Department of the Bleedin’ Obvious – Lending Created Crisis

Some totally obvious comments are coming out in the media today.

Take the UK’s new Chancellor of the Exchequer (the old one got
promoted to Prime Minister) Alistair Darling who is headlined today
as saying that banks “need to know who they're lending to, how much they're
lending and what the risk is. Now,
that's elementary banking, one might think, but there are times when going back
to good old-fashioned banking may not be a bad idea.”

This headline is actually Mr. Darling ripping off an
interview with Henrik Paulson a couple of weeks ago. Henry, Hank
to his friends … as I said, Henry is US Treasury Secretary and was interviewed
by CNBC a couple of weeks ago
about the meltdown in subprime. 

A critical part of his commentary goes as follows:

“If a market
turbulence is precipitated by economic weakness or by the credit quality of the
corporate sector, it's one thing, but we have, again, strong economies, we have
a healthy corporate sector, we have a healthy financial sector, major financial
institutions, so the problems we're experiencing right now are coming from bad
lending practices.“

Mr. Paulson is an ex-banker from Goldman Sachs and he met
Countrywide, JPMorgan and Citi yesterday. After the meeting he came out and pretty much repeated the same mantra,
but this time laying
it firmly at the feet of his compatriots.

Interesting. 

Maybe it’s me or maybe I’m just getting old, but isn’t this all
stating stuff from the Department of the Bleedin’ Obvious (DBO).

DBO states: “Previous financial crises have been caused by
bad lending practices, such as the 1997 Asian
Financial meltdown, and should not be repeated.”

DBO states: “Offer someone a mortgage at five times salary
and they will be stretching themselves to pay it back.”

DBO states: “Interest rates can go up as well as down.”

DBO states: “A market that makes lots of money won’t last
forever.”

DBO states: “Give a guy something he cannot afford and he’s
unlikely to pay it back no matter how hard he tries.”

I could go on, but instead recommend that you read the one
book that tells you what’s going on: “Extraordinary
Popular Delusions & the Madness of Crowds” by Charles Mackay.

If you haven’t heard of it, the Amazon summary states:

“Why do otherwise
intelligent individuals form seething masses of idiocy when they engage in
collective action? Why do financially sensible people jump lemming-like into
hare-brained speculative frenzies--only to jump broker-like out of windows when
their fantasies dissolve? We may think that the Great Crash of 1929, junk bonds
of the '80s, and over-valued high-tech stocks of the '90s are peculiarly 20th
century aberrations, but Mackay's classic-shows that the madness and confusion
of crowds knows no limits, and has no temporal bounds.”

In other words, people can be greedy and stupid.

Published in 1841, it shows why DBO applies as much today as
it did 1,000 years ago. 

When you see a way of
making money with no risks, you see the fool’s gold.