Who is responsible?
There are many unknowns with respect to who is ultimately responsible for the current economic housing bubble bursting, or bubble forming/inflating for that matter. As a result, it will be difficult to focus a moral debate toward a specific party without endorsing an uncertain argument. Are Americans becoming too credit reliant and have they lost the fundamental ability to understand solvency? Probably, but people should have the right to sink their own ship (they should be taught to do otherwise and media should assist in this effort by stopping the promotion of credit). Did financial institutions in the US and the rest of the world go too far with respect to improper lending? Probably, but their position is defendable from a legal perspective and from the market condition at the time (most of them anyway). Are monetary policy and the Fed going to solve this with interest rate reductions and bailouts? No, because the rate manipulations were mostly likely the source of the bubble and the bailouts do not serve to have financial institutions correct themselves. There is, however, a common thread between the financial market victims (banks or otherwise) and individual home owners that should be on everyone’s agenda, especially the Fed. The commonality of the two parties pertains to the financial stability and risk in an individual’s credit future. I will explain.
Should an individual person with a decent credit rating decide on their own that it is in their family interest to pursue the purchase of home now by borrowing money, in lieu of saving and purchasing home later (at a higher level of initial equity and lower personal risk), then that is their undeniable right. A financial institution has a right calculate the risk of lending to this person based on the person’s credit rating, history and most of all, current market conditions, albeit interest rates, rise and fall of home prices, down payment or initial equity, etc. In this small instance the bank has the right to determine whether an individual person can undertake this additional risk and financial responsibility. That should be where it ends for the bank in terms of profiting from an individual’s right to expose themselves to risk. It needs to be understood from a moral and lawful stand point that the individual is taking the risk on his own future and that the bank is not purchasing the rights to the successes of this individual by entering into a substantive mortgage agreement. If an individual wishes to agree to terms wherein the loan payments reset, that are of a high percentage of their annual income and that the loan is to be for a long period, the bank has the right to deny the loan. The bank’s failure to do this, in recent years is not the immoral issue in of itself, yet this is a good reason for the banks to fail or radically adjust their way of doing business. However, the bank leveraging this personal mortgage risk is an immoral one.
If a company that sells bread needs a new bread facility and borrows money from the bank. The bank has the same rights to make judgments about the bread market and the company’s ability to do business and pay back the loan as indicated above in a personal mortgage. In addition, and in stark moral contrast to a mortgage of an individual, the bank should be able to leverage the success of the bread market and the bread company. This is the risk of doing business in a free market.
A financial institution should not have the right to bundle loans and resell the risk, bundle the loans and place the loans on the free market, engage in credit default swaps based on mortgages, or perform any other action where the bank serves to profit from individual mortgages in any way other than being paid interest against the actual loan itself. A bank cannot totally abstain from fractional reserve lending or leveraging their position in order to make money. A bank should be able to leverage their investments and create illiquid capital from their future gains against current investments. This is the bank’s risk and the bank’s reward or failure from the taking on such an investment. However, these investments, morally, must not include personal mortgages. If a bank or financial institution forecasts gains from personal mortgages, it should be done on a dollar for dollar basis and the bank should not be allowed to increase its leverage in other markets or make a market from the perceived gains. Financial institutions should not have the right put people’s individual futures on the open market for gain. Only that person has that right. Our society and successful free market allows for enough opportunity to earn money from speculation without this on the table.
The industry is rampant with bundled mortgages that are all leveraged on the books. Most of the banks and financial institutions exposed to this immoral market are overleveraged and have solvency problems. Some banks have this in their business plan and are able to continue doing business. All financial institutions need to begin a de-leveraging cycle or program which they need to have in place by the end of a determined period. This program needs to be monitored and measured by FDIC or whichever entity that the Fed deems to have the responsibility. Furthermore, new programs of bundling mortgages or putting mortgages on the free market need to be deemed illegal and should not be permitted. The Fed and FDIC need to protect people from failing banks by adjusting the coverages of the FDIC from the antiquated poster board $100,000 maximum to a set of new rules that instills confidence through protection. The current $200 billion in Fed backing should protect people from failing banks, not protect the banks from failing people. The money came from the people to begin with and the banks can protect themselves from failing people by changing policy and taking less risk. The above, of course, needs to be needled by the economists and federal bankers of the world who will provide the numerical metering, standards and measure of such actions and plans. On the other hand, a moral and fundamental stance and explanation of the above can be implemented immediately without much calculation.
Some will argue that the above does not solve the current burst of the bubble. My response would be that there is little use in defusing a bomb after it has gone off, but there is a need to stop the bomber at the same time as treating the injured. Others will argue that the Fed needs to take stronger action and more stringently regulate lending practices of banks and continue bailouts of those affected or even monitor investment firms. These people will argue that credit and confidence need to be repaired first. I argue that confidence and stability comes from agreeing on the principle of corrective action and wrong doing, not from nationalization of our lives and our banks. I contend that banks will not experience runs on them when investors have a broader personal protection from agencies like the FDIC in times of trouble. Let’s face it, it is the run that brings down the bank, albeit on the market or in withdrawals. The market needs to remain free along with all the people living and using it. Those that have failed in it will need to fail of their own accord. We can soften their fall by protecting individuals, but they must be responsible, in some way, for the actions taken and self correction must occur. People speculating disaster from these bank failures, like members of the Fed, should be reminded that new principles should be created to stop bubbles from inflating and bursting and that they should learn from these failures, not attempt to pretend they do not really exist or that they could be fixed through monetary policy or some other confidence defending measure. Make the numbers plain, open, available and understandable. People will do more with the truth in a crisis than a sedative half truth.
