SectionsTime to end 'safety nets' for banking
J.D. Garretson
Issue date: 10/14/08 Section: Opinion
From what I understand, the current global financial meltdown began with private credit rating businesses. Organizations like Moody's and Standard & Poor's began rating mortgages by degrees, making all loans within a rating theoretically equal in risk. This allowed easy bundling and resale of mortgages to investor groups, and eventually usurped government oversight.
Instead of waiting decades to make good on home loans, banks and businesses could repackage them, make their money in one lump sum, and use that to issue more loans. It was suddenly beneficial to take on riskier loans, or even just any loans at all.
Thousands of loans totaling hundreds of millions of dollars were routinely packaged together, often including sub-prime mortgages - those held by people with bad credit histories. Sometimes the bundles were entirely sub-prime. These exotic new ways to sell IOU's were once widely celebrated.
More loans, more risk, less regulation, Lehman Brothers. There was an inevitable wave of defaults, and suddenly banks owed more than they were worth - the same sort of mess many homeowners are finding themselves in.
Now the Treasury is investing in banks, buying stock to inject equity and reduce the risk of lending. The trade-off is that the government and the taxpayers funding this bailout take on partial ownership of the company.
Some call this partial nationalization. Some fear it's a step toward economic socialism.
But is that really something to fear? Imagine that this step was completely unneeded. What if instead of a partial nationalization of select banks, we had a central national bank? What if the bailout money went directly to loans, as opposed to the roundabout path the government is taking now?
Imagine a world without private banking. Imagine living free from the tyranny of ATM fees. Imagine a bank with the same phenomenal customer service we've come to expect from government agencies. OK, actually, try not to think about that… But, consider the risks of the current system.
Instead of waiting decades to make good on home loans, banks and businesses could repackage them, make their money in one lump sum, and use that to issue more loans. It was suddenly beneficial to take on riskier loans, or even just any loans at all.
Thousands of loans totaling hundreds of millions of dollars were routinely packaged together, often including sub-prime mortgages - those held by people with bad credit histories. Sometimes the bundles were entirely sub-prime. These exotic new ways to sell IOU's were once widely celebrated.
More loans, more risk, less regulation, Lehman Brothers. There was an inevitable wave of defaults, and suddenly banks owed more than they were worth - the same sort of mess many homeowners are finding themselves in.
Now the Treasury is investing in banks, buying stock to inject equity and reduce the risk of lending. The trade-off is that the government and the taxpayers funding this bailout take on partial ownership of the company.
Some call this partial nationalization. Some fear it's a step toward economic socialism.
But is that really something to fear? Imagine that this step was completely unneeded. What if instead of a partial nationalization of select banks, we had a central national bank? What if the bailout money went directly to loans, as opposed to the roundabout path the government is taking now?
Imagine a world without private banking. Imagine living free from the tyranny of ATM fees. Imagine a bank with the same phenomenal customer service we've come to expect from government agencies. OK, actually, try not to think about that… But, consider the risks of the current system.
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