Banks - let's create another crash?
First a recap of the previous problem. Banks were encouraged by various governments to make loans to those they wouldn't normally have done so. People were encouraged to go into debt and all these debts were grouped and sold on, the returns were high and the risks were reported as low. With a culture focussing towards the short-term it was a sensible business decision, until it all fell apart and the banks required bailing out by the governments
Since the bailout the banks have reverted to their old conservative ways of only wanting to lend out money to those that don't need it, this has caused a contraction of growth and is causing more economic problems.
So why do I bring all this up? Well this morning I hear the bright idea from Vince Cable of linking bank bonuses to lending. That is if the banks don't lend out the money they don't get rewarded. Does this sound familiar? Okay it's not as bad as purposefully lending out money to those you know won't be able to pay it back, but it's darn close.
4 comments:
Hahahaha!
Oh my god, this would be hilarious if it wasn't so damned scary.
And of course all this comes after the stress testing the EU regulators have been doing.
It's one of those delightfully intractable problems - the banks by their nature don't want to loan out money unless they're sure to get it back with interest. This in turn produces a downturn in the economy which increases the risk of business failure which decreases the pool of those the banks will lend money to continuing the spiral.
As the banks make money by lending it out, the risk limit needs to be shifted about and loan interest rates altered to insure the banks take the minimum amount of risk they can. Except there are limits that apply to such rates so the levels get capped. Remove the caps and you might as well turn to a loan-shark.
Competition would supposedly keep things down, but if you're a risky prospect no bank will touch you unless they can nail you to a high rate and that would soon stabilise, until someone breaks ranks at which point you start back at the original mess of trying to make money out of loans that shouldn't have been given.
The other would have been to constrain the growth of the banks, prevent them getting too large which would create more of them. Should one fail it wouldn't bring down the entire system, it's simply not large enough.
This is fine until you need some stupendously large loan such as Kraft buying Cadbury and no-one would be able to undertake it. I suppose a group of banks could, but again if the debt went sour you'd be looking at multiple simultaneous collapses.
Yeah it is hilarious :-)
So what you're basically saying is that the Western economic system basically cannot work?
What a hoot! :-D
To my mind it's based on a serious of assumptions that are flawed, the role of the government in this case is to prevent the exploitation of such, yet we've 'suffered' under the lead of those who believe it to be perfect.
Let me present a simple assumption I've used before, try to spot the flaw.
A company makes a product that customers want, it sells such products and makes a large amount of money. Under the free-market assumption this company is 'good'.
Another company comes along that makes the same sort of product only better.
Under competition the first company either reduces its price or improves its product.
Under the same competition the second does the same.
Thus the free-market assumption shows customers getting a increasingly better product for the minimum of the necessary price.
Gosh isn't that good. Now the flaw is that each company are good old chaps that will always act gentlemanly to each other don't you know.
So Company 2 starts up and Company 1 instantly files for patent infringement. As Company 1 is large and has money and company 2 is in this instance a start-up. Company 2 can't afford the fees, can't make their product and so fail.
This is where the government is supposed to step in. In theory it should prevent any company becoming large enough to reduce competition by means other than by rewarding the customer. However by elevating the invisible hand and the 'customer is always right' fallacy the assumption becomes that the market would right itself.
Except it can't because said invisible hand is being sat on by the larger companies.
While I don't mention banks they deal with such all the time. In theory they should happily lend Company 2 money - it's products are better and due to the proven power of Company 1 there's obviously a market for them. Except they have to take into account Company 1's influence and all the dirty tricks they might use. Hmm better not to risk it and so Company 1 continues its merry way and Company 2 doesn't even have a chance of existing.
Post a Comment