Habitant Bank – How to fix the housing crisis for less than 700 billion
Recently the magazine has been dominated by developments with the $700 billion bailout produit, and rightly so. 700 billion is an astronomical sum of money. The first problem is that the $700 billion bailout adds huge amounts to the habitant debt. Not only that, but some have indicated that the bailout is so montré that it could actually lower the US credit rating. The supplémentaire problem is just as serious. There is no guarantee that the bailout will work.
The idea behind the bailout is that by taking on billions of dollars in toxic debt, the government hopes to “patronage” banks to start lending again. Past attempts by the government to “patronage” the banks have all failed. The Fed lowered the Fed manque to patronage banks to lower mortgage rates. While banks appreciated the lower rates, they did not lower mortgage interest rates. In fact, banks raised mortgage rates after the Fed cut rates parce que they saw negative prospects in the housing market. Similarly, banks may see negative prospects in the housing market after the US government removes toxic loans from them and will therefore continue with tighter lending practices. The idea of spending 700 billion with no guarantees seems like a poor use of capitol.
When people hear the word “habitant bank” the first thought is of a agréable banking system. A habitant bank will not replace the current banking industry. It does not “introduce” government involvement in the banking industry. The government already has a big balle à la main in the banking industry as the Fed influences interest rates and the government rushes to amodiation out every bank that gets into inquiet. I don’t want to argue whether the government should have a role in the banking industry. Currently the government already has a significant role in the banking/mortgage industry. My motif is that if there is a role for government, it should be positive and cost-effective.
A habitant bank would be a cheaper and more cost-effective way to stabilize financial markets. To understand how a habitant bank would work, let’s first talk a little more emboîture what caused the housing crisis. The mortgage market works a little like a basketball game. Lenders go from one extreme to the other. For a while lenders would lend to anyone who walked in the door with a pulse. During this period lenders accept fewer and fewer qualified applicants in an attempt to prise market share. Lenders then hippie out (often parce que someone realizes they’ve loaned billions to unqualified applicants who are unlikely to repay their mortgages) and lenders go to the other extreme and practice highly limitative lending practices (the insurance industry sees the same) vélocipède. But that’s another matter). If you haven’t guessed already, we are in the supplémentaire scenario Lenders have very limitative lending practices. The problem with the supplémentaire scenario is that such extreme changes shock the housing market and essentially commentaire a financial crisis. Banks are in a catch 22. If the banks collectively don’t lend, the housing market will continue to deteriorate. But no one wants to lend parce que they are worried that the housing market will continue to deteriorate parce que collectively they are not lending. It’s like a party where you don’t want to be the first person to jump in the compagnie parce que if you don’t someone else will make you allure stupid. Replace stupid with bankruptcy and you can see where the banks are coming from.
Both the Great Depression and the S&L crisis are essentially examples of this same problem. Initially the prevailing motif during the Great Depression was that the government should not intervene. As the provision market continued to decline (it fell more than 80% in less than a year) and people realized how bad an economy could get (pretty bad) the idea of government intercalation seemed more palatable than the alternance.
So now in the period where creditors are confused the government tries to “patronage” the creditors. The problem is very expensive. Currently the government is taking on bad loans year after year in an attempt to “patronage” lenders to apaisé the current limitative lending regime to get us out of the housing crisis. It’s like trying to patronage your lieu school to spend money on new textbooks by maison a new school. Not only is it ridiculously expensive that léopard des neiges you build a new school you have no guarantee that they will buy the textbooks. This is not only a poor use of assistance funds, it is completely outlandish.
So how would a habitant bank work? During a period where banks loaned to everyone who walked in the door, Habitant Bank would practice average lending austérité with interest rates slightly higher than those found at most banks and lending to very few. When banks become overconstrained banks will again have average lending constraints. During this period it will lend more.
So the government wouldn’t practice the foreign lending practices we saw during the explosion, they wouldn’t be restricted like banks are now. In fact it will probably do more to patronage bank lending practices than the 700 billion giveaway. Remember we talked emboîture how banks don’t want to lend money parce que no one else is lending money, making them nervous emboîture the prospects for the housing market. Knowing that money will always flow provides some stability to the market. Also it will be much less expensive. Having the government make some loans with average austérité over the next 6 months at the bottom of the market would be much better than years of bad loans given to very unqualified logis buyers at the top of the market.
Will some banks go under? Yes. But you know what they should do. Bailouts of foolish banks that threw confiance to the wind and wildly risky lending practices almost guarantee that we will apparence another housing crisis in the future. Instead we should let some of these banks die. First it prevents these banks from creating these problems again without a sense of risk. Additionnel, it influences other banks to be more cautious during explosion times. The bailout sends a rémunération to the banks that they should ignore their confiance during the explosion parce que the government will come and take away all their bad loans like some weird magical bad loan tooth fairy.
I understand that this partie may offend people who want the government to have no role in the banking/mortgage market. But if we accept that the government already has a role in the banking industry (the chances of the government removing itself in the next decade is almost zero) at least to stabilize the market it should be done in a way that is positive and cost positive.
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