I actually think Martin Armstrong hit the nail on the head when he said that the 2008 recession was precipitated by a transition from relationship banking to contractual banking. What he means by that is that when a bank used to loan you money, they kept the mortgage contract themselves, and so had huge incentive to vet you properly. In the decade preceding 2008, that model went out the window. They now had an incentive to sign up as many people as possible for the loans because they no longer had to keep the contract. They could package it up into derivatives and pawn it off on some poor schmuck that you've obscured the risk from. No need to vet anyone, because you could sell the contract as soon as you made it, and collect all of the value while only holding the risk for a very brief time. The lifting of Glass-Steagall made this possible.
In a world without other financial regulations, a lack of Glass-Steagall wouldn't be an issue, because people would be incented to properly assess risks and structure investments accordingly, but under the current system, lifting Glass-Steagall and allowing banks to gamble with people's deposits while propping them up with government money is a huge part of the problem. And this problem has gotten bigger in the interim.
You are viewing a single comment's thread from:
fantastic comment IMO
Thanks for the thoughtful comment! It is not Martin Armstrong's claim that the shift to transactional banking (contractual is not the term he uses) caused anything. His claim is that the shift to transactional banking is one important facet of an infinitely complex and interconnected global economic system that has evolved over time and which he describes in his Economic Confidence Model. For example, it is not his claim that if the shift from relational banking to transactional banking had been avoided everything would be fine. The shift was one small part of a larger whole and in fact, was just a symptom of larger trends. Obviously the system is far more complex than that. I am a big fan of Armstrong's.
Yes, thanks, transactional is the word I was looking for. Good point on it being just a piece of the puzzle. It's a very big piece of it though.
When the regulations limiting banking/investing were removed by the Bill Clinton Administration, anyone could be and was approved for home loans they had no hope of actually qualifying for or repaying. This caused the massive bubble in the housing sector. The same bubbles (but bigger) now exists in several areas of the USA, INC. economy... housing, derivatives, stocks. When the next bubble bursts, the Federal Reserve has no more ammo this time around. FYI: when nations get into economic trouble there is no way out of, world wars happen soon there after.