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Investment Analysis Clubs / Macro Economic Trends and Risks
|Subject: Re: “This Time it is Different”||Date: 10/5/2012 7:07 AM|
|Author: AdvocatusDiaboli||Number: 405330 of 447118|
I still haven't heard a compelling argument about why Kling was wrong:
Thanks for the link. I shall read it.
In the meantime, maybe you can think about my assertion:
The truth is that the banking system is ALWAYS evolving towards blow-up, as (during normal economic times) taking more risk leads to higher growth, and so the fools among the bankers have a competitive advantage until there are too many of them, which destabilizes the system and causes a blowup.
It is historically observable that in a banking sector with actual competition (less so in a cartelized banking industry) cyclical banking crises are what always happens.
Again and again and again. Sure, there's always some regulation of the banking sector somewhere, but it's never the same regulation, is it?
What IS the same in all banking crises are large volumes of objectively very imprudent loans (which are usually not forced by the government).
If the government isn't forcing the banks to make stupidly risky loans, why are they doing it?
They do it because for a while (several years), making stupidly risky loans is rewarded with high short-term profits and growth.
There are strong (short-term) market incentives to make stupidly risky loans, and so they are made. More and more of them, as people accept the decline of credit standards as the "new normal".
Until the total volume of stupid loans reaches a certain critical mass and/or there is some trigger causing a decline in confidence, which makes the stupid loans difficult to refinance, causes a decline in the (usually bloated) price of the collateral, causes the banks to withdraw credit, causes the failure of debtors, which makes everyone scramble for liquidity, etc.
This is what every banking meltdown looks like, and it's a mechanism inherent in human nature and the uncertainties of the business.
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