Banks and the Financial Mess

The editorialists at the NY Times do not understand how and why the financial mess occurred. They do not understand finance or economics. In this editorial they think the Federal Reserve has its priorities mixed up. Editorial here.

The banks may have weathered the financial crisis, but the rest of the country hasn’t.
. . .
The Federal Reserve recently gave the all-clear for several banks to increase dividends and expand share buybacks, among them JPMorgan Chase, Wells Fargo, Citigroup and Goldman Sachs. That’s good news, at least in the short run for bank investors, but it is a dubious development for everyone else.

“Helping” shareholders. Sigh. Dividends and share buybacks are not only rewards. They attract and entice shareholders to buy more shares. That helps banks raise capital by selling shares, which is what the people at the NY Times wants banks to do with their earnings.

Also, the good people at NY Times express the incorrect view of why this financial mess occurred.

The dividend-boosting banks that were too big to fail before the crisis are even bigger now, while reforms to rein them in are under political attack even before they have been implemented. Sheer size and inadequate regulation — the combination that led to the crisis — argue for banks to use their earnings to build bigger capital cushions, not to pay dividends and repurchase shares.

The problem is size or inadequate regulation.  If banks are going to be part of the Federal Reserve system, then they have a point.  Banks are simply conduits to manipulate the money supply through the economy.  But this recent crisis was a result of changed regulations designed to let banks lend to unqualified people.

This piece at Investor’s Business Daily explains what happens when politicians and social engineers use government to “solve” problems.

Blacks and Hispanics have lost much of the housing gains they made during the Clinton and Bush administration campaigns to boost minority homeownership, new census numbers show.
. . .
In 1995, President Clinton unveiled his National Homeown ership Strategy to push black homeownership above 50%. After he pressured banks and Fannie Mae and Freddie Mac to ease lending rules for low-income minorities, black ownership rates shot up to record levels.
. . .
“You can imagine somebody newly arrived from Peru looking at all that print and saying, ‘I’m not sure I can possibly understand that,'” Bush said. He urged Fannie and Freddie to continue Clinton-era programs “to help deserving families who have bad credit qualify for home loans.”
. . .
The artificially induced demand fed a subprime bubble that eventually burst. As home prices cratered, minority ownership rates proved unsustainable.

By pushing uncreditworthy minorities into homes they ultimately could not afford, the government did them no favors. The “revolution in affordable housing,” as HUD called it in 2004, made victims of the very people it was intended to help — the underprivileged.



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