Wednesday, September 12, 2012

Inordinate fear of banking still alive and kicking

The indefatigable Peter Wallison recently spanked the Housing Cause Denialists over their irrational exuberance for stifling bank lending, with a history lesson;
Glass-Steagall was never repealed. It is still applicable to insured banks and forbids them from underwriting or dealing in securities.  ....
The portions of Glass-Steagall that remained in effect after 1999 prohibited insured banks from underwriting or dealing in securities. However, before and after 1999, banks were permitted to trade (that is, buy and sell) bonds and other fixed-income securities for their own account. This is logical, because these instruments are simply a loan in a securitized form, and loans are the stock-in-trade of banks. Just as Exxon Mobil is allowed to trade oil, banks must be allowed to trade the assets that are an essential part of their business. ....
Insured banks got into trouble in the financial crisis by buying and holding MBS [mortgage backed securities] backed by subprime and other low-quality mortgages, not from trading these instruments. When these loans declined in value in 2007, they caused significant losses to the banks that had invested in them. This is the same thing as saying that banks got into trouble by making bad loans, but it has nothing to do with Glass-Steagall or its supposed repeal. ....
The 1999 change in Glass-Steagall allowed insured banks to be affiliated with investment banks, which could indeed take substantial risks in underwriting, dealing, and trading securities of all types. Investment banks—even those affiliated with insured banks—have no access to insured deposits.....
Although investment banks could take more risks than insured banks and had much higher leverage, the investment banks that got into trouble in the crisis—Lehman Brothers, Bear Stearns, and Merrill Lynch—were not affiliated with any of the insured banks that had major losses, and thus could not have caused these losses.
And those bad loans were virtually required to be made by the federal government, as former Labour Party politician Oonagh McDonald was saying to the Huffingtonistas;
The 'affordable housing ideology' dominated the American housing market for thirteen years and ultimately destroyed it. It was introduced by President Clinton in 1995 as the National Home Ownership Strategy against a background in which a report produced by the Federal Reserve Bank of Boston (1992) argued that they had identified systematic discrimination against minorities in bank lending.
Both the results and the methodology were severely criticised at the time, but that did not prevent it from being extremely influential at the time. When Clinton announced the strategy, he stressed the benefits to families and to society as a whole, since extending home ownership would create a more stable and neighbourly society.
However, committed as he was to a balanced budget, he cut spending on public housing, and instead substituted a strategy which would transfer the costs to the private sector and away from the taxpayer. The route chosen was to amend the Community Reinvestment Act so that banks would obtain an 'outstanding' rating if they increased their loans to carefully defined low income groups. This legislation took effect at the same time as that allowing interstate banking for the first time. Banks had to have an 'outstanding' rating before their regulators gave them permission to engage in a merger or acquisition. 

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