Thursday, October 28, 2010

You Wouldn’t Know that Banking Is a Business

I was glumly reading this morning’s New York Times article about Spain, where bankruptcy law holds borrowers fully liable for their outstanding mortgage principle (plus interest and legal costs) even after their properties are foreclosed, when I came across this striking paragraph:

Several opposition parties in Parliament have been pressing for amendments to the country’s foreclosure laws, including letting mortgage defaulters settle their debts with the bank by turning over the property. But the government of José Luis Rodríguez Zapatero has opposed such a major change in lending practices. Government officials say Spain’s system of personal guarantees saved its banks from the turmoil seen in the United States.

So like the US, where Obama has refused to impose a foreclosure moratorium, despite massive fraud, in order to shore up the banking system. After all, we need these banks to remain sound and solvent if we are to emerge from the financial crisis, right?

Just one thing, though: aren’t the banks private, profit-making businesses? What is the implication for the rational allocation of resources, not to mention social justice, of ginning the rules so that one industry can enjoy greater profits at the expense of everyone else? And we’re not talking about struggling startups here: financial profits have simply metastasized in the 00s, driving income inequality and rewarding the very activities that put modern economies at extreme risk.

If banks truly are public utilities, providing an indispensable service that requires frequent infusions of public support—subsidies, bailouts, favorable regulatory dispensations—they should be publicly owned. No risk, no profit.


BenL8 said...

Polonius said, Neither a borrower nor a lender be, especially in Spain. Maybe I'll have to brush up my Shakespeare. In Europe the bond markets are calling the shots, and tax revenues are dropping as austerity measures (higher taxes and lower public spending to achieve balanced government budgets) are slowing things down. I'm foggy about the solution, it seems to have to do with developing institutions the spread wealth instead of concentrating it. Utility banking, utility housing, land trusts, child trust accounts, individual development accounts to build wealth and spread it, higher wages, higher earned income tax credits, taxes on wealth at the top --- a concerted effort to provide security to citizens and their governments. It's balling up in a mess in my mind. Slowly reforms will take shape in that direction. I see that 80% of households earned 40% of U.S. income, and wages amounted to 29% of it. The other 11% were transfers such as social security, pensions, alimony, etc.. If the non-supervisory workers only earn 29% of what the economy produces, there is room for higher wages. (Brookings/Urban Institute, Tax Policy Center).

Shag from Brookline said...

The situation described in Spain involves "recourse" mortgage loans, which have been traditional in America for home mortgages for years; but of course America also has had "non-recourse" mortgage financing for commercial developers/property owners, where the lender relies upon the underlying property for its security. Fortunately, America does provide some bankruptcy relief for a foreclosed homeowner for the shortfall from the foreclosure. Query: what happens when the commercial real estate bubble hits the fan?