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This guy prides himself on being a right wing, the government should keep out of everything, conservative. Of course he doesn't have to deal with the fallout of his suggestion. Do you think his way would work?
Will financial lessons ever be learned?
Government bailouts protect everyone, even institutions that ignored the risks
Lorne Gunter
Freelance
Friday, March 14, 2008
Failure is one of the marketplace's strongest signals. Indeed, it may be the strongest. And the swiftest.
The textbook example is Arthur Anderson.
Andersen was one of the largest accountancies in the world. At its peak it had 85,000 employees worldwide, including 28,000 in the United States.
But in January 2002 it was revealed that some of the firm's partners had ordered Enron documents shredded.
As the crooked energy company's auditors, Andersen's shredding helped Enron defraud investors and employee pension funds of some $30 billion.
Within three months, Andersen was effectively out of business. By April of 2002, most of its clients had abandoned the firm. They couldn't afford the investor doubt that would accompany having Andersen audit their books.
Partners across the United States -- the vast majority of whom worked in neither Houston nor Chicago (the two culpable offices) -- had their equity in the firm wiped out almost overnight even though they had no knowledge of or involvement in the deception. Hundreds of thousands of dollars in value each had built up over their careers was destroyed, along with net worths, lifestyles and retirement savings. The remaining 100 or more lawsuits could still cost partners, who have long since moved on, even more millions.
No regulator or government prosecutor could exact punishment that swiftly, and few could make it so deep.
Sure, failure is painful. Still, the lessons it provides are sharp and long-lasting.
If a few large American, Canadian and international banks suffered huge losses or even went under as a result of foolish mortgage-lending practices, world economies would almost certainly contract. Credit would be harder to come by, even for well-run businesses far removed from the mortgage crisis. People would lose their jobs. Shareholders would lose their investments. Pension funds would suffer. Housing values would decline.
But going forward, the remaining banks would a lot more careful who they lent money to. Homebuilders, developers, speculators and house flippers would do much greater due diligence.
Even homebuyers would have to become better informed about the source of their mortgages' funds and the clauses that permit escalating interest rates in the later years of their loans.
Investors in general would be chastened and would take the time to better understand the risks before they handed over their money.
Indeed, I have long wondered why people who oppose what they see as the madcap expansion of economies are not more supportive of the market than less, because typically rapid expansion of the economy -- or at least unrealistically rapid expansion -- is only possible because of government intervention to protect markets from inherent risks.
Take for example this week's massive bailout of North American and international banks.
By absorbing more than $200 billion in housing debt to prevent the collapse of the mortgage finance industry, the American central bank -- the U.S. Federal Reserve -- may well have taken "its boldest action since the Great Depression." But that is not something to boast about.
"The Fed" -- along with the Bank of Canada, the Bank of England and others -- has also shielded the mortgage industry from the full consequences of its capricious lending.
As such, it has blunted the lessons failure teaches. And by signalling that government is willing to charge in and save industries from themselves when they over-reach, the central banks have indirectly ensured that such failures are more likely in the future, not less.
Why shouldn't businessmen and women lean out on their tiptoes away from the tightrope when they know the government is there to catch them when their bad decisions cause them to fall?
There will undoubtedly be many who welcome this move since it defends small investors and homeowners from what they see as the excesses of greedy corporate executives.
But that defence, too, creates a false sense of security among investors and borrowers. It creates the illusion of a regulatory security blanket that insulates them from having to understand the risks of their investments and loans.
One of the most deserving knocks against the so-called Bretton Woods institutions, such as the International Monetary Fund and the World Bank, is that they in reality encourage currency crises by absorbing the body blows the come from industrial-world banks rushing to make questionable loans in emerging economies.
Had the IMF not stepped in to rescue risky investments in Mexico in 1994, the 1997 Asian currency crisis may not have happened, or the 1998 Russian one after that.
The same principle is at work now in the so-called subprime crisis.
In the past decade, the number of loans made by U.S. and foreign banks to high-risk borrowers -- mostly in the U.S. housing market -- has risen from nine per cent (already likely too high) to over 20 per cent.
That's insane. But with the bailout of the industry by various governments, the lunacy behind the current credit crisis will not sink in. And the next crisis will come sooner rather than later.
Will financial lessons ever be learned?
Government bailouts protect everyone, even institutions that ignored the risks
Lorne Gunter
Freelance
Friday, March 14, 2008
Failure is one of the marketplace's strongest signals. Indeed, it may be the strongest. And the swiftest.
The textbook example is Arthur Anderson.
Andersen was one of the largest accountancies in the world. At its peak it had 85,000 employees worldwide, including 28,000 in the United States.
But in January 2002 it was revealed that some of the firm's partners had ordered Enron documents shredded.
As the crooked energy company's auditors, Andersen's shredding helped Enron defraud investors and employee pension funds of some $30 billion.
Within three months, Andersen was effectively out of business. By April of 2002, most of its clients had abandoned the firm. They couldn't afford the investor doubt that would accompany having Andersen audit their books.
Partners across the United States -- the vast majority of whom worked in neither Houston nor Chicago (the two culpable offices) -- had their equity in the firm wiped out almost overnight even though they had no knowledge of or involvement in the deception. Hundreds of thousands of dollars in value each had built up over their careers was destroyed, along with net worths, lifestyles and retirement savings. The remaining 100 or more lawsuits could still cost partners, who have long since moved on, even more millions.
No regulator or government prosecutor could exact punishment that swiftly, and few could make it so deep.
Sure, failure is painful. Still, the lessons it provides are sharp and long-lasting.
If a few large American, Canadian and international banks suffered huge losses or even went under as a result of foolish mortgage-lending practices, world economies would almost certainly contract. Credit would be harder to come by, even for well-run businesses far removed from the mortgage crisis. People would lose their jobs. Shareholders would lose their investments. Pension funds would suffer. Housing values would decline.
But going forward, the remaining banks would a lot more careful who they lent money to. Homebuilders, developers, speculators and house flippers would do much greater due diligence.
Even homebuyers would have to become better informed about the source of their mortgages' funds and the clauses that permit escalating interest rates in the later years of their loans.
Investors in general would be chastened and would take the time to better understand the risks before they handed over their money.
Indeed, I have long wondered why people who oppose what they see as the madcap expansion of economies are not more supportive of the market than less, because typically rapid expansion of the economy -- or at least unrealistically rapid expansion -- is only possible because of government intervention to protect markets from inherent risks.
Take for example this week's massive bailout of North American and international banks.
By absorbing more than $200 billion in housing debt to prevent the collapse of the mortgage finance industry, the American central bank -- the U.S. Federal Reserve -- may well have taken "its boldest action since the Great Depression." But that is not something to boast about.
"The Fed" -- along with the Bank of Canada, the Bank of England and others -- has also shielded the mortgage industry from the full consequences of its capricious lending.
As such, it has blunted the lessons failure teaches. And by signalling that government is willing to charge in and save industries from themselves when they over-reach, the central banks have indirectly ensured that such failures are more likely in the future, not less.
Why shouldn't businessmen and women lean out on their tiptoes away from the tightrope when they know the government is there to catch them when their bad decisions cause them to fall?
There will undoubtedly be many who welcome this move since it defends small investors and homeowners from what they see as the excesses of greedy corporate executives.
But that defence, too, creates a false sense of security among investors and borrowers. It creates the illusion of a regulatory security blanket that insulates them from having to understand the risks of their investments and loans.
One of the most deserving knocks against the so-called Bretton Woods institutions, such as the International Monetary Fund and the World Bank, is that they in reality encourage currency crises by absorbing the body blows the come from industrial-world banks rushing to make questionable loans in emerging economies.
Had the IMF not stepped in to rescue risky investments in Mexico in 1994, the 1997 Asian currency crisis may not have happened, or the 1998 Russian one after that.
The same principle is at work now in the so-called subprime crisis.
In the past decade, the number of loans made by U.S. and foreign banks to high-risk borrowers -- mostly in the U.S. housing market -- has risen from nine per cent (already likely too high) to over 20 per cent.
That's insane. But with the bailout of the industry by various governments, the lunacy behind the current credit crisis will not sink in. And the next crisis will come sooner rather than later.
I worked out a budget and found I could really afford a $225,000 house. So I bought a $190,000 house and have extra cash each month to put away in savings.
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