Feds Bailout Obsolete Banking Business Model
And while I am it there is another thing that really bothers me about the current federal government bailout of the banking sector.
Financial services firms such as Citigroup are failing because their business model does not work. Now, who would have ever guessed that a business model based on charging millions of consumers 12 to 30 percent annual interest for sub-prime mortgages and credit cards might not work? Who knew that consumers who took on those high interest loans and could pay them back would retire those debts early and not pay the interest, while customers unable to escape those usurious terms would increasingly default? And who would have ever thought there would eventually be problems after many of those accounts were bundled together and sold as interest-bearing securities?
The answer is that this was — and remains — a very stupid, unsustainable business model. And now the federal government steps in not just to save some favored banks and financial services firms but also to prop up that very same underlying stupid, unsustainable business model, which has already totally failed in the marketplace.
Meanwhile, in a development that has apparently gone completely unnoticed by leading economic policymakers from both political parties, new more consumer-friendly, less reckless financial services business models are starting to emerge in capital-starved towns and communities across the nation. These new models rely on peer-lending, are Internet-based, and often involve the facilitation of loans between parties who know each other or have reason to want to loan to one another. This is particularly true of the “lending circles” that are increasingly popular within ethnic and immigrant enclaves. These new types of community-based financial services enterprises are growing precisely because the traditional financial services business model has failed to meet the needs of communities and consumers. But the federal government isn’t lifting a finger to help these more socially and economically constructive financial services operations emerge, grow and expand. No, the federal government doesn’t even seem aware they exist.
Instead, the feds are busy picking winners and losers in a financial services sector that many of its customers regard as an adversary. It’s like trying to pick the winner of a card game that is being played on a sinking ship.
November 24, 2008
USA 2008: RIP?
As a longtime economics and financial correspondent, I am just stunned reading today’s news. Totally and completely flabbergasted. November began with us watching the global financial system starting to melt down. But it is ending with what appears to be the near-total collapse of the U.S. economy itself, along with many of the most basic and important rules, customs and practices that once made it the envy of the world. How on earth will an ethical bank ever compete with the unethical and usurious Citibank now that Citibank has the federal government as a full silent partner? How will new auto companies and new technologies compete with General Motors, Ford and Chrysler after those companies get billions in operating subsidies from the feds? Will state and local governments ever build or maintain a single decent new road once it becomes possible for rich drivers to push poor drivers off our existing roads in the name of congestion pricing? We are witnessing much more than the economy in free fall. We are watching the destruction of the American way of life. That system, the one we learned about in school, was based on free enterprise and taxpayer support for basic infrastructure that everyone needed. In its place we are getting a new version of fascism, call it American Fascism, characterized by an incestuous relationship between big government and big business and involuntarily financed with taxes extracted from working men and women. Who is getting help in Washington today? Industries with lobbying muscle. Wealth is being served. With our money. As the Beatles used to say, “I read the news today…Oh, boy.”
November 22, 2008
Money for Citibank?
I bet I am not the only person cheering this week at the news that the nation’s largest credit card company, Citibank, may soon go broke and shut down. I closed all my Citibank accounts a few months ago (I had several) after a company representative lied to me, flat out lied, about my interest rate and then threatened me that Citibank would damage my credit rating if I paid off the card and closed the account (which I did, or at least tried to). After I paid the account in full, Citibank refused to close it (!), insisting instead that it had to remain open for another year. They’ve already put thru at least one improper charge since then, which I manged to reverse after several phone calls. These guys are crooks, plain and simple. Thugs with suits. They richly deserve to go out of business. I’ll be outraged, totally outraged, if the federal government spends another dime of my tax dollars so that Citibank can keep its jackboot on the throats of the American consumer. Far better to make an example of the company, and do to them what they have tried to do, and already done, to millions of hard-working Americans, which is to push them off the ledge without mercy. Gee, do you suppose that if Citibank goes out of business that might actually close my account with them?
November 16, 2008
How to End the Credit Crunch
The scariest thing about the current global economic crisis is the look of uncertainty and sometimes even panic in the eyes of many of those who are supposed to fix the problem. They clearly don’t have much of a clue. So, how could we solve the credit crunch? Really, what would it take?
The answer seems pretty obvious to me. The feds need to set up a Consumer Lending Authority that gives loans to people, yes, ordinary people, at rates close to what the Federal Reserve charges banks, which is practically zero. Okay, maybe charge a percent or two.
That way consumers could unwind the debt burdens too many of them carry themselves. The current approach is to give billions of taxpayer dollars to big banks, usually with few if any strings attached. That’s like giving money to the mafia to combat illegal loansharking. Last month, when, for the first time ever, I missed my payment to a credit card company, First National Bank of Omaha, by just a few days, the bank responded by retroactively increasing my interest rate from 1.9 percent to nearly 30 percent. When I called to protest they said, essentially, “sorry, sucker, them’s the breaks.” Nearly 30 percent! I’m taking steps to close that account. But the experience reminded me that these big national banks are in many ways now worse, or at least as bad, as the Mafioso loansharks of old. Giving these big banks more money won’t solve the problem. They are the problem. What’s more, the credit card industry’s often lowlife business practices make the sub-prime mortgage lenders seem like saints. In my direct experience, credit card companies routinely lie about the interest rates they charge, arbitrarily change the terms of loans, fail to disclose interest rates in online account summaries, and act in many other ways designed to lock consumers into a “debt-trap” from which they can never escape. One must constantly be on guard against the credit card industry’s scams and ripoffs.
A Federal Consumer Lending Authority, by contrast, could lend money to folks at reasonable rates who can demonstrate that they are basically credit worthy based on their ability to pay their bills over some more lengthy period of time, say, the last five or ten years, rather than the “what happened last month” standard used by the credit reporting agencies.
The only way to resolve the credit crunch is to resolve the credit crunch. And the best way to do that is to make credit available to consumers at reasonable rates. If the FDIC-insured, government-coddled banks won’t or can’t do that, then the feds must. The length and depth of this next Great Depression may well depend on how long it takes our economic policy makers to understand that our economy can only be rebuilt from the bottom up.
November 14, 2008
David Cohn Tells It Like It Is
My friend and colleague, Spot.US founder David Cohn, wrote an inspired blog post today about the future of journalism and our shared responsibilities as citizens. An excerpt:
What we need is inspiration, hope, a belief that yes “journalism will survive the death of its institutions.” That a new media start-up can serve the same mission that traditional media has done for us in the past. Hope that many of the institutions we love can find a way to steer their large bureaucratic ships to safety before taking on too much debt.
I am writing this post physically exhausted but emotionally charged. I feel like a lion. As if I could talk down the curmudgeonist of curmudgeons. Not because I know the answer(s) – but because if we can’t even talk those people down, then we might as well just crawl into a hole and give up. Fuck that! We are moving forward with or without them.
Read the rest here. Go, David, Go.