The Irish property boom and subsequent bust is a portent reminder of the hazards of the Wall Street version of banking, which over several decades has managed to turn the most conservative institutions in our economy into Las Vegas like gambling casinos.
Bankers have traditionally been the guardians of assets, its why it they were so dour; their job and role was to protect the value in assets, and thereby protect their depositor’s principle and the integrity of the capital system. In Wall Street’s version of the game, traditional banking is a bit of a dog; much better to turn boring (low return) mortgage assets into a stream of high value ‘services’ that generate multiple sources of immediate fees (earnings and personal bonuses).
The ‘sub-prime’ mortgage scandal demonstrated clearly that under this regime, NOBODY in the system is focused on stability. Every player in the property game these days, mortgage ‘originators’, servicers, securitization specialists, banks and their and sophisticated investment advisors, even credit rating agencies are focused entirely on fees, no one is watching the asset. In changing the focus of attention and misaligning the incentives in the system, the quality of mortgage assets was degraded – to devastating effect.
Assets matter, for instance, with a solid housing market individuals are able to leverage their homes to raise funds for, perhaps, sending their children to school, for investing in their businesses or expensive life-savings operations. Businesses are able to leverage their commercial property for a variety of purposes, including managing cash flow. Banks holding solid mortgage assets are able to leverage these assets to provide liquidity for the local business community, while national governments are able to leverage the housing stock to support currency values and central banking liquidity to the benefit of the economy as a whole.
As the Irish are discovering today to their dismay, blindly following Wall Street model of ‘servicing’ an economy creates instability; for the Irish it created a kind of economic whiplash.
Assets, and their sustainable value are the underpinnings of the capitalist system and all nations value and in many ways ‘rest’ upon their asset foundations. Turning assets into fee generating ‘services’ is the reverse of what a sensible economy should be doing. Unfortunately the game today is all about finding new and exciting ways of converting assets into services; this means that capital stability is sacrificed for expediency.
‘Servicing’ the economy not only degrades an economy’s strength but also reduces leverage and growth potential. Not that leverage disappears in this new Wall Street system, banks, naturally, publically traded, are able to leverage their new ‘mortgage’ related earning steams – good for them. Unfortunately this is very bad for the rest of us.