Tuesday, July 8, 2014
Unsecured Loans --The Formula for Economic Disaster
Unsecured Loans --The Formula for Economic Disaster Borrowing Money Used to Be More Trouble Than Lending It. Consumer Protection Laws May Be the Real Cause of Collapse? Lex Loeb Contributor Network . It's a wonderful life. Borrowed money is the way to do just about anything and if you have the time and enough credit cards everything. It was not always the case that credit was so easy. Going back though history to ancient times, borrowing money was dangerous business because it could put the borrower's life on the line. In ancient Babylon an insolvent debtor could be legally converted into a slave along with the rest of his family. The friendly neighborhood loan shark is closer to what a lot of lenders were in ancient history. One had to have a very good reason to borrow money back then. Using borrowed funds for business purposes was probably wiser, as it is today than borrowing for pursuits that are consumption oriented. The first loans were probably having credit at a store and being able to pay for the items later. That would have been though the ancient world. Others might have needed borrowed money to buy or build a sea going vessel to engage in trade or do something on commission for a member of the patrician class. The roots of banking are ancient. Larger loans were collateralized by security of life, liberty and property. This aspect of loans really did not begin to change until the modern era. Banking houses that survived multiple generations, like the Venetians, or the Medici always made sure that loans were backed with more than pledges of honor. Real Collateral was the life root of successful banking. Unsecured loans were the equivalent back then of loans for Wimpy's hamburger today if he can pay you tomorrow not for major sums of money. Successful banking houses ran their money businesses in a manner that they never lost the advantage they had over their borrowers. They ran the game like a typical casino runs it's house severely limiting internal risk. Modern bankers from the Rothschild's , Mellon, and JP Morgan, did not give away a lot of unsecured credit. The Rothschild Bank worked it's magic bailing out governments with real asset based collateral. The Rothschild bank did not often go begging for government bailouts the way banks like Citicorp and Goldman Sachs do repeatedly. What has changed is that banks are now socially responsible by law and by a populist morality as if the ethics of a bank should be to loose money to promote a fantasy world where lenders are responsible for the well being of those who borrow from them more than they are to their own shareholders. If you want to know why the US banking system is so weak this is the reason. Corporate interest should naturally be a from of composite self interest representation for shareholders who limit their liability and risk by allowing the corporation to act on and for their personal interests and nothing more. Government believes its purpose is to promote general welfare. It has taxation for that which if based on income should promote the biggest profits possible as income for corporation.s More often government is exposed as merely fostering hidden selfishness. Governments prod companies with laws and cajole them to spend money on social programs to pass the buck and that ultimately is now undermining the virtues of capitalism as a means of employing capital to enhance capital instead of destroying it. Why is is unsecured credit such a big problem in today's world? Government is out of wack now because it does not believe in private property or private wealth but instead looks to turn every aspect of society into more and more feel good programs that cost someone else money. The whole system becomes unsustainable when banks are not allowed to foreclose on credit dead beats . Where banks are not prepared to take homes and other property back for unpaid loans in default and either sell or rent the properties out to recoup all or most of their depositor's invested funds then they don't belong in the banking business. Loan to value ratios with substantial down payments should be required not by government regulations but by the banks own administration before making any loan. Bank laws requiring banks to keep reserves on hand for depositors seems like a pretty rational law. Requiring banks to loan to those who cannot afford to purchase assets is not a good policy. The whole systemic risk in the banking system is not being in the business of property management. It is funny how the federal government is busy merging bad banks with good ones once again instead of merging banks with property managers and real estate experts. It is a wonderful life that everyone should be able to avoid foreclosure on their personal American dream. Banks are stupid to be in the dream business. If dream fulfillment is the reason why we pick presidents like Bush and Obama than that is what American Politics is for. The over extension of credit can be the banks own fault but it should never be forced to do it as part of some social program, Even if banks are not acting as real banks in our society others are doing what banks do without calling themselves banks . Banks loaded with social goodwill and loans in default becomes goodwill banks in default themselves. With laws and atmospheric conditions pushing social responsibility of banks , the banks attempted to find other means of remaining profitable in spite of the legal limitations in running their businesses the way banks should be run . This is how and why a lot of derivative products were invented and became major problems. Attempting to compensate for not being in business making safe loans to protect bank capital banks went out and got other financial institutions to insure mortgages. With the insurance in hand then the banks felt they could make unsecure loans. They just dug deeper holes for themselves until they had a pit big enough to suck the entire financial system into . There have been many past purely liaise faire banking failures but the 2008 banking crisis and panic was not caused by liaise faire ethos but in a very strictly regulated government oversight environment. Government sees the banking failure and in knee jerk reflex fashion is immediately talking about the a lack of regulation in the financial industry. Government has the power to point the finger and pretend to be blameless. Banks suddenly are over joyed to become closer to government having depleted capital reserves. It is funny to watch the process. It is impossible to imagine the Rothschild's or JP Morgan among other great banker ceding control of their banks to a government. The history of finance is about governments looking to private banks for financing on many occasions, As time goes by banks are seen as social service agencies and arms of the the government. In some countries banks are completely owned and controlled by the government and they tend to become true bankers with high threshold terms to borrow money unless maybe you are a member of the country's ruling family. Getting a unsecured loan from the bank of Norway or Sweden is not what you find there. In The USA we have government that wants other people's money to be banked in unsecured loans not government funds unless the loans are special pork barrel politics loans. If you can get a pork barrel grant loan from the US congress it is as good as getting to be the Queen of England in England with a public stipend. After a financial crash the US banking system becomes much more conservative than it was in a boom every time with or with out government intervention but just wait until inflation dollars start getting pumped out and banks are panicked to lend money at higher interest rates with consumers looking to borrow as much as possible as fast as possible for quick wealth transfer at the longer term expense of the banks. Inflation tends to be just about as destructive to the banks over time once that process goes full cycle. Every Latin American country with double digit inflation eventually meets an end in yet another national banking crisis and a subsequent devaluation of pesos. American banks get entangled in that process in Latin America over and over again. The international money center bank model like Citibank is absolutely likely to end up in one default country after another the way the real world system of banking works. Having real collateral as a world wide banking rule might actually prevent more banking disasters built on artificial cheap growth banking programs. What is interesting about a free credit bonanza is how it can make a whole country feel richer when it is actually growing poorer. The solution is not going back in time to Babylon Slavery for dead beats but in allowing a free economy with credit restraints based on the security of collateral for loans. The whole concept that economic expansion requires easy credit might be better replaced by a government that takes a lower percentage of people's incomes when they save it. That is why you buy snake oil when government convinces you that corporations and you should be paying higher and higher capital gains taxes on top of income taxes. A lot of people don't realize that what the government withholds from their pay checks is part of the reason the government tries to compensate for a lack of economic growth by getting banks to deliver easier credit. If the government had to pay your interest on the deposit of your taxes as a loan the way you have to deal with a loan from a bank, government would work a little harder for you. Each successive time this happens the banks become less and less responsible for their shareholder's money until they come crashing down again. .