| In the contemporary environment where “money” is little more than electronic IOUs (liabilities) from financial institutions and intermediaries, I believe a more applicable “law” would hold that “bad lending drives out good.” Certainly, we have seen exactly such a situation develop over this protracted cycle as Wall Street has grabbed the reins of the money and credit creation process. While traditional finance sought to profit from lending prudently, today’s game is all about voluminous fee-based security issuance, sophisticated vehicles and structures and, of course, lots of derivative products. Quality was been completely sacrificed for quantity. In the process, the investment banker and “rocket scientist” derivative specialist has come to dominate the monetary system, supplanting the local loan officer. And while lending for investment into cash-flow- generating enterprises was the business of the local banker, the volume seeking Wall Street banker specifically pursues enterprises with negative cash flows that will require continuous financings. After all, the “best” clients are those that “keep coming back to the trough.” Besides, as Wall Street thinking goes, if the marketplace does become nervous about the soundness of securities (as it is today) doesn’t that just provide more opportunities for “our derivative department down the hall” to peddle credit insurance? Why has it not been absolutely obvious that this was no way to run a financial system? |
