Save and Conquer

In the 1970s, many people screamed “too much regulation!” The banks were regulated to where they only provide banking services (credit cards, business loans, and such) which were separate from savings and loans (mortgages) which were separate from brokerages (stocks). Even more importantly, the government set the length and rates of the loans for the banks and savings and loans. These regulations were in place because it was well understood how important lending institutions are to the national economy.

The banks said they could offer much better rates without regulation, however. Their pitch was that they could make brokerage trades and mortgages more competitive without the oversight of “Big Brother.” They got their way in the 1980s.

Things went swimmingly for some years after that. It was easy to get a loan. Even dead people were being issued credit cards. And the lenders were making money hand over fist.

Then along came variable rate loans, followed by historically low rates, followed by subprime loans which were repackaged as bonds with interesting names like CDOs, CMOs, and SIVs, Banks and investors bought these things because they could get high returns and they were backed by hard assets like property and houses.

Crash! Rates adjust, people can’t pay, and we have the largest housing and bank failure since the Great Depression.

The largest banks are too big and too important to let fail, so the Fed steps in with emergency carryover loans and help with takeovers (e.g., Bear Stearns). The Fed is now having to save Fannie Mae and Freddie Mac from their liquidity crisis with emergency loans. There is concern that the Fed will have to buy large amounts of shares of these two companies to keep them afloat. (Of course, this share dilution will wipe out existing shareholder value.)

In return for this help, and working with hindsight, the Fed is now bringing some regulation back into the banking world in the form of universal mortgage rules. They will

• Prevent lenders from giving credit without looking at a customer’s ability to repay using income and assets other than the home’s value.
• Require lenders to verify a customer’s income and assets.
• Reduce or ban prepayment penalties.
• Require lenders to establish an escrow account for property taxes and insurance.

These regulations are probably a good thing to reduce abuses. Regulation, like laws, are often necessary for society to properly function.

People are scared, though. Some people are shouting that this is not enough and that the government should take over Freddie Mac and Fannie Mae. They say these mortgage lenders are too important to be owned by investors in the private sector.

Similarly, people are seeing inflation of oil as cause for federal intervention. In a recent telephone poll of 1000 people, 29% were for nationalizing oil and 24% were unsure. Oh well, at least 47% said no.

I don’t know if there is any correlation between banks and oil, but difficult times seem to bring out the “take care of me” attitude.  If things get even more difficult, we will hear more people crying for federal takeovers and intervention.

Beyond things such as large tracts of land and sea, public roads, the military, and some museums, federal ownership of things like banks, oil, shipping, or whatever that is currently in the private sector is not a good idea. The stock holders of the private companies that get “aquired” will lose large amounts of money. More importantly, taxpayers will lose large amounts of money by having to pay for things we don’t all need.

Stumble it!