A Post-Bubble Hangover

Once in a while, a person has to wonder about the learning processes of Americans. A massive bailout of our banking system was necessitated almost three years ago by the inability of our biggest (and smallest) banks to properly regulate their own activities. Lending practices over the decade leading up to our housing meltdown could do nothing but lead to a market bubble. Home “ownership” rates were at an all-time high, and the corresponding failures of those being foreclosed upon now is a simple market correction of the banks’ collective inability to make accurate risk analyses.

An obese housing market slims down by wearing smaller pants.

The Weekend Journal had a good write-up by Nick Timiraos and Maurice Tamman about big banks’ response to being saved by the American taxpayer. After letting lending standards slide so far toward loose money, the banks, it seems, are overcorrecting a bit now. The tightening of the current money supply helps to indemnify lenders against future error, but the multiplier effect of funds available to lend and stimulate economic growth are now tied up in possibly overcautious rates of credit denial.

Today’s lending market is more heavily reliant on borrowers with ample cash, which creates kind of a vicious cycle here. Those who don’t need to borrow money have ample means and historically low interest rates with which to attain credit, while those people and areas that need credit the worst are now unable to acquire it.

If the banks were “too big to fail” three or four years ago, they are every bit as big or bigger today. Furthermore, their books are still polluted with toxic assets—a number of properties stagnated in limbo between foreclosure and renewed marketability. The banks can’t release all the foreclosures they should back to the market at one setting, or the entire pricing structure would become devalued. Every bank would be stuck with piles of worthless paper.

So now it appears our banks, and perhaps our housing market, are “too big to succeed.” Fun stuff, knee-jerk pendulum politics...