among certain borrowers, are also clearly relevant factors, and I apologize for not including that in my earlier comment.

Oh, and in anticipation of Tom's possible assessment that I am blaming liberals and liberalism for the current sub-prime mortgage mess, I'm not. I'm just saying liberalism it exacerbated it.

A wee definition: "Liberalism, the belief in equality and non-discrimination as the ruling principles of society, attacks all the larger wholes--natural, social, and spiritual--that structure man's existence, because those larger wholes create differences and distinctions which violate the rule of equality and non-discrimination. Liberalism attacks God, truth, religion, objective morality, social traditions, the family, parental authority, sex differences, nation, ethnicity, and race. It aims at a world of liberated, equal human selves, with no God above them and no country or culture around them, free to interact on a basis of total freedom and equality with all other human selves on earth. To achieve this universal freedom and equality, the ability of actual peoples to define and govern themselves must be eliminated. Democratic and constitutional self-government must be replaced by a regime of the global elite, a regime that is beyond criticism and democratic accountability because it represents and embodies the very principle of liberal goodness: the equality of all."

Okay, I have to throw my $.02 worth in here, being that I have around a decade of experience in the banking industry.

Banks will, regulations or not, throw money at consumers when times are good. I've worked for two small, community banks (less than $150million in assets) and when they are in good shape, you can borrow just about any sum of money you want with very little regard to what Experian says about you. You may have a higher percentage rate, but you still get the loan. At one previous employer, this resulted in a single borrower with a yearly income under $100,000 leaving us with nearly $5 million in bad loans. Yes, $5 million.

Banks are so heavily regulated that somewhere along the line someone should have noticed that this guy couldn't pay back his loans. A loan committee, the bank president, the third party auditors, or maybe the FDIC on their yearly visit. But since the bank was making money, no one asked. But once the bank started losing money everyone came crashing down on them. They came within a few days of the feds locking the doors and turning every employee out into the streets. All because the board of directors and senior management got greedy and the FDIC didn't bother to enforce it's own rules.

In the end we have plenty of federal regulation of banks. More than enough, really. But banking regulations are a lot like immigration policies; it doesn't really matter how many rules you have on the book if no one is willing to enforce them.

*btw, I have no dealings with loans or lending. I'm an IT guy, so I keep the wheels turning for the guys who are out trying to make those 96% loans.

Thanks for the insight, Frank. Amazing how so few will do what's right if that gets in the way of making a profit.

(No, I'm not bashing capitalism; I'm criticizing immorality.)

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