Wednesday, May 14, 2014


It would be nice, perhaps even useful, if the policy makers wandering around Washington today could get together every once in a while and compair notes.  A couple of days ago Janet Yellen was waxing poetic about her concern for the increase in risk in the banking sector as a result of bank lending to M & A transactions and to private equity firms which supposedly were inherently risky clients.  Actually, banks have done pretty well over the years with such clients because the structure of most transactions is such that banks are in a pretty good position among the debt holders; they are in fact the preferred lenders.  They also get out first and depending on the state of the markets, often before the expiration of their commitments keeping the substantial up-front fees while losing the risk which supposedly justified said fees.  But, with this Fed composed more and more of proponents of the theory that banks take deposits and make good old C & I loans, this stuff does look risky.  Forget about the fact that losses in this area have been historically no higher than any other sector of lending and in fact probably lower.  Each transaction is unique; each is subject to individual risk assessment; each is individually structured and of considerable importance, there is diversity of sectors.

Now one area of lending that has caused problems in the past and which has probably been the home of most losses is real estate.  It's sector lending pure and simple and when things go wrong they go wrong all at once and all over the place.  There is no diversity whatsoever.  The bubble bursts and good-bye asset values.  The other bad thing about real estate is that the proclivity of the sector to "bubble-up" is a result of excess liquidity which, resulting in the unnatural ease with which to finance transactions, drives up demand which in turn drives up prices to uneconomic levels which results in, well, can you say 2007/08?

Anyway, while Janet was warning about too much risk in bank lending (while continuing to pump scads of liquidity into the system), comes the newly installed boss of Fanny and Freddie announcing that these institutions along with a couple of other are about to formulate a new set of rules, loosening credit to home buyers, abandoning the tightening measures which were put in place to avoid the insanity lending of year 2000 and on.  One could almost hear Barney Frank lisping and spitting all over the House conference room saying, "I think I'll roll the dice on this one."  It seems that The Leader and the geniuses around him have come to believe that the slow growth of the housing sector is playing a major roll in the lack of growth in the economy.

Now I know that I can be accused of being too critical at time regarding the folks in charge of running this show, but it seems to me that if you want to get a pretty good idea of why there is a reluctance on the part of business and industry to invest, you might want to ask yourself who the hell is in charge here and what is the fiscal and economic policy of this administration?  You simply cannot have the Federal Reserve which becomes less independent as each day, pass warning about risk in the system where historically there has been acceptable risk and a political appointee mandating policies in a sector that together have produced the most enormous losses in the nation's financial history.  And the policies are exactly the same as those which have been condemned for the past five years!  Are we now saying that the financial institutions of this country are to be directed by their regulators as to their activities on the basis of political concerns?  Europe, here we come and one can see just how that has worked out--or not as the case may be--and continues to reap havoc even as of this date.  Where are the clowns?  Don't bother they're here.

Off to see granddaughter #1 graduate from high school.  Back next week.  God! I feel old.

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