Monday, September 22, 2008

Big Five go Caput!

Today marks the end of an era. Less than a year ago, five American investment banks were marquee names on Wall Street. Today none exist!!

Bear Stearns went to JP Morgan Chase. Lehman went up in flames. Merill Lynch went to Bank of America. And today the last two, Goldman and Morgan Stanley have been allowed to become 'Bank holding companies'.

And among the Big Five industries, Mortgage, Insurance, Mutual Funds, Investment Banks and Commercial Banks, only the last retains a modicum of respect and customer confidence. So is this the failure of capitalism? Should the world embrace that abomination called Socialism and rein the market forces in with stringent regulation? Obviously no. But that discussion can wait.

I think the root cause of all this turmoil is the greed of the middle class. And worse, the governments especially the socialist ones seem to be actively encouraging this middle class rat race to procure gaudy wealth. Lets take two examples.

Credit Cards: Why on earth does any one in India need a credit card? There is no such thing as Credit history here. So for most people credit cards only have a nuisance value. Ofcourse there are some morons who spend nearly all or over their monthly salary and need Credit cards to get them close to the next pay day. How many people who use credit cards today would take a personal loan from friends? Credit Cards take away the shame associated with hand-to-mouth loans.

Housing Loans: I have never understood why governments should offer tax incentives to people who are stupid enough to spend money they don't even have. One can understand if the government encourages people to save. But tax breaks to spend?! And this, when every employee's house rent is actually paid by their employers as HRA. Weird, ain't it?

13 comments:

Arun said...

"Why on earth does any one in India need a credit card?"
what?!?!?????

wats the problem with credit cards? it encourages ppl to spend. if there is no money rotation, there is no economy. if ppl just save in banks ,banks will have lot of money. they have to lend in form of credit,mortgages etc.
lending credit is based on some credit score or in india based on ur income etc. so, it doesnt make middle class ppl suddenly with money, if they dont repay, they wont get more credit, forced to pay and so on.
its a perfectly fine system.

regd tax breaks, if they wont give tax breaks, not many ppl will buy houses which means not many banks will lend loans. if banks dont lend house loans(which is the lion share of all loans), wat else do they spend on?

so u r essentially asking for a society were ppl who only have real cash can spend. that means nobody can take loans to build businesses,houses or basically buy just plain stuff? if there were no loans, there wud be no venture capital or any R&D and there wud be no job for u in first place to earn some real cash.
that does not mean, anybody shud be given a loan(ofcourse the lender can take his risks but my tax money shudnt go for if goes belly up). only ppl who have the ability to repay(determined by credit score or otherwise) shud be given. the problem is mortgages given with 0$ down payment not housing loan itself.
as long as there is a check maintained on the number of defaulters its prefectly fine. atleast looks like.

Balaji said...

>> wats the problem with credit cards? it encourages ppl to spend. if there is no money rotation, there is no economy.

spend money that they don't even have? i'm not against loans, just against spending above one's income. 'fiscal conservatism' - the bedrock of right wing ideology.

credit cards are the first symptoms of this overspending disease. especially in India where credit cards have no other utility than spending money which the person doesn't have.

>> if banks dont lend house loans? (which is the lion share of all loans)

i really doubt housing loans are the lions share of loans. in personal banking, yes. but corporate loans are more important than housing loans to stimulate the economy.

>> wat else do they spend on?

ideally banks should give it to entrepreneurs, cooperative societies and farmers. we know how difficult it is to get these kind of loans. infact government screws up this segment with loan write-ofs that discourage repayment.

Arun said...


spend money that they don't even have? i'm not against loans, just against spending above one's income. 'fiscal conservatism' - the bedrock of right wing ideology.

i dont see any problem with spending more than one has. its a free market, economy will just thrive fine based on demand and supply. in the end, if u overspend u suffer and if u overlend u suffer, so the market will define a line and seems to work, i dont see any problem with that.



credit cards are the first symptoms of this overspending disease. especially in India where credit cards have no other utility than spending money which the person doesn't have.

well, this is the definition of credit card(not just in india). u r seeing overspending as something bad, in the end afterall its not free money for u, u got to repay it with high interest, knowing that u'll control ur overspending, unless u want ur assests to be confiscated by the bank or go bankrupt.
lending money and taking interest on it is a fundamental business needed to do anything in economy. credit card is just one form.

i really doubt housing loans are the lions share of loans. in personal banking, yes. but corporate loans are more important than housing loans to stimulate the economy.

yes, it is. i wud be surprised if housing loans are less than 70% of the total money loaned. corporate loans are a tiny fraction.
corporate loans make sense only if there are consumers who are willing to spend which is fueled by credit cards.

ideally banks should give it to entrepreneurs, cooperative societies and farmers. we know how difficult it is to get these kind of loans. infact government screws up this segment with loan write-ofs that discourage repayment.



banks are just profit making entities. they loan money where there is a demand. corporate loans are small and if consumers are not getting loans they wont buy anything and there wont be need for many businesses.

if there were no housing loans and since house is relatively an expensive resource compared to salary , ppl will just start saving all thier salary and wont spend anything other than basic needs.

both credit cards and housing loans are the basics to cause the spending behavior which is the basis in which most economies thrive.

Balaji said...

1. >> corporate loans are tiny.

is this a joke? have you heard of credit ratings for companies? what does that mean? when a company says during an acquisition, that it'll raise money (as opposed to internal accruals or equity), where are they raising the money from?

2. credit cards in the US are also a safer option to spend unlike in India. here there is very little protection against fraud. upto some amount you are supposed to pay the credit card bill before they investigate a suspicious transaction. debit cards and net banking seem to be lot more secure.

3. what makes you think i'm against loans? is this Economics 101 for me? I'm saying Credit Cards and Housing loans are the worst forms of loans and that government should stop encouraging them.

4. your arguments stem from the logic that consumer spending drives the economy. thats not necessarily the best economic model. US is the best example of consumer spending driven market. But there are ones like Japan where savings are as high as 33%.

5. your logic of spending fails on housing loans. houses are infact long term and mostly dead investments. if a person is not using his salary to pay mortgage, he would likely invest in equity of some kind which benefits the economy more. or he spends it on consumer durables, which may also help the economy. or he saves.

6. "saving in a fixed deposit is bad" is probably the most abused argument. its not very profitable for the individual but very beneficial for the banks and the economy.

if nobody saves, where will the credits come from? US borrows heavily from countries like China bcos Americans don't save much. why did Goldman Sachs and Morgan suddenly become bank holding companies. bcos getting deposit from individual customers provides them with a stable source of capital.

>> i dont see any problem with spending more than one has. its a free market, economy will just thrive fine based on demand and supply

what???? u are saying this at a time when the world economy is reeling because of the spiraling effects of mortgage bust, credit crunch and now lack of liquidity in investment banks?

anyway its your tax dollars that are being spent to bailout Fannie Mae, AIG etc. just bcos some morons wanted to buy houses they could never afford?

Arun said...


is this a joke? have you heard of credit ratings for companies? what does that mean? when a company says during an acquisition, that it'll raise money (as opposed to internal accruals or equity), where are they raising the money from?

u cud check the stats on total money spent on lending for business and for housing. im pretty sure with 50M(or so) houses, money spent on corporates will be a drop in the bucket.
and u wont get loans for corporates as easily as houses.

credit cards in the US are also a safer option to spend unlike in India. here there is very little protection against fraud. upto some amount you are supposed to pay the credit card bill before they investigate a suspicious transaction. debit cards and net banking seem to be lot more secure.

i dont know wat u mean by credit cards are unsafe in india. if net banking is safe, i dont see any reason for credit cards to be unsafe

what makes you think i'm against loans? is this Economics 101 for me? I'm saying Credit Cards and Housing loans are the worst forms of loans and that government should stop encouraging them.

like i said before credit cards and housing loans are the 2 most fundamental loans. if u want govt to discourage them, u r essentially asking to abolish most of the loans. i guess regulate maybe the right word u wanted to use, not discourage.

your arguments stem from the logic that consumer spending drives the economy. thats not necessarily the best economic model. US is the best example of consumer spending driven market. But there are ones like Japan where savings are as high as 33%.

i dunno abt japan, but all economies are driven by consumer spending. this is from my understanding how markets work.

your logic of spending fails on housing loans.

housing loan is one which is the biggest spend for most ppl.

houses are infact long term and mostly dead investments.

if everybody thinks thats the case, houses wud be damn cheap since prices are just set by demand and supply.
houses are not only investments but its a valued posession to many, and u get benefits like not paying rent and tax subsidies. if u r paying rent, the money is going down the drain that is the worst form of spending.

if a person is not using his salary to pay mortgage, he would likely invest in equity of some kind which benefits the economy more. or he spends it on consumer durables, which may also help the economy. or he saves.

that is assuming nobody is interested in buying a house.

"saving in a fixed deposit is bad" is probably the most abused argument. its not very profitable for the individual but very beneficial for the banks and the economy.

when did i say this? :)
but why wud i care as an individual wats beneficial to banks? i care only whats profitable to me.

if nobody saves, where will the credits come from? US borrows heavily from countries like China bcos Americans don't save much. why did Goldman Sachs and Morgan suddenly become bank holding companies. bcos getting deposit from individual customers provides them with a stable source of capital.

sure, so?


what???? u are saying this at a time when the world economy is reeling because of the spiraling effects of mortgage bust, credit crunch and now lack of liquidity in investment banks?

anyway its your tax dollars that are being spent to bailout Fannie Mae, AIG etc. just bcos some morons wanted to buy houses they could never afford?

like i said earlier, the solution is not to give loans to anybody, but only ppl who can afford to repay. watever bust happened is just a big market correction, right now min. down payment needed is not 0% but 20%
i think u r blaming the credit and mortgage system bcos banks just greedy and gave loans to anybody and suffered in the end.
the system itself is needed and good, its only the question of making sure, loan amounts are given such that the defaulters/foreclosures are controlled. market will make mistakes and correct itself regularly.

Balaji said...

hmm, I'm more concerned about the macro economics than micro economics. i cannot care less if individuals lose their houses or their investments in a bad company.

but i care when government encourages, as policy, spending non-existent money. encouraging housing loans is wrong even when everything is running smoothly. US government should instead encourage savings.

regulation is exactly the bad word i didn't want to use. it leads to corruption, lobbying, paperwork, inefficiency, loss of accountability and eventually bailouts at the expense of tax payers money.

checking whether companies give loans at 0% or 20% down payment is hardly the work of a government body. even in socialist India, regulation happens at a very high level. Like how much capital do banks park at the Reserve Bank.

netbanking is anyday safer than credit cards because, you'll need the password as well as the debit card to make a transaction. with credit cards any pickpocket can make online transactions. number, name, year and cvv are all just there. besides, in India, reporting a fraudulent transaction seems to be a pain.

as for your claim that corporate loans are tiny compared to housing loans, you may wanna check these stats.

all US values for 2007.

Mortgage Debt - 10.8 trillion
Credit Card Debt - 2.6 trillion
Corporate Debt - 10.1 trillion
Financial Sector Debt - 15.8 trillion.

Anonymous said...

hai my dear Gandu how are you?

Vijay said...

yes, it is interesting to think about this as a fundamental failure of capitalism...although intuitively it seems too early to conclude.

Arun said...


but i care when government encourages, as policy, spending non-existent money. encouraging housing loans is wrong even when everything is running smoothly. US government should instead encourage savings.

no doubt govt shud encourage savings. but im stressing that ppl just cant live without housing loans. if there is no loan, they have to save a LOT which means they wont spend anything. that is too much of a savings.


regulation is exactly the bad word i didn't want to use. it leads to corruption, lobbying, paperwork, inefficiency, loss of accountability and eventually bailouts at the expense of tax payers money.

checking whether companies give loans at 0% or 20% down payment is hardly the work of a government body. even in socialist India, regulation happens at a very high level. Like how much capital do banks park at the Reserve Bank.

its just the paperwork of the lender not govt. sure enough, govt can enforce regulations on these lenders, so that they dont have to bail out them when they screw up. in india even for education loan they do too much verification, this is the way it shud be. i think housing loans in india is the perfect way. US is too extreme.


netbanking is anyday safer than credit cards because, you'll need the password as well as the debit card to make a transaction. with credit cards any pickpocket can make online transactions. number, name, year and cvv are all just there. besides, in India, reporting a fraudulent transaction seems to be a pain.

well, the problem is with security, not with credit cards themselves. probably u r overestimating the theft of credit cards, definitely i havent heard this as a major issues. exceptions are there everywhere


as for your claim that corporate loans are tiny compared to housing loans, you may wanna check these stats.

this is not corporate loan, atleast wat i was implying. the figure includes the ones loaned to investment banks. i was talking more abt loans to small business like ur next door mom-and-pop store and startups.


vijay: wat r u talking about? capitalism never fails.

Arun said...

btw WaMu is also out now :)
i hope i get my 10$ from FDIC

Balaji said...

housing loans: i said government should not provide tax benefits on housing loans. thats all. if people wanna screw themselves by getting loans anyway, thats their problem.

regulation: if banks in india are being more cautious with lending, thats their business strategy. why on hell should govt validate someone's business strategy? regulation is a waste of tax payers money.

credit card: i said security cannot be an excuse for using credit cards in india. in india credit cards = loans. i'm arguing that getting loans for trivial reasons is bad.

corporate loans: i listed financial sector loans separately (15.8 tn). corporate loans are loans received by business which is roughly equal to housing loans. so its not tiny.

Arun said...


housing loans: i said government should not provide tax benefits on housing loans. thats all. if people wanna screw themselves by getting loans anyway, thats their problem.

if there is no tax benefits, housing price will go down south(since ppl wont be able to afford) which will cause the salary levels to go down south ,will cause tax to govt go down. although im not sure myself, my guess its just like deflation , everything will go down. situation will probably be the same. its like living in an expensive city and an ordinary city.affordablity and money needs are probably the same.

regulation: if banks in india are being more cautious with lending, thats their business strategy. why on hell should govt validate someone's business strategy? regulation is a waste of tax payers money.

govt regulates a lot into private's sectors business stratedgies in the best interest of the consumers or the economy. it theres no regulation of certain biz strategies, consumers cud easily end up being cheated.
for eg even in simple things like
enforcing reciepts on purchase to telemarketing calls which companies make to random ppl, the company has to oblige to answer questions like:
"is this is a telemarketing call?"
"wats ur full name" etc. regulation=protection of consumers



credit card: i said security cannot be an excuse for using credit cards in india. in india credit cards = loans. i'm arguing that getting loans for trivial reasons is bad.

everywhere credit cards=loans, not just in india.
wats ur definition of trivial. i pay all my groceries and bills with credit cards. do u call that trivial? if i dont have cash, wats the problem with borrowing a loan, afterall the banks will screw me with 15-30% interest and if dont pay, they will screw me back(incl going after my assets).
sure i agree that, companies may lend too much for consumers who cant pay, this will taken from tax money which is bad.

corporate loans: i listed financial sector loans separately (15.8 tn). corporate loans are loans received by business which is roughly equal to housing loans. so its not tiny.

yeah, i didnt read the link carefully. so, looks like business debt is actually comparable to housing. i was guessing it wud be more like 5% of housing loans in total volume. maybe bcos it includes all major corporations (i as just thinking in terms of poti kadais etc, which is wrong assumption)

அர டிக்கெட்டு! said...

Sorry sweet hearts, What we are witnessing is naked capitalism, the one which has failed and still holding on to its dear life by begging at the feet of tax payers.
We will never be able to see capitalism as we know it again. Wether we like it or not, the end is near