For 20 years, loans grew twice as fast as GDP, and real estate loans grew faster than anything else.
Lenders sold off their U.S. Treasuries - let the Chinese buy them - and financed risky mortgage securities instead, funding riskier and more complex transactions, and trusting S&P and Moody's bank-paid credit ratings instead of checking below the hood.
ELMAT:
This back to making things may come with protectionism and then target the protected indutsries or sectors for profits.
PhillyDeals: Time for U.S. to get back to making things?
By Joseph N. DiStefano
Of all the questions asked last week at the Financial Crisis Inquiry Commission hearings about why U.S. finance wrecked the economy and what to do about it, commission member John W. Thompson, chairman of Symantec Corp. and a native of Burlington County, asked one of the best:
Has the United States "had too much of its human capital diverted to financial engineering, as opposed to mechanical engineering or electrical engineering or engineering of real products that over time make the real economy competitive?"
"You probably will see a change," agreed JPMorgan Chase & Co. chairman Jamie Dimon. "The talent will go into a whole bunch of other fields."
Well, we'll have to find something for the bright young people to do. Mark Zandi, chief economist at Moody's Economy.com in West Chester, testified that the economy had "permanently" shrunk, shedding millions of jobs, with the real estate collapse.
Bankers on steroids
Though Goldman Sachs Group Inc. chairman Lloyd Blankfein told the commission he was still not sure that what happened was "a bubble," the clearest prescription among last week's witnesses came from a onetime Federal Reserve bank examiner, Mike Mayo, who has followed bank stocks for a string of investment firms over the last 20 years.
The banking industry, like Major League Baseball, has been "on steroids" throughout his career, he testified.
A year and a half after Lehman Bros. Holdings Inc. blew up, "I'm shocked and amazed that more changes to banks have not taken place," he said. The risks were "obvious and easy to see. Wall Street has done an incredible job at pulling the wool over the eyes of government and others."
For 20 years, loans grew twice as fast as the gross domestic product, and real estate loans grew faster than anything else.
Lenders sold off their U.S. Treasuries - let the Chinese buy them - and financed risky mortgage securities instead, funding riskier and more complex transactions, and trusting S&P and Moody's bank-paid credit ratings instead of checking below the hood.
The Securities and Exchange Commission made things worse when it ordered banks to stop hoarding cash in prosperous years. The Federal Deposit Insurance Corp. let down its guard; it stopped charging for deposit insurance from 1996 to 2006 (and laid off thousands of bank examiners). The government used Fannie Mae to "subsidize" social policy by financing low-down-payment loans to risky first-time home buyers.
And, Mayo said, banks offered executives and traders perverse incentives. True, bankers can say they paid themselves a steady 25 cents or so for every dollar they collected in fees and interest over the last decade. But, Mayo points out, citing FDIC data, if you subtract loan losses, banker pay actually zoomed from about 27 cents of every dollar they collected in 2007 to more than 40 cents of every dollar last year.
What's to be done? "A, B, C," said Mayo: Tighten bank accounting rules, ending "mulligans and gimmes" companies use to camouflage bad debt. Let badly run companies go bankrupt, and charge higher insurance rates for banks that insist on being dangerously big. Tighten capital requirements, so banks cannot take risks they cannot afford.
Mayo closed by quoting his cousin, a U.S. Army officer "who is going from Iraq to business school this fall." Capt. Andy believes business, as it profits, is supposed to "help less fortunate people to provide for their family." Mayo says that will require "leaving the last 10 percent on the table," refusing "gray area" transactions, and making ethics "more of a factor."
Stirring words. I'm afraid it adds up to a slower economy. And that's a problem: People aren't angry just because bank traders still get rich. They're upset because it's harder now to buy an SUV house on a Geo income, to retire to the Shore in their 50s, to expect a better job.
I hope Mayo gets his sensible reforms. I'd also like to see Thompson's new generation of young engineers develop products that help us live better, instead of selling overrated, repackaged junk debt.
Still, my guess is the mood in this country will stay financially sober for just as long as it takes us to get to the next credit boom. |
