It is all so curious. It is all so curious where we are now. Abusive relaxed credit underwriting sold many homes, and now those lenders are getting the opportunity to own them. It was all so predictable. The train was coming and no one wanted to believe it wouldn't stop in time.
Before the great depression of 1929, little attention was paid to the amount banks had as working capital. A lot of what they loaned depended on payments and loan settlements being made by other borrowers.
And they made their banks sound really sound. Many of them had United States and United States of America built in to their names. One owned by Frost Banks still remains. It is the United States National Bank. That practice is illegal today.
When it all crashed and burned before Americans' very eyes, everyone was seriously hurt as the direct result of a small percentage of those who had abused the credit markets.
Some good and solid rules came out of that. Banks were no longer able to operate but in one state. Savings and loan associations were invented to take over from commercial banks the making of long term home loans. No more lending long, borrowing short.
The new idea was for lenders to take care of providing an orderly capital market for the area where their depositors lived and worked. The Fed and correspondent banking were invented to keep the money supply flowing where it was needed and to restrain the overbearing practice of arbitrage.
It was great while it lasted, and then savings and loan associations decided they wanted to be involved in other businesses - businesses that had not been previously allowed by their charters. Banks wanted to compete with banks that were not only not in their town, but not even in their states. They started collapsing again.
Now we have reduced that control even further by allowing mortgage companies to sell their paper, collateralized by Americans' home loans, to investors world-wide.
Like the financial institutions of the ‘20s, they thought the money supply would never run out; they thought that their delinquency ratio would be so low when compared to the influx of capital, that it would make no difference, in the scheme of things.
Well now they are all learning the same lesson in banking economics as their forefathers learned. Money and capital supply require a delicate balance. A bunch of kids with MBAs and five years of experience in the capital markets are hardly candidates to be making these decisions for themselves, much less the rest of us.
Mr. Greenspan was not our friend.
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