Saturday, September 27, 2008

US bailout makes sense

The idea of letting bankers escape the consequences of their own folly leaves a bad taste, especially if the bailout is provided from public funds. Some people are dead against it, others have doubts, and the point is made that other businesses are allowed to go to the wall, why not banks? The answer is another question: do you have a bank account? As the answer is almost certainly yes then you can see the problem. If a carmaker or a retailer or an estate agent goes under then it can be very bad, but the damage is limited, at least on the national scale. If a bank goes under it can be catastrophic for a wide swathe of the country. That means people in fear for their savings, business denied the capital they need to survive, mortgages climbing to punitive rates and the very mechanisms by which the commerce on which we all depend getting done under threat. So banks, popular or not, have such an important role in a modern society that letting them crash is like refusing to put out a fire in your house just because the person you live with started it.

The thing is that the actual malpractice at the root of all this belongs to only a limited number of players in the world financial system. Some banks in the US invented a thing called the NINJA loan, which stands for 'no income, no job, no assets'. This is a loan product for people who have no prospect of paying it back, and yes, this is as bonkers as it sounds. You can do this sort of business in a rising property market because if the victim defaults, and they do in droves, you just reposses and sell on into a rising market. These mortages were securitised, sold on, and, well, you know the rest. There were some UK near-equivalents in the Northern Rock 125% 'Together' mortgage, but nothing nearly so bad. Most banks have been caught out be the problems in the Money Markets, not by bad loans, at least not to the point that they will fail. So, a bailout makes sense, and it doesn't even mean that most of those getting it are undeserving.

We do need better regulation though. Unfortunately, most of the horses are long gone.

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