Remember thinking to yourself, over the last few years, that all the new restaraunts and strip malls in suburbia must have been unsustainable?
As the financial system tries to right itself after its near-collapse last fall, the Treasury Department has assembled a team to examine what could yet bring it down and has identified several trouble spots that could threaten the still-fragile lending industry.
Informally known as Plan C, the internal project is focused on vexing problems such as the distressed commercial real estate markets, the high rate of delinquencies among homeowners, and the struggles of community and regional banks, said government sources familiar with the effort.
Part of the mission is assessing which firms are the most vulnerable and trying to decipher what assets these companies hold and whether they pose a danger to the wider financial system. Plan C is a small-scale, relatively informal approach to a problem the administration hopes to address in the long term by empowering the Federal Reserve to oversee systemic risk.
The cynic in me says that this will just be more big banks cannibalizing smaller ones, overseen by our benevolent overlords, of course.
Thousands of these institutions wrote billions of dollars in mortgages on strip malls, doctors offices and drive-through restaurants. These commercial loans required a lot of scrutiny and a leap of faith, and, for much of the decade, the smaller banks that leapt were rewarded with outsize profits.
In doing so, many took on bigger and bigger risks. By the beginning of the recession in December 2007, the median midsize bank held commercial real estate loans worth 3.55 times its capital cushion -- its reserve against unexpected losses -- according to the Federal Deposit Insurance Corp.
I'm sure some people would cry "Regulation!" here, but if we would just control M0 (and by extension M1, M2, and M3) a lot better from the government's end, this easy credit problem probably would have been fixed. Banks can't gamble with what they don't have.
While I'm definitely not against all regulations in every form, it seems that trying to regulate a bank from the liabilities side is just swimming upstream. Instead of trying to show how much a bank is really on the hook for, subject to certain market conditions, and trying to get a detailed sense of the cash flow of every damn institution in the FRB, why don't we just cut the problem off at the source, the Treasury's presses, and the Fed's authority to turn them on?