Archive for the ‘Banks’ Category
What you might not know is that there are technology solutions for banking every bit as powerful as social media such as Facebook that can step into the gap, making it possible, this very minute, for you to borrow or lend money safely online, completely independent of an actual bank. They’re called peer-to-peer (P2P) lending services, and they have been around for years. This kind of “citizen banking” should be reshaping the business of borrowing and lending, and shaking the foundations of the financial industry in a way no amount of Occupy Wall Street protesting could accomplish. So what’s the hold up?
The idea is simple. Lenders meet borrowers through a website that is something of a mash-up between eBay and a social network. To borrow money through Prosper, for example, you set up a profile and apply. The website assesses your creditworthiness, then assigns you a grade and an interest rate. Lenders can then weigh up these criteria to decide whether to finance your loan. They review borrowers’ profiles much as one might review profiles on a dating site, and can finance anything from $25 of a requested loan to the whole thing. Your monthly payment goes directly into the lender’s bank account, including interest. Every part of the process takes place online.
Over the last three decades the US financial sector has grown six times faster than nominal GDP. This paper argues that there comes a point when the financial sector has a negative effect on growth – that is, when credit to the private sector exceeds 110% of GDP. It shows that, of the advanced countries currently suffering in the fallout of the global crisis were all above this threshold, above which financial development no longer has a positive effect on economic growth. We develop a simple model in which the expectation of a bailout may lead to a financial sector which is too large with respect to the social optimum. We then use different empirical approaches to show that there can indeed be “too much” finance. We conclude by showing that the size of the financial sector was a significant amplifying factor in the global crisis that followed the collapse of Lehman Brothers in September 2008.
“..we are throwing more and more of our resources, including the cream of our youth, into financial activities remote from the production of goods and services, into activities that generate high private rewards disproportionate to their social productivity“. James Tobin
The looming second banking crisis raises the question whether banks have learned anything from the Lehman debacle only three years ago. They have indeed learned a lesson, but you may not like it.
So we face another Lehman moment. The sea is rising and the wall isn’t high enough so it should be in the self-interest of the core banks to take precautions and raise more capital to withstand the flood – right? Haven’t they learned anything from 2008?
Actually, they have. They have learned from Lehman that they are now bigger and more systemically important than ever. So if they refuse to recapitalize, then the problem is simply passed back to the state to sort out. Oddly, Germany’s entire banking industry has just joined forces to attack the EU’s recapitalization plan. In effect, playing the immoral hazard card. They know there is trouble coming, but sorting it out themselves would cut into profits. Far better to pass it back to the state with a reminder of the consequences of their failure. The lesson of Lehman has indeed been learned – it’s good to be too big to fail. It’s a truly immoral hazard.
Just as the subprime mortgage bubble was giving way to a bust that would help trigger a devastating financial crisis, Goldman Sachs, a firm that had been at the center of Wall Street’s rampant mortgage speculation, found its way to a new area of explosive growth: In claiming what would eventually become a 41 percent stake in Education Management Corp., Goldman secured itself a means of tapping into the boom in for-profit higher education. The federal government was boosting aid to college students nationwide, just as a declining economy prompted millions of Americans to seek refuge in higher education, leading to dramatically expanding enrollments at many institutions.
But unlike in the mortgage markets, where some unwise or unlucky investor got saddled with the bad loans after the festivities ended and home prices fell, this new market in higher education boasted seemingly unlimited growth potential at virtually zero risk. The burden of college loan repayment falls entirely on students’ backs, shielding corporations from the consequences of default. The colleges essentially receive all their revenues upfront, primarily through federal government loans and grants for tuition, regardless of whether students are able to gain employment and pay back their loans.