The Banks and Irresponsible Lending

November 8, 2009 Debt Free Living No comments

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The banks were a major culprit in the world monetary crisis because they were extremely irresponsible in excuting their lending practices. For several years it was “anything goes” when it came to lending because they did not have to keep the loans. They could easily package the loans and sell to the highest bidder. This was a great business model while it lasted. But because the under writing was so poor it soon collasped.

Be that as it may, on the other side they were equally irresponsible consumers of credit because it was so easy to get. The reaction among many is that credit should be given only to those that can show they don’t need it. That argument is kind of silly because what would be the point of having credit if you don’t need it. The point is that credit is needed but it should not by abused by the lenders or to those receiving the loans. Our credit system can work well if there is enforcement of practical rules that ensure the system is sustainable.

Part of the problem is that banks saw fit to speculate on the continuing boom in the global economy and felt that by lending to people who were looking to become upwardly socially mobile they could cash in on those people being successful. However, for some potential borrowers it became clear that banks were taking risks and lending to people who had little hope of comfortably repaying the debt. Knowing that some contingency has to exist for these eventualities, people took advantage of this profligacy to take out big loans and enjoy a short-lived period of financial windfall – knowing that even when the money ran out they would simply be back to living the life they led before. Banks seem to be learning the lesson – but look at what it took for that to happen.