Where relationship banking still survives, there have been relatively few problems of bad debts. The problems have arisen in transactional and unsecured credit card banking with one-off or completely unknown customers. Of course the customers have often behaved badly; if a bank does not know its customers, who are only blips on a computer screen, some of them will behave badly. The bank only has itself to blame.
The Sunday Times yesterday had a blazing example of the evils that can result. Banks issuing credit cards have found a legal way of turning unsecured debt into debt secured on house property. That means that credit card debt, which banks have been ladling out to all comers, can lead to the repossession of the family home. Which bank is notorious for the harsh use of this loophole of which credit card customers were given no prior warning? Apparently it is Northern Rock, which was “rescued” by being nationalised. So the grotesque situation has arisen in which the Government is repossessing the houses of credit card customers – to their considerable dismay – as part of the rescue of an incompetently run bank.
The decline of moral responsibility has damaged British banks; it is the real flaw behind the credit crisis. There will be new regulation of the world’s banking system after the crisis. Governments cannot risk another catastrophe on this scale. The banks need to change their behaviour. They need to re-establish relations with their clients and value experience in their staff.
So let us be clear – It is the bank’s fault for lending money to people who could not or would not repay their debts. No blame attaches to the poor victims of the banks for over-extending themselves. The big bad banks held the poor consumers down by their throats and threatened to thrash them if they wouldn’t borrow even more money. Or perhaps the banks kidnapped their children and held them hostage until the consumer took another credit card. Where is individual responsibility in all of this? I don’t buy the argument that because you were stupid enough to lend me the money, I shouldn’t have to pay it back or better yet, the government should pay it for me.
Lord Rees-Mogg surely [i] knows [/i] that Britain’s adherence to the gold standard did [i] not [/i] last “from Isaac Newton’s recoinage of gold in 1717 until Ramsay MacDonald’s abandonment of it in 1931”, and that the effect of the gold standard on Britian in the 20th century was economically disastrous and [i] not [/i] a stablising factor.
Britain did not adopt the gold standard until the Bank Charter Act of 1844. Britain left the gold standard in 1914. Its decision to rejoin the gold standard in 1925 at pre-War rates was a major contributor to the economic dislocation which caused the General Strike of 1926, and to subsequent economic shocks and stresses which finally forced its humiliating abandonment of the gold standard in 1931.
Lord Rees-Mogg is famously unreliable in his analysis and predictions. But he is usually a good source of fact. He lets himself down badly here.
#1, I don’t buy the argument either, but, if a bank lends money to someone that it knows is unlikely to be able to repay, and then the money is in fact not repaid, the bank bears some responsibility for its own poor business decision. This does not mean the debtor should be relieved of his obligation to repay, but the fact remains that there are two irresponsibly acting parties– the borrower who should not have borrowed, and the lender who should not have lent. And now the taxpayers are being asked to bail out both of them.
4, that is what is so galling. But there has been an abandonment of morality and the secular state is reeping what it has sown. Unfortunately we get to pick up the pieces and Government nevers says it is sorry. It may blame the other side, but it never accepts culpability and, because it has no money of its own, taxpayers always pay.
“We get to pick up the pieces and Government nevers says it is sorry. It . . . never accepts culpability and, because it has no money of its own, taxpayers always pay” —#4
Br. Michael [#4]: Whatever happens, it’s all the government’s fault, right? Never us, always Them.
I agree with you Rick. If borrowers can’t pay and the collateral does not cover the amount due, the banks book the losses and move on. I am just tired of hearing that the consumer credit problem is all the fault of the banks for making credit too readily available and not any of the fault of the folks who borrowed beyond their ability to repay.
Irenaeus, I didn’t say that. There is a lot of blame to go around. And yes Government has become a “them” because in many cases the therory of government that it is a creature of the people is no longer correct. And I say this apart from party.
[blockquote]And I say this apart from party. [/blockquote]
Indeed, it’s good to remember that Nobel economist FA Hayek addressed his opus, “The Road to Serfdom” to “socialists of all parties.” Well said.
Q: Whose money did the banks lend, their own or other peoples?
Q: If they were lending other peoples money, did they have some obligation to perform due diligence and ensure to the best of their ability that the borrowers would be able to repay the loans?
Q: Is lending money to someone without requiring them to provide any evidence of income performing due diligence?
Q: Which party, the lender or the borrower, had the institutional and legal obligation to ensure that the loan could be repaid?
“Q: Whose money did the banks lend, their own or other peoples?”
A: From a legal standpoint, their own. When you deposit money at a bank, the money becomes the bank’s property. A bank deposit is a debt, not a trust.
But banks have a legal duty to operate prudently—and in my view, also a moral obligation.
What advantage would accrue to a bank that made a loan that it knew would likely go unrepaid?
Modern bank lending has been sold on shortly after the loan – therefore banks did not care about ultimate repayment, only about the mark up they got when they sold the loans on for others to collect. This is what we call the sub prime market – a market in dodgy loans. What has shattered the banks is that the loans they thought they had sold on turned out to undermine the whole of the banking system anyway.
Q: Do banks have shareholders?
Q: Whose money did the banks lend, their own or other peoples?â€