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Should lenders or borrowers be blamed for recessions? Should lenders or borrowers be blamed for recessions?
by Joseph Gatt
2020-11-05 12:12:01
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Lending money to someone is a militant act. The idea is if you lend your friend 5 bucks so he can buy lunch, and that he promises that his parents will give him money and that he will pay back tomorrow, that's a militant act. You're basically giving your friend a lifeline.

So banks could lend money as a militant act. Banks want clients to be able to purchase expensive items, and necessary, vital items that they would otherwise not be able to purchase. Could be a house, could be a car, could be education, could be healthcare, could be consumer products. Or could be loans to unemployed people that you as a bank hope they can soon find a job and pay back. As a bank, you're handing in loans as a militant act to help clients survive, and hope they pay you back with minor interest rates when they can afford to.

recess0001_400But I've worked with bankers and creditors in the past. And I'm the kind of guy who loves using the phrase “helping people.” All banks, including government banks and development banks I worked with or dealt with, were furious whenever I used the phrase “helping people.” We don't help people! We're a business! OK.

So for a lot of banks and loan institutions, the idea of a loan is two-fold:

-getting monthly annuities (which are what payments really are) from people who take out loans, and those monthly annuities add up to a lot more than the initial sum they borrowed. So that's where the profit is made.

-asset diversification. When borrowers can't pay back, banks or creditors seize their property. So banks collect assets. The assets could be housing, could be sports venues like stadiums or tennis courts, could be fully-built and equipped businesses like restaurants or bowling alleys, could be valuable assets like gems, stones or jewelry and so on.

Now my acquaintances who worked at banks had a point when they were forbidding me from saying that they were “helping people.”

Banks rarely dish out loans as a militant act. If your grandmother gives you an emergency loan, that's a militant act. But if the bank gives you a loan, they want your annuities, or they want your property, or they want the property of the person who guaranteed your loan. That's not helping people.

So the first question goes like this: how do banks calculate risk? The math is fairly straightforward. Banks either loan money to people who have assets or property that can be seized in lieu of monthly payments. Or banks get someone to guarantee the loan that has assets or property that can be seized if the loan is not repaid.

So how come so many people take out loans? Many reasons. But the main reason is that in the old days few banks used the guarantee system, and banks tended to rely on the borrower's health condition and employability (those were the two main factors) before dishing out loans. Now banks, in somewhat predatory fashion, are no longer looking at health or employability, and are looking at who can guarantee your loan and what assets can they seize from the person?

But banks make a slight miscalculation: they tend not to consider land price fluctuations. That is, when banks want to seize property if debt can't be repaid, banks sometimes don't realize that their initial assessment of the price of the land was overinflated and they overestimated what they were going to get from the property.

Banks sometimes also overestimate the prices when it comes to auctioning off seized property.

Third problem: banks sometimes lack common sense when dishing out loans.

There's something I used to tell banks (and still tell banks) which is that if someone takes out a loan to purchase a yacht, the yacht is not the problem, nor is his ability to pay back the loan. The problem I see is that anyone who is employed and purchases a yacht probably has no intention whatsoever of waking up in the morning and going to board meetings and reading balance sheets. So I don't see his income going up, I actually see his income going way down.

But of course borrowers are also to blame.

Student loans were meant for bright students who couldn't afford to pay tuition. They weren't meant for every single kid. Just for those bookish kids who couldn't afford tuition.

The problem with some loans is that loans increase the demand for a product, and that causes inflation.

For example, credit cards increase the demand for consumer goods, and consumer good prices go up!

Mortgages increase the demand for housing, and housing prices go up!

Car leasing increases the demand for brand new cars, and car prices go up!

So who's being punished here? The guys and girls like me who like to go out with nothing other than 15 Dollars in their pocket to avoid shopping temptations. In the old days it used to be 15 dollars, but in 2020 it's more like 50 bucks otherwise I probably won't even be able to pay for my taxi. That's the punishment I'm talking about.  

And sometimes when I'm chatting with bankers I'm like “are you guys trying to own the entire property of the entire country? Or are you just trying to help people pay afford their education, housing and transportation?”


     
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