In the wake of the financial meltdown that we are experiencing–and it’s not quite over with–there are calls for new regulations on the financial services industry.
That’s a tempting reaction, but one that needs to be carried out with caution. This piece from the 16 October 2008 edition of the 700 Club is a good example of that, although the report doesn’t put its finger on why Wachovia pulled the plug on the jeweller in such a capricious way.
The reason goes back to the last major real estate induced crisis we had, namely the S&L crisis of the 1980’s. This can be seen as the result of changes in the tax code which reduced the attractiveness of real estate investments, which in turn led to the collapse of the housing market, which took an entire financial sector (the savings and loans institutions) with it. Congress’ reaction was moral outrage, which is its usual cover for doing something really constructive.
In this case it forced the whole banking industry into a Faustian bargain: the banking industry agreed to more oversight over its lending procedures in return for “business as usual.”
But it wasn’t business as usual for everyone. Before this banks would work with borrowers who had an ongoing business and/or ample collateralisation through cyclic downturns in their business. To make regulators happy, after this “bargain” larger banks especially simply evaluate notes “by the numbers.” If a business’ numbers don’t match up to the bank’s criteria, the banks simply call the note. Future business prospects–which got the loan in the first place–don’t matter. Neither, for that matter, does the loss of value of the assets due to a “fire sale” liquidation, which can actually hurt the bank if the depreciated assets aren’t worth what the loan is. (Since, with small businesses, banks almost inevitably make the owners personally guarantee the note, bankers don’t worry about that either.)
The upshot of this is that small businesses will avoid borrowing money from banks due to the horrific downside. That will scale back small business startups and growth, which will in turn hurt the long-term growth of our economy. It should be remembered that real estate, not business, loans were at the root of the mess we’re in. But further regulation of our glorious financial system will doubtless only make problems such as this worse.
While on the subject of increasing regulation, we now have George Bush calling for a meeting to “resolve” this:
“I look forward to hosting this meeting in the near future … so we can insure that this crisis does not happen again,” Bush said after he welcomed Sarkozy and European Commission President Jose Manuel Barroso here for talks on the economic crisis.
Just before the scheduled three-hour meeting, UN Secretary General Ban Ki-moon said he backed the idea of a summit by early December at the latest.
“We are in this crisis together,” Bush said, detailing steps that have been taken to bolster lending institutions around the world.
“These are historic measures suited to our system which I believe will work,” Bush said.
Ban has proposed holding talks at the UN secretariat in New York, saying earlier in Quebec City, Canada that would “lend universal legitimacy to this endeavour and demonstrate a collective will to face this serious global challenge.”
The secretary general met with Sarkozy at the 12th Francophonie summit in Quebec City, where the French president pressed for a meeting of the Group of Eight (G8) industrialised nations, and others, to mull an overhaul of the global financial system.
The big problem here is that the Europeans’ situation is, if anything, more dire than ours. So they’re eager for an overhaul to solve their problem.
Prophecy buffs are already seeing the formation of the unitary monetary system that accompanies the rise of the Antichrist. And there’s no doubt that such a system is a necessary component of his system to control the world.
The combined recent liquidity injection by Western central banks could exceed US$4 trillion, yet that vast amount has created nothing real, not even one grain of corn.
To summarize, continental Europeans a week ago, on October 13, following the British plan for UK bank recapitalization, unveiled a plan requiring $2.55 trillion to recapitalize their banks, at the same time promising unlimited dollar funding in coordinated action with the US Federal Reserve.
The Fed, meanwhile, has injected $1.3 trillion in liquidity into the banking system and has decided to bypass banks and extend directly lending to borrowers. These sums certainly dwarf the $700 billion Troubled Assets Relief Plan (TARP) of US Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke. If recent bailouts and liquidity injection are added together, the price tag could easily amount to 70% of US gross domestic product in 2008.
Certainly, Western central banks have not injected this much in real gross domestic product, that is, in millions of tons of commodities (rice, corn, milk, oil, vegetables, clothing). If they had done so, their action would have been most beneficial. They have only created money out of nothing. Some call it legal robbery, others call legal counterfeiting.
Their action has amounted only to a redistribution of real GDP and real wealth among two groups: the winners (bankers, debtors) and the losers (workers, taxpayers, pensioners, creditors). How will this redistribution take place? The answer is forced inflation.
Bailouts schemes on such a scale have no precedent. They are the outcome of cheap money policy followed in the past decade and the sophisticated speculation, call it financial engineering or exotic finance, which developed complex derivatives, proliferating fictitious credit to gain abnormal returns.
Now my question: ever wonder why the Tribulation will only last seven years? Answer: the smoke and mirrors will only last that long!
As for you, you are children of your Father the Devil, and you are determined to do what your father loves to do. He was a murderer from the first, and did not stand by the truth, because there is no truth in him. Whenever he lies, he does what is natural to him; because he is a liar, and the father of lying. But, as for me, it is because I speak the truth to you that you do not believe me. (John 8:44, 45)
And you find out the Truth, and the Truth will set you free. (John 8:32)