posted by dsk on October 8th, 2008 at 12:26AM
>The investment banks successfully pushed to remove regulation that dictated how much money they had to keep in reserve to buffer against losses from failed investments.
Ok. So now you explain to me how being allowed to hold a lower reserve of cash makes banks issue irrationally risky loans. I can't see a correlation between the two. In fact, I could make the case that it should make banks more prudent.
Anyway, the most I could say is that they would have less money to throw around on bad loans - which might have meant an eventual bailout of $500 billion, instead of $700 billion. But it doesn't address the fundamental issue I had with your reasoning. Mainly why banks would exhibit irrational behavior in the form of lending to people that have little chance in paying those loans back (and all this with full knowledge that house prices were not going to go up forever), in the first place. The answer to this question has nothing to do with deregulation, and almost certainly implies market distortion.
Deregulation might have increased the eventual losses only by the happenstance of coming about during a time of this distorted behavior but clearly, could not be the root of the problem itself. With or without deregulation we were heading towards this crash.
Ok. So now you explain to me how being allowed to hold a lower reserve of cash makes banks issue irrationally risky loans. I can't see a correlation between the two. In fact, I could make the case that it should make banks more prudent.
Anyway, the most I could say is that they would have less money to throw around on bad loans - which might have meant an eventual bailout of $500 billion, instead of $700 billion. But it doesn't address the fundamental issue I had with your reasoning. Mainly why banks would exhibit irrational behavior in the form of lending to people that have little chance in paying those loans back (and all this with full knowledge that house prices were not going to go up forever), in the first place. The answer to this question has nothing to do with deregulation, and almost certainly implies market distortion.
Deregulation might have increased the eventual losses only by the happenstance of coming about during a time of this distorted behavior but clearly, could not be the root of the problem itself. With or without deregulation we were heading towards this crash.
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posted by rick on October 9th, 2008 at 4:32AM
The problem is two-fold: The banks had more capital to dump into failing investments, thus digging themselves into a bigger hole; and they no longer had the reserve to guard against failing investments. It's hard to say how much it would have helped, although I don't believe it would have required $500 billion to fix. Heck, I don't even know where the $700 billion figure came from.
As for why banks would take on risky investments, subprime loans charge higher interests, which generate more profit for them. And as you said, as long as housing prices kept rising, it didn't matter that some borrowers couldn't afford the loan, because they could simply foreclose and sell the house at a higher price for a profit. The banks saw this trend and tried to capitalize, but they couldn't predict when this trend would stop in time.
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