Bankers’ Hours column: Financial collapse unlikely in the near future
As real estate prices shoot up, and the stock market continues a record climb, we hear some scary things out of the mouths of economists and financial pundits. But to the question “Is a repeat of 2008 imminent,” no real answers. Brings to mind one of the things that Harry Truman is reported to have said: “You could lay all the economists in the world end to end, and they’d never reach a conclusion.”
So will banking experience another tsunami like the one that precipitated the Great Recession? In the short run, almost certainly not. Banks are in very good shape right now, they know how to stay that way, and they intend to do it. Financial institutions don’t need to make a lot of loans to stay healthy; they just have to avoid making too many bad loans. Today, the TBTFs (too big to fail banks) are raking in enormous revenue simply on their spread — that is, what they pay for their wholesale commodity, money, and the return that they get on their good loans. Today these enterprises have contingency plans that would enable them to hunker down very comfortably in the event of a significant economic downturn. They would have to be very stupid to have to welcome the suits from the FDIC come some future, dark, Friday afternoon.
Of course, we in the banking business can be, well, very stupid from time to time. Sometimes you have to wonder about the comparative IQ of, say, the bank president and his very famous depositor (true story) who walked in to rob the bank and handed a demand note to a teller written, you guessed it, on the back of his deposit slip with his name address and phone number.
This is where the regulators come in. They’re from the government, and they’re here to help benighted and disadvantaged bank managers by making sure they don’t shoot themselves in the foot. During regular examinations, loan quality is carefully and stringently vetted, which keeps bank execs on their toes, because having too many loans classified as “substandard,” or worse, can have an extremely deleterious effect on the ability of the bank to make money, not to mention the job security of management.
Some say that this is a positive effect of the Dodd-Frank Act, which was quickly passed after the Great Meltdown of September 2008. This viewpoint cites the lack of regulatory tools to limit bad lending practices. This is only partially true. After the savings and loan crisis of the late ’80s, the Financial Institution Reform, Recovery Act (FIRREA) was passed in 1989.
This statute, and others, gave the federal bank regulatory agencies — Office of Thrift Supervision for savings banks and the FDIC and Federal Reserve for commercial banks — all of the power they needed to flag institutions like Countrywide Bank, IndyMac Bank and WaMu (Washington Mutual) for “unsafe and unsound practices.” These were some of the institutions, now defunct, that purchased subprime loans by the billions, and packaged them into mortgage-backed securities
There were several reasons that didn’t happen. First, some of the biggest creators of bad loans weren’t supervised directly by the banking agencies. This includes Merrill-Lynch, Bear Stearns, Lehman Brothers and AIG. So the bank regulators were reluctant to move more or less unilaterally. But the overriding sentiment was that nobody wanted to be the first to say the emperor had no clothes. No brave soul wanted to tell the passengers (the rest of the country) about the iceberg, for fear of starting a mad rush to the lifeboats, which happened anyway.
No doubt about it, housing prices are soaring, but, unlike 2008, this time it’s a function of supply and demand. There’s a shortage of housing, and it’s getting worse, exacerbated by the escalating cost of building materials and a labor shortage that has no end in sight. For five years in the early 2000s, there were people buying a lot of homes, not a lot of people buying homes. Meaning that, leading up to the Great Meltdown, an individual might buy two, three or even more houses to flip them, all the while lying on the app about the intent to occupy. A lot more stuff was built than was needed for shelter. Today, more stuff is required for shelter, but it’s not being built.
Housing booms feed on themselves, until they don’t. These economic peaks can have a positive effect across the board, because so much labor and materiel are involved in creating the product. A classic example was the city of Thornton, a Denver suburb, in the late ’50s and early ’60s. In the mid ’50s the postwar housing boom was in full swing, salaries in the building trades were healthy, and the workers bought the homes that they built.
But then the Eisenhower Recession took a toll on employment, and those people were without work. When I first got into the mortgage business in the early ’60s, one of my jobs was working delinquent loans, and most of them were in Thornton, which got the reputation of being a suburban slum. (Not the case now, of course.)
Today, however, that’s not happening. Real estate prices are rapidly outdistancing wages. Which, obviously, will ultimately be a check on prices.
Will there be a downturn in housing? Absolutely; that’s the nature of capitalism. Prices will rise and fall, influenced by a variety of factors, and the falls will occasionally be precipitous. Stocks will fall also, and then recover. It’s the nature of a free market economy.
So one would assume that the maintenance of free markets, unrestrained by over-regulation, trade wars and tariffs, is the path to economic health. A 2008 type crash certainly could happen again, but not in the near future, and maybe not in the mid-range time line. Of course, if we’ve learned anything in the past 10 years, it’s that human ingenuity, fueled by greed, is capable of almost anything.
And now, a special gift to the readers of this column — I call them the Three Musketeers, but one left town, so we’re down to the dynamic duo. Just to show you how much intrinsic value this article has, simply cut it out, take it to your nearest Starbucks, and that piece of paper, along with $2.50, will get you a small cup of coffee.
No need to thank me; it’s my pleasure.
Pat Dalrymple is a western Colorado native and has spent more than 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His e-mail is firstname.lastname@example.org.
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