Reform Wall Street: Put the Risk back in

Discussion in 'Economy' started by Skull Pilot, Sep 23, 2008.

  1. Skull Pilot
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    Skull Pilot Platinum Member

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    Reform is a word being thrown around a lot. I was talking with a few colleagues and inevitably, conversation turned to the economy. I realized something that is one of those "duh" it's obvious points that I have not heard much said about.

    One of the problems with the market over the past years is not capitalism per say but rather risk-less capitalism.

    In the world of small business, we practice a pure form of capitalism where the enterprise is privately owned and the risk is solely on the individual. What caused the mortgage "meltdown" was the removal of risk. Loans were written by "lenders" who lent no money. Those loan were then bundled and sold off not once but several times further removing the loan originator from the risk associated with bad decisions.

    There were questionable lending practices such as not verifying incomes etc. but the consumer was also to blame and the "meltdown " was inevitable. We all knew that housing costs had to correct and we got it in spades because of the risk removal going and with mark to market trading.

    So now with regulation threatening to strangle the free market, what should we do?

    To me the answer is simple we only need a little regulation here. Put the risk back in capitalism. Lenders should be required to hold a loan for a specified time frame before selling it off on the securities market.

    Fixed rate loans should be held by the originator for 5 years. ARMs should be held for a period of the arm plus 5 years IE. a 3 year arm cannot be sold off for 8 years. Now real money is at risk and lenders will be forced to be more responsible.

    Yes money will be harder to get but that is how it should be. Risk forces accountability which is exactly what has been missing.
     
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  2. Ravi
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    Ravi Diamond Member

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    That sounds logical. Two questions, how is regulation threatening to strangle the free market and how is your plan not regulation?
     
  3. Skull Pilot
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    Skull Pilot Platinum Member

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    I should have said over regulation.

    When the government can step in and spend tax payer dollars to "save" a private entity then tell said entity what to do and how to do it is nothing but regulation of the worst sort.

    And I said what we need is a "little regulation" to put the risk and accountability back into capitalism.
     
  4. Diuretic
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    Diuretic Permanently confused

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    That's an interesting OP SP.

    Just on question for anyone. I read today in one of our newspapers that in the US if a mortgagee defaults on a home loan they walk away and the mortgagor forecloses and that's that. In this country (Aus) if we default on a loan the bank will sell our house from under us and will sue us for the remainder of the money owed. So if a mortgagee owes say 250k to the bank the bank (mortgagor of some type) gets 200k then the former mortgagee has to find the other 50k.

    If that was the rule in the US would banks/lenders have been as keen, less keen or more keen to run this whole low doc loan scheme?

    I have no idea, which is why I'm asking.
     
  5. Ravi
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    Ravi Diamond Member

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    Okay, that makes sense. I do like your plan, as it seems pretty clear the cause of this entire mess was the ability to make bad loans and sell them off, over and over again. Until people started defaulting and suddenly the bad loans were visible to those whizzes on Wall Street.
     
  6. Skull Pilot
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    Skull Pilot Platinum Member

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    My understanding of foreclosure laws in the US is one that they can differ from state to state and that 2 the home is considered collateral for the loan and the bank can confiscate the home as a result of a loan default. It is then up to the bank to sell the property to recoup its capital. but I might not know all the ins and outs of the law. Maybe a shyster can enlighten us more on this?

    I like the idea of keeping the borrower on the hook. Again risk makes one accountable
     
  7. rayboyusmc
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    rayboyusmc Senior Member

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    I agree, we need some sort of regulation for the large companies/ corporations just like we need regulation/laws for you and me and the small business owner.

    It is more of a temptation to try and get away with millions and move to another country than to steal a thousand and go to jail. There is not risk of failure or of accountability.

    Maybe if some more of the bastards like Ken Lay, Kowolski, and other crooked CEOs went to jail and lost their homes, they might just believe that the laws were for them also.

    If the Dems buckle on this one, I am an independent. Bush and Co are trying to panic US into agreeing without full oversight like with The Patriot Acta and the war in Iraq.

    Bernanke and Paulson: Congress must move now - Yahoo! News
     
  8. editec
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    editec Mr. Forgot-it-All

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    What risk is the bank taking that can lend fourty times as much money as it has?

    Insolvency?

    They lose money they didn't really have to begin with and this is my problem why?

    Fuck the bankers.
     
  9. Skull Pilot
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    Skull Pilot Platinum Member

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    i can't believe that i basically agree with you on this or that you seem to agree with me. The world really is coming to an end no?

    No one should be gives free reign over a trillion dollars of tax payer money. PERIOD.

    Now we have some pols saying that " we don't even know if we'll need all that money so don't get scared of the amount"

    Now when has a government NOT spent all the money that is is given and then some?
     
  10. Diuretic
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    Diuretic Permanently confused

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    Thank you SP, will check later for further enlightenment (I think we get the shaft here though on this stuff, don't mean to distort the thread).
     

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