The Great Debate

-James Saft is a Reuters columnist. The opinions expressed are his own-

A dilemma at the heart of the response to the financial crisis is that the antidote to so many ills actually causes the symptoms to worsen.

Take for examples bank capital levels and the chaos surrounding home mortgage foreclosures.

Both issues are the fruit of the same tree: the desire to do things quickly, cheaply and with minimal safeguards.
And both, if you want to fix them, are probably going to slow the economy and lower asset prices in the short term.

So over the long term, paradoxically, the economy will slow and asset values fall anyway.

Being in possession of a hammer and sighting a nail, Governor of the Bank of England Mervyn King put it bluntly on Monday: “Of all the many ways of organizing banking, the worst is the one we have today.”

(James Saft is a Reuters columnist. The opinions expressed are his own)

If you thought the U.S. housing crash could be blunted if only lenders would cut delinquent borrowers a break, it is perhaps time to move on to another vain hope.

That’s right, the loan modification movement – pushed by the U.S. administration and others as a means of keeping non-paying borrowers in their houses, keeping those same houses from flooding the market as foreclosures, and even helping beleaguered lenders – is running into a reality-shaped wall.

An exhaustive study of loan modifications by economists at the Boston Federal Reserve, under which delinquent borrowers are given lower rates, more time, or even cuts in the principal amount owed, showed fundamental problems with the way that idea works when put into practice.

– James Saft is a Reuters columnist. The opinions expressed are his own –

Banks in the U.S. face a new source of write-downs and failures in the coming year as loans made to developers to finance residential and commercial property development rapidly go bad.

And as these loans are old-fashioned and concentrated in smaller banks, their fate is particularly interesting as it indicates that issues with the banking system go far deeper than the so-called “toxic assets” belonging to the largest lenders that have thus far gotten most of the attention and government aid.