18 February 2009
It Is Wrong to Equilibrate Aid to Banks and Aid to Homeowners
Ariana Huffington's article on February 17, 2009, reflects the public's basic misunderstanding of the banking business. Commercial banks do not sit on cash that they lend to borrowers when the opportunity pleases them. They are primarily agents for other investors (including Sovereign Wealth Funds in the Middlle East, China, Singapore, etc.) who entrust their surplus funds to them in search of reliably high returns. While these investors believed in the unreasonably constant expectation that American real estate prices would always rise, banks made money by structuring mortgages for home-buyers who also were convinced that their outsized obligations would always be covered by the long-term increase in real estate values. The banks have been very good at performing this middleman function between willing lenders and willing borrowers.
Overreaction by international investors to the collapse of the U.S. housing bubble (not to mention similar collapses in Europe, the Persian Gulf and other regions) has deprived commercial banks of the credit to relend to consumers and small and medium-size busnesses, causing the deep recession the global economy is now experiencing. The appropriate parallel to government help for families to stay in their homes is government assistance for small and medium size business owners to help them weather the disappearance of the working capital they need to continue operations and maintain their payrolls. Financial institutions are still needed to perform the functions of channelling funds to home owners and SMEs, no matter whether they come from Sovereign Wealth Funds or from the governments of the U.S. and other economically depressed nations.
Ariana Huffington's article on February 17, 2009, reflects the public's basic misunderstanding of the banking business. Commercial banks do not sit on cash that they lend to borrowers when the opportunity pleases them. They are primarily agents for other investors (including Sovereign Wealth Funds in the Middlle East, China, Singapore, etc.) who entrust their surplus funds to them in search of reliably high returns. While these investors believed in the unreasonably constant expectation that American real estate prices would always rise, banks made money by structuring mortgages for home-buyers who also were convinced that their outsized obligations would always be covered by the long-term increase in real estate values. The banks have been very good at performing this middleman function between willing lenders and willing borrowers.
Overreaction by international investors to the collapse of the U.S. housing bubble (not to mention similar collapses in Europe, the Persian Gulf and other regions) has deprived commercial banks of the credit to relend to consumers and small and medium-size busnesses, causing the deep recession the global economy is now experiencing. The appropriate parallel to government help for families to stay in their homes is government assistance for small and medium size business owners to help them weather the disappearance of the working capital they need to continue operations and maintain their payrolls. Financial institutions are still needed to perform the functions of channelling funds to home owners and SMEs, no matter whether they come from Sovereign Wealth Funds or from the governments of the U.S. and other economically depressed nations.
