The U.S. banking system has been healing since its near-death experience in late 2008. After Lehman Brothers went belly up, a major hemorrhage of liquidity nearly took out several other big banks and financial companies.
Despite this trauma, after three years the financial industry has roared back quite strongly. The most direct evidence of this is in the bottom line – i.e., corporate profits. Not only have they rebounded, but they have shot up to an all-time high in 2010. Profits in 2011 will likely match last year’s figure.
The problem now is that the banks are holding on to these profits and not redeploying them back into the economy. For the real estate industry, the credit standards continue to remain very tight despite exceptionally low default rates among recent homebuyers of the past three years. The high aggregate of default rates is just the legacy impact of problem mortgages that were originated during the housing bubble years and that are still working their way through the pipeline.
Banks are claiming that there are uncertain regulatory rules from the Dodd-Frank legislation as a justification for the necessity of holding on to the extra cash. There is a certain validity to that argument, since there are several ‘blank’ pages in the Dodd-Frank bill where the rules are not yet set in stone and will be finalized in the future. But the extra cash holding could also be due to the steady income stream that is present in the current, less-competitive banking industry. Economic textbooks say fewer firms mean easier tacit collusion in raising prices for consumers.
As for jumbo mortgages, which do not carry the government-backing of FHA or Fannie and Freddie, the interest rates are notably higher. The average 30-year jumbo mortgage rate was 4.81 percent in late September, versus the conforming mortgage rate of 4.05 percent. On a $500,000 mortgage, the difference in mortgage rates is the difference in a monthly mortgage payment (principal and interest only) of $225 per month. From October on, over 600 counties across the country will face a lower loan limit, and some consumers in these communities may be forced to pay higher mortgage rates because they will be pushed over into the jumbo loan classification. In other words, some consumers will be forking over extra money to banks that are already flush with cash. It is worth remembering that these private banks are not purely private like small business owners.
In a free market system, effective firms survive and thrive while the ineffective or detrimental ones face destruction. But in the history of the banking industry, big banks somehow do not face the market test. The big banks, not uncommonly, are able to squeeze out taxpayer money to help support themselves in times of crisis. Given this unique bank relationship to taxpaying consumers, it is a pity that consumers are asked to pay more on their mortgages. A quick policy change that would help consumers would be (1) raise the mortgage loan limit and (2) a moratorium on paying interest on the money the banks park at the Federal Reserve in order to encourage lending to the economy. In conjunction, the Dodd-Frank bill should also be thoroughly revisited page by page to remove any obstacles to sound lending.
I think it is safe to say that corporate America has strong ties within the U.S. government. Corporate America is basically stealing money from the taxpayers…CEOs are making huge bonuses from our bailout money. Why aren’t the citizens getting bailout money? It is our money. Logic tells me that the people in charge of our money (the government…with strong ties to corporate America) doesn’t know what they are doing, or do they? Is the government stealing our money? Hmmmmmmmmmmmmmm
What a load of crap. The underlying notion that “somehow” the big banks escape market forces is some kind mystery is pure BS. It’s the way the financial system is run by design. It’s a big club and you’re not in it.
Simply during my lifetime, I’ve seen the same nonsense played out again and again, both in this country and in the international arena. The Penn Central Bailout, The Continental Bailout, The Savings and Loan Bailout, and the current bailout..and those are just the biggies.
Government education has produced a crop of illiterate, self interested morons who can’t even put it all together, no matter how many times the same scenario is played out.
Read a book.
Additionally the Dodd excuse for not lending doesn’t wash either.
With potential multi-billion dollar exposure for both criminal and civil wrongs committed by them, the banks are busy screwing the public in any way imaginable (BofA’s $5 surcharge on debit cards, failing to send bills then jacking up rates on cards…etc…etc..) are all designed to do the same thing…generate quick cash for dividends and bolster their reserve ratios.
Why do you think they’ve fought tooth and nail to avoid doing what Ocwen servicing is doing now? Writing down assets means higher reserves. As long as they can cook the books, much like they did with the Savings and Loans to minimize the size of that “crisis”, then they can shovel money out the door to the executives and stockholders and not increase reserves.
Additionally..and this ain’t rocket science…if you could borrow money at virtually zero percent from the Fed, then walk across the street to Treasury and reinvest that money in Treasuries with a 3.5-to 4% CMT…why would you lend money to an individual who is an unknown..with a job that is not a certaintly…on an asset that has no determinable value over time…for 4.25%? If you’re an idiot you would. I wouldn’t.
If you’re not going to prosecute the banks for criminal behavior and just want to roll over for them, much as the habitues of the National Bordello that is DC are doing…why not just RAISE rates. Deal with reality. Banks are all about greed..up the rates till they can get a return that makes sense to them..and they’ll lend.
Absent that…you’re just spittin’ in the wind.