Over and over again through print or on the airwaves it is being said that bankers have learned their lesson from the current economic crisis and credit will no longer be extended to people in the subprime market.
While we hope that banks have learned their lesson that bad things happen when you lend to people most likely to default, they haven’t. And why will subprime lending return as soon as possible, profit. Prime loans or lending to people with a good credit report and good credit score also returns the least amount of profit. Prime loans and Alt A market loans are the most desired customers and the most fought over. This competition creates a downward pressure on interest rates charged the customer so this crowd gets the lowest rates that generate the least amount of profit.
Prime and Alt A market credit card accounts, home loans, car loans, etc. also generate the lowest amount of fees and penalty income simple because the primeish consumers pay their bills on-time and behave within their contractual obligations. So who generates the highest fees and penalty income for the banks, yep, the subprime market.
Subprime consumers, that is consumers less than those who don’t default or pay late, are like heroin for lenders. While they may be publicly detoxing right now, it won’t be long before the banks will be jonesing for another hit of the pipe or another dirty needle. Maybe the recent government bailout for banks is actually more like an Amsterdam needle swap program?
Banks can’t make massive profits to appease investors by lending only to the least profitable and safest borrowers. It is inevitable, they will go back to the street corner, first in disguise under other names and then back into the open.
Should we be able to trust banks, credit card companies, and lenders from not wandering back into the dark default waters again? We should be able to but we can’t. The very banks at the heart of the current financial crisis employ or employed some of the highest paid brainiest people who engaged in lending above market value to people who could least afford it and then repackaged those loans over and over again to firms around the world who in turn did the same thing damn stupid thing.
Think about it like this, the current economic crisis is like a drug war. The blame right now is being cast on the users that bought the bad drug and consumed it. Bad users, dumb users. But the user was told that the drug was good, safe, priced right and if you don’t buy it now you’ll lose out. Of course people bought it.
If we want to prevent this situation from happening again then the only real hope is to provide hard and concrete rules, like the kind that come with a board game, about what the pushers, sorry, banks can say and do. You can’t stop drug distribution on the street corner unless you stop or control the distribution network.
The truth is that bankers, credit card companies and lenders cannot be trusted or allowed to self-regulate because the lure and attraction to profit is too powerful a drug. Sure it will speed up the economy but how fast will it go? It is a lot like saying that we don’t need police enforcing speed limits because we trust drivers to exercise prudence and drive at the appropriate speed for the road. Knowing that there is no enforcement, drivers will drive faster and faster and more accidents will result.
As soon as the recent wave of economic pain and punishment is over consumers will say “Please sir may I have some more?”, and the lenders will only be to happy to comply because it generates profit and it is almost a patriotic duty. Why patriotic, because government is saying, “Dear consumer, please go out and spend again to save jobs and companies. We are counting on you to do that.”
Governments are desperately trying to save the sinking economy by begging and bribing banks to “start lending again”. But isn’t it unregulated lending that led us into the economic mess we are in to begin with?
It seems that if we are going to print new currency to address the current economic crisis that it would be much more effective to pay off the credit card bill of every consumer than to force funds back onto banks and encourage them to lend more to swamped consumers and businesses. If we pay off the bills what will people inherently do, that’s right, consume.
Bailing out banks might boost the banks activity at this moment but what will happen when they break their logjam and begin to lend more freely again to more and more consumers that will add to their pile on the debt? The banks will be saved but the disposable individual consumer will be sacrificed in a second wave of economic turmoil.