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Sunday, August 26, 2007

Calculated Risks

It's as predictable as water boiling at 212 degrees. Banks will put their quest for profits above any other concern - even the ability of their debt-holders to keep up with interest payments. Does it sound too moronic for any self respecting MBA? Not if your government will bail you out rather than risk a national economic meltdown.

In 1982, I was an intern on the PBS business series, "Enterprise," produced at WGBH-Boston. I did research and wrote narration for a particular episode about bank loans to Brazil. The producer interviewed very uncomfortable bankers from the likes of Citicorp and Citibank (before their merger) who had collectively made loans totaling many billions of dollars to Brazil (and other countries like Mexico) for enormous mining and hydroelectric projects that couldn't keep up with high interest payments. The banks preferred a few gigantic loans rather than numerous smaller loans that could benefit regions and small scaled local industries. They knew that countries like Brazil were falling way behind on payments, but seemed to be confident that between the Brazilian government and the US government, there would be bailouts when necessary (on the backs of the Brazilian population).

Now we have this latest scheme of banks (since the mid-90's) lending subprime mortgages to people unlikely to be able to keep up with ballooning payments. Apparently many of the banks sold the loans to more risk-taking financial institutions, without any concern about the inevitable foreclosures coming down the pike.

In between we had the massive Savings and Loan meltdown of the late 80's that came about when office construction was really hot and loans were given out to every guy with a hammer and a vertical sketch drawing.

In both of those debacles that federal money system came to the rescue of our economic system (though many S&L's went down).

I was taught in school that socialist systems are fundamentally flawed due to a lack of individual incentive as time goes on. I don't remember hearing that the capitalist system will inevitably lead to economic meltdowns due to reckless profiteering, unless the government saves the day (in a pretty socialist-style move). I guess you'd have to go to school in a place like Cuba to hear that lesson.

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