Let’s see some real financial regulation!

President Obama’s push to reform the financial system is causing disquiet in many executive offices.  Yet he has not proposed any serious changes in the way that business will be done, instead merely expressing a desire to create a source of funds which would be used to bail out big banks that get in trouble, as well as seeking some form of protection from predatory lending for the average consumer.

No one has suggested taking steps to stop the underlying problem with the financial system, which is the selling of debt to investors.  What used to be standard practice was never regulated, because there was no need.  Banks traditionally carried the loans that they originated to maturity, even 20 year mortgages.  There was no law saying that they had to, it was just the business model.

Bet greed changed things around, and banks discovered that they were able to sell those loans to other banks, which then packaged vast numbers of those loans into single investment vehicles, the infamous ‘collateralized debt obligation.’  Add the ratings agencies willingness to give these vehicles AAA ratings, and a whole new realm opened up.  Gone are the days when the bank that wrote the mortgage was there to keep an eye on the borrower, or when a borrower could call the bank to talk about altering some aspect of their mortgage.

Mr. Obama also wants to stop the credit card companies from engaging in loan shark behavior, but his proposals do not address the penalties which banks can impose when a creditor is late with a payment, or goes over their credit limit.  Nor does his proposal prevent credit cards from being issued to people who are likely to get behind on their payments.  This has been a source of great revenue for credit card companies, at least on paper, because they can impose fees which, when combined, exceed the amount of the monthly payment whenever a creditor slips up.  These fees can add up very quickly, so that a person with a 500 dollar credit limit is suddenly 1200 dollars in the hole over a credit card.

The credit card company counts that 1200 dollars as real money, which increases their net worth, irregardless of the ability of the creditor to pay.  This can lead a person to file bankruptcy over credit card debt, which hinders their ability to rent an apartment, get a job, or even to travel, while the credit card company is faced with charging off substantial amounts of money it had been treating as already in its pocket.  Instead of increasing consumption, the credit card company has hurt the prospects of consumption growing.

The business leaders of this nation have got to stop trying to increase consumption by handing out easy credit, and banks have got to stop trying to grow their profits by selling debt over and over again.  Investors need to be putting their money into ventures which will create real, concrete growth, not numbers in accounts which can disappear overnight.

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