TiggertheMad's Journal: How to fix the banking industry, in 5 minutes or less

Now that you have been suckered into reading this with a completely ludicrous subject line, I offer my insincere apologies. They are insincere because, after all, you are still reading...

I was sitting around the other day thinking about what a complex mess the US financial system is in these days. Just to really understand the whole issue, you have to do quite a bit of reading. It's pretty clear that the massive deregulation that occurred over the last twenty years is a complete failure. If you look at the models of economic thought, there seems to be a graphable range of options. On one extreem side of the spectrum you have complete lassier-fair economics without any market interference, and on the other side, a complete centrally controlled economy where everything is managed. A capitalist might favor the former, and a socialist would favor the latter.

I have always been of the opinion that rarely in life, when there seem to be choices that are presented in black and white, that the truth of the situation lies somewhere in the middle. Both schools of thought have pros and cons, and most societies seem to have adopted solutions that are sustainable and functional that incorporate elements of both. So what sort of solutions might have some benefits of both?

The deregulation of the banking industry over the last two decades seems to have allowed financial institutions greater freedom to pursue profit and growth, but at greater risk to their investors and the society as a whole. The basic problem is one of, how do you allow financial institutions the maximum possible flexibility in their activities, while regulating them in a simple efficient fashion so as to protect the country's financial system as a whole? These companies do not operate in a vacuum, and have a responsibility to grow their investor's money, but not at the expense of the greater system (especially since their investors probably exist within that financial system too.)

In thinking about the problems that seem to be plaging the country right now, I wonder if there might just be a simple solution that might alleviate similar future problems. It seems like many of the root causes surround the ability to sell debt. Many companies these days will issue credit to a borrower, and then sell that debt to a third party, allowing them to quickly recover their investment, make a quick buck, and be able to have more assets to loan to new borrowers. Now, having capitol available for borrowing is generally a good thing, as it facilitates economic growth in all sorts of ways. But, I wonder if some of the problems we are seeing are a result of having too much credit being available. By not having to retain possession of debt, companies are economically encouraged to acquire as much as possible, since it is, in essence an asset. The quality of credit becomes less of a concern, since the quantity is so great. This sort of behavior has lead to the problems of the sub-prime mortgage market, and the rampant availability of consumer credit. Nobody is too concerned with over-issuing of credit, because the problem will be sold off to another party.

If the selling of credit were completely prohibited, then any credit issuer would suddenly have a vested interest in making sure that any credit that it was issued was going to be paid back, and would result in the market correcting itself to some degree in its lending practices. I am not sure that the selling of debt actually generates any economic value, so while there would be a number of people upset over such a law, I don't think that it would affect the final economic bottom line, the basic production of commodities. I don't think that this would be a complete solution to all the problems that lead to existing quagmire, but it might be a simple step in the right direction.

Closing thought: I posted this under 'America Online' because it is about America, and you are online right now.