Why a Financial Bubble is Worse Than Usual; Why We Need to Reform Lending

When the Dot Com Bubble was still considered a safe investment, not a bubble, it manifested itself in the production of a few physical things: more computers, more cables, more stores and more employees to handle all those things. When the bubble burst, materials to produce things dried up, investment dried up, companies when under and people lost their jobs. All very painful, but all very common in a well-capitalized and robust economy, especially one on the brink of technological breakthrough.

When this financial bubble started, it began in the housing industry. But the bubble does not concern itself with the building of houses as you might think, though new homes were of course inevitable. Rather this bubble concerned itself with the creation of mortgages, which is literally creating something from nothing. Yes, economists will tell you that there is sound theory behind all of it – and perhaps they’re even right – but at the end of a day, banks borrow from other banks so they can lend you money they don’t have to buy a house you can’t afford.

Then those loans of no-money get rolled into superfunds which pay their investors dividends based on interest earnings on the money lent but never owned. Investors buy shares of superfunds made up of fake money at a profit, thus still more banks are making more money off of fake loans of no-money for people who can’t afford to pay cash for houses.

And what happens when there are not enough good-credit customers to continue creating new fake loans of money you don’t have? Well, you start dipping into the bad-credit customers, of course. And once you’re there, you’ve already forfeited any claim to a moral or ethical business justification for what you’re doing. Now, you’re just slumming.

And we’re all supposed to be pissed at Bernie Madoff? Seriously?

But the elephant in the room that no media outlet wants to touch, no Congressman is going to raise and I doubt very much if even Barack Obama’s going to have the balls to handle – after all, his Veep is in bed with his credit card buddies in Connecticut – is that we need to drastically overhaul any regulations we have on lending and even install some new ones. No, it won’t get us past our current crisis. The damage is done and we need to deal with that separately. But we got here in part because of lending laws that were repealed under the Clinton Administration and they need to be put back in place.

There needs to be penalties for a company who lends to a borrower without full disclosure and without proper documentation – some banks were giving out loans without even bothering to fill out credit checks. Banks aught to be required to provide full details of any mortgage including credit checks and negotiation. There needs to be a minimum and maximum interest rate set by the bank on any loan or mortgage and it needs to be advertised right along with the current deal. Penalties for late payment on loans aught to be loss of credit, not an increase in interest rates on the loan, which benefits the bank and leads to predatory lending. If interest rate penalties are imposed, they aught to be imposed on a temporary basis, not in perpetuity.

We also need to encourage a “Credit Economics” class in high schools across America. We would be less susceptible to the scams and machinations of creditors if more of us knew what we were dealing with.

But will such measures be introduced in the next few years? Perhaps, but probably not until such time as the recession we’re in gets bad enough for people to start demanding answers.

By Tommy Belknap

Owner, developer, editor of DragonFlyEye.Net, Tom Belknap is also a freelance journalist for The 585 lifestyle magazine. He lives in the Rochester area with his wife and son.