Federal regulators warned Thursday that banking-industry turmoil would continue as financial institutions come to terms with piles of bad loans they made to finance the construction of homes and condominiums.Home and apartment construction has a significant effect on the consumption in the economy. This suggests that as banks cut back on lending, the economy will slow down and unemployment will rise. Higher unemployment will reduce consumption in the face of a consumption-based recession.
Until now, most of the damage to banks from the housing crisis has come from homeowners defaulting on their mortgages. But amid a dismal spring sales season for new homes, loans to home and condo builders are looking increasingly shaky. Banks have begun to dump them at what will likely be steep discounts, setting the stage for billions of dollars in fresh losses.
"As long as the housing market is on a downward path, as long as those prices continue to fall, I think there's a risk that the losses could continue to mount on a variety of loans," Federal Reserve Vice Chairman Donald Kohn told the Senate Banking Committee Thursday.
At the same hearing, Federal Deposit Insurance Corp. Chairman Sheila Bair said banks that aren't diversified, or those with high exposures to residential construction and development, are of particular concern. "That's where we are really seeing the delinquencies spike," she said. [Snip]
The health of the economy is heavily dependent on the willingness of banks and other financial institutions to lend to consumers and businesses. Many banks have already taken substantial losses, and either will have to pare their lending or raise new capital to rebuild their safety nets. The Federal Reserve and Treasury Department have been pressing banks to raise capital so as not to further reduce lending.
Banks with swelling portfolios of troubled loans tied to land and housing are struggling to unload some of their real-estate debt. IndyMac Bancorp Inc., a Pasadena, Calif., lender, is trying to sell $540 million in loans made to finance land purchases and housing construction projects. Winning bids on many of the loans were, on average, about 60 cents on the dollar, according to people familiar with the matter. But some winning bids were only about 20 cents on the dollar.
That makes this a real downward sign.
1 comment:
Actually the problem is that the fed has abrogated its responsibility to regulate the banks. The source of the current problems is primarily the large investment banks. Since ex-Senator Phil Gramm forced the elimination of Glass-Stegall through in the late 90's (before he and his wife, Wendy, helped cause the Enron disaster) allowed the same organizations to operate both regulated commercial banks and investment banks, there is no real difference between large regulated and unregulated banks. That is another cause of the current financial crises.
Bear Sterns collapsed because it bet that it could leverage its capital $31 to $1 and make a profit. Unfortunately, when their investments went South, that same 31 to 1 leverage worked to create losses instead.
BS was so tightly intertwined with the other investment banks around the world that if it had been allowed to collapse without government intervention, the entire world banking structure would have been at best severely damaged and the American financial banking system would have been destroyed. Government intervention was critical. The situation was even worse than the collapse of the Southeast Asian economies in the late 90's, when worldwide disaster was headed off by the Fed under Greenspan.
The federal Reserve has a lot of things to answer for, but the answer is not to eliminate it. Banking must be regulated if the economy is not to undergo a series of ever greater boom-and-bust cycles caused by banking irresponsibility.
SEC regulations also need to be strengthened. And while eliminating the Fed is a disaster in the making, the reverse proposals of centralizing financial regulation under the fed is also a very dangerous idea. Regulators also benefit from some competition and mutual oversight.
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