Banking on thin air

TIME.com is running an interesting article on the American banking crisis and why bailout money has been disappearing like water on a hot stove. The banks are actually in worse shape now than they were before the bailout. Reassuring, eh?

I'm not going to rehash the whole thing here. You know where to find it. The most interesting thing in it as far as I'm concerned is how the underlying cause - banks lending massive amounts of money they don't have. Before 2004, banks could lend 15 times more money than they actually had (which strikes me as pure lunacy right off the bat). Then the SEC lifted even that restriction and things got even worse. Compound the problem with high-risk loans and you have the recipe for disaster.

"Changing the net-capital rule was an unfortunate misjudgment by the SEC," says former SEC official Lee Pickard. "It's one of the leading contributors to the current financial crisis."

That has got to be the understatement of the year. What the banks were banking on was the inevitability of unending good times. And you thought banks were institutions of stodgy good sense. Not when you dangle an easy buck in front of them, they're not. Common sense and integrity get left behind in the dust.

All of which leads me to the conclusion that if you abandon common sense, no matter what your computer models tell you, sooner or later reality will bite you in the rear. I wish I could say that things look hopeful for common sense, but I'm not inclined to be optimistic. Having rubbed elbows with the right people is still much more important than showing signs of common sense or integrity. Just ask Timothy Geithner. Despite all the change that's been promised, being an insider is what still really counts, and insiders scratch each others' backs.


Technorati tags: Banking, Economics