Wednesday, March 05, 2008

Waaahah, I Don't Want to be Regulated!!!!

This Financial Times article perfectly illustrates the problems with bankers, the credit market, and the politics of money. Britain's finance minister wants to force banks to package mortgage-backed securities in groups appropriately labeled by risk. (i.e. If the security says it's AAA mortgage-backed debt, then every mortgage feeding the security meets certain standards relating to the credit ratings of the debtors, debt-value ratio of the mortgage, etc.) What do bankers say to this? It might create a "two-tier system" whereby some people (i.e. good credit risks) could get cheap home loans and others (i.e. bad credit risks) wouldn't be able to. The banks act as if lending to people who are likely to repay their debt and not lending to people who are less likely to do so is a both bad business and socially irresponsible. What!? There are two possible reasons that banks really don't like this idea. One: The banks made so much money lending to people that couldn't afford to pay their notes and selling the bad debt packaged up with the good debt that they can't wait for the market to recover and let them do it again. Two: The banks are so regulation-phobic that, even though option "one" is apparently not true (based on the number of banks that had billions in write-downs this year) they can't stand the idea of the government making them not do it again anyway. It's very much like a small child who cracks his head open riding a bike and then whines because mommy makes him wear a helmet next time.

Like many free-marketers I tend to support letting the banks do whatever they want, but that only works if we don't bail them out, don't lend them money from the public coffers (or printing press as the case may be), don't back their mortgages through Fannie Mae, and don't let them form government sponsored cartels that masquerade as government-run central banks. Just like the spoiled kid, he can ride the bike, but he's got to wear the helmet.

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