(This should be part of the Rant Meme. It sure feels like one.)
[He walks out, with a soapbox. He sets it on the ground. He climbs up on it, and speaks…]
Many people believe that our economy is tipping towards recession. They blame for this is often placed on those folks who bought houses when they couldn’t afford it, and those who live on credit. The government is attempting to address this by lowering interest rates and providing supports for those homes in foreclosure. But that’s not addressing the problem. We need to shine some light on the root cause, and just like with the oil windfall profits tax, find someway to address it.
Financial companies have gotten too greedy for their own good.
There are a number of reasons that I believe this to be the case:
- The risky loan products were pushed originally not to get homeowners safely into homes. They were pushed because the banks made money off the fees and the interest. They were pushed because there was no risk to the bank: they were made and then sold, bringing full income to the originating bank.
- As the number of foreclosures has increased, the banking industry has not pushed to come up with mechanisms to prevent folks from going into disclosure. Yes, there are pushes to stave off the actual foreclosures, but that’s because each foreclosure costs the banks actual money. But banks aren’t doing anything to address the problem before folks start being late on their payments and entering the foreclosure process. Why? Very simple: Late payments lower the credit rating of people, allowing the banks to raise interest rates on the loans they do make to those individuals. They would rather you be late and then recover than not be late in the first place, because they make money on the raise of interest rates.
- This can also be seen in the increasing spread between the Fed Rate and the mortgage rates. Although the Fed keeps lowering the cost of funds to the bank, we’re not seeing a corresponding drop in 30-yr mortgage rates nor the rate on consumer rate loans. Where does this extra spread go? To the financial industry. It is not helping lower rates so that folks in adjustable rates can refinance (even under harder credit guidelines) into 30 yr fixed products.
- At the same time, banks are increasing fees, and doing tricks to increase fees. Wachovia has just introduced a program that moves $1 to savings everytime you use your debit card or pay online. If you don’t keep track of your balance, this will move your account into the overdraft area sooner.. and with overdrafts, who makes the fees? The banks. And of course, banks are regularly increasing their fees.
- Saving rates are similarly dropping. I was looking at savings rates at a number of institutions in the Sunday paper, and some are in the 0.5% and 0.75% range. That’s ridiculously low. Remember, the traditional savings and loan process was that the spread between the interest the bank earned on their funds and the amount the bank paid on savings was income to the bank. As this spread increases, so does bank income.
- It’s not just in the consumer market that this is happening. Cities are being hit hard, with financial institutions lowering the bond rating on most muni bonds (even though those rarely default). The lower bond rating means the cities (and states) must pay higher interest in order to sell the bonds, which finance needed improvements for the cities. The institutions that buy the bonds benefit from the higher interest; the taxpayers ultimately pay the price in a reduce amount of infrastructure work (because of the increased bond cost) as well as higher taxes to pay for bond service.
We need to address this greed, and come up with some way to properly cover the cost of risks, without impacting those who are not adding to it, and making it so that people don’t impact their credit ratings when it is not necessary.
