creditcrunchch

Issue #62

Last Update February 28, 2009

National Credit Crisis by Gerry Krownstein January 3, 2007 The current credit crisis is the result of long-standing distortions in our money and banking system. While sub-prime mortgages have gotten most of the recent attention, problems pervade our entire system, and are mostly the result of the dismantling of the financial checks and balances in place since the Depression. Left to their own devices, bankers, credit card companies, mortgage and loan associations and financial derivatives packagers will always let greed overcome common sense. (Marx? Lenin?) said capitalists will sell us the rope with which we'll hang them. Actually, he was wrong; they will braid the rope and then, through incompetence, shortsightedness, arrogance and avarice, they always end up hanging themselves. The worst enemy of capitalism has always been the capitalists.

The credit structure of the United States (and those other parts of the world that copy our pattern) suffers from three major problems:

l       consumer credit is almost completely disconnected from the rest of the credit system. Credit card rates bear no relationship to the rates the banks, credit card companies and even commercial and industrial borrowers pay for their money. As a result, consumer rates are often in the vicinity of a usurious 30% (not counting fees and charges that are often loaded on top). This sucks huge amounts of consumer money from a consumer economy and moves it to areas that are less economically productive.
l       Predatory mortgage lending, including steering creditworthy borrowers to higher rates and less advantageous mortgage terms, creating forms of mortgages which, by their very structure, are a prescription for default.
l       Lending is disconnected from direct lender/borrower relationships through the packaging and sale of debt instruments to the international derivatives market. This removes the responsibility and penalties of bad loans from the loan-maker and transfers the risk to third (and sometimes fourth and fifth party investors with no knowledge of the people or companies involved.

It doesn't take a genius to know what must be done. A five point program will do much to put us back on the right path.

l       Reconnect consumer rates (credit cards, unsecured loans, etc.) to commercial rates by restricting consumer rates to double the commercial lending rate. Which rate (LIBOR, Fed Funds, latest t-bill or bond rate or any of the other interbank or commercial standards) can be debated
l       Forbid variable rate home mortgages where the rate can exceed 200 basis points above the teaser rate, or which have balloon payments of more than 10% of the total loan. Set a standard requiring an after tax income level of the borrower at least double the amount of the monthly or annual loan payments (including principle, interest and fees), unless these loans are subsidized.
l       Restore the bankruptcy provisions that were in place before the recent changes to the law made it almost impossible to get out from under credit card debt.
l       Restrict the packaging and sale of mortgage obligations. The originating financial institutions must warrant a maximum default rate, and be obligated to make good to the purchasers of the packages any overage.
l       Let the consequences of past overreaching fall on those responsible - the lenders, not the borrowers. Roll back adjustable rates to no more than 200 basis points above the teaser rates to slow defaults. Resist any bailout of financial institutions under pressure from the consequences of bad decisions - after all, that's what capitalism is all about, isn't it? Or do the ill effects of capitalism only apply to the weak? There are no financial institutions that can be considered too big to fail; actually, the markets can be relied upon to absorb the assets and take over the functions of any entity that blew itself out of the water. Real money will not disappear from the economy; bubble money was never real and remains a ticking bomb. In short, protect the people who had no hand in the creation of the problem, and let those who caused or abetted the problem bear the brunt.

For the future, appropriate regulation will prevent a recurrence of the recent excesses. Adam Smith, the saint of free-market capitalism, was a strong promoter of countervailing forces; reasonable and appropriate regulation fits into his philosophy, and will help preserve the capitalist system.

New York Stringer is published by NYStringer.com. For all communications, contact David Katz, Editor and Publisher, at david@nystringer.com