• About Farm School

    "There are obviously two educations. One should teach us how to make a living and the other how to live."
    James Adams, from his essay "To 'Be' or to 'Do': A Note on American Education", 1929

    We're a Canadian family of five, farming, home schooling, and building our own house. I'm nowhere near as regular a blogger as I used to be.

    The kids are 18/Grade 12, 16/Grade 11, and 14/Grade 10.

    Contact me at becky(dot)farmschool(at)gmail(dot)com

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Hard landings

Or as my daughter asked last night, how many zeroes are in a trillion?  Unfortunately, in her lifetime, she and her children will have the chance to find out.

One of our neighbors, an elderly farmer who was a boy during the Depression — Dirty Thirties, as they were known around here — stopped by last night to return our grain truck, which he had borrowed for his harvest. He mentioned that as awful as the Depression was, people then learned some very important lessons that stayed with them for a lifetime. He said that he was concerned hearing news of the bailouts this week — during harvest time, riding around in trucks and tractors, many farmers have a good chance to listen to news on the radio and catch up on current events — that a good many bankers were losing the chance to learn some of those important lessons.

I was reminded of his words as I read Colbert King’s op-ed piece in The Washington Post this morning,

Back to Basics in Banking

Before becoming a journalist in 1990, I spent nearly a decade in commercial banking.

The banking business was rather simple in those days. We took in deposits, made loans and collected repayments, hoping all the while that we would get at least two of those three things right.

Still, many bankers managed to botch the last two steps.

Reasons for the lending mistakes weren’t hard to uncover, however.

In most cases, the bad loans were made by loosely supervised bankers who, MBAs notwithstanding, were clueless about the true ability of borrowers to repay their loans.

Bad loans also ended up in bank portfolios because management, obsessed with generating ever-increasing quarterly and annual earnings, encouraged and rewarded those ambitious bankers who excelled at booking high-interest loans.

In such a climate, awareness of risk took a distant second place.

Either way, back in my day, the bank, as much as the borrower, was responsible for the defaulted loan.

In that respect, today’s no different. ..

But the causes of this week’s financial meltdown are no mystery.

In the Sean Hannity-Sarah Palin infomercial that aired on Fox’s “Hannity & Colmes” this week, Hannity asked Alaska Gov. Palin who was responsible for the failure of financial institutions. The Republican vice presidential nominee said, “I think the corruption on Wall Street — that is to blame.”

If, by that, Palin is suggesting that Wall Street has been induced to do something illegal, I would like to see her evidence.

I have a different take.

Point a finger at those old standbys: greed, imprudent financial decisions and ignorance on the part of people who should have known better. Those factors are at the root of today’s crisis, just as they were sources of problems encountered during my banking days.

And the lies told today are the same ones I heard in the ’80s.

“The check is in the mail” is still the largest and most enduring lie in the business. We heard it back then, and it’s being spoken now.

Except that those doing the fibbing these days are hordes of borrowers stuck with unaffordable subprime mortgages. Their checks aren’t in the mail. Their mortgage payments will never be sent.

As a result, banks have been foreclosing on homes at a rate not seen since the Great Depression.

The shame is that banks carelessly extended subprime mortgage loans to the very people who should not have received them in the first place — those who were least able to repay.

But the lure of making a quick buck, coupled with the ability to lay the loans off to Wall Street, which converted them into investment packages, prompted bankers and mortgage brokers to look the other way and book the loans.

Thus we now encounter the second-biggest lie usually heard in the industry: “There will be no changes after the merger.”

Bad lending decisions should have serious consequences, and not only for the people losing their homes.

The institutions that caused this collapse have to pay. There will and must be far-reaching changes in the industry as the hastily arranged mergers and consolidations are taking place.

Removing toxic mortgage debt from the hands of so-called smart financiers who did dumb things should come with a high price. After all, the American taxpayer is footing the bill for the package that the Treasury, the Federal Reserve and Congress designed to rescue the very institutions that produced this calamity.

Show those high-flying financial types the door and make them jump without golden parachutes and fat pensions. Hard landings for them all. …

Finally, make commercial banks go back to doing what they do best: providing a safe place for people to deposit their money. Maybe even encourage them to make loans again.

But work on them to make certain they understand why and how loans should be repaid.

Getting only one out of three right isn’t good enough anymore.

Read the entire column here.

Also worth reading, The Washington Post‘s editorial today, “Day of Reckoning”, from which:

The government will finance the operation with borrowed money — on top of a federal budget deficit already projected at more than $400 billion for the next fiscal year. Like the trade deficit, the budget deficit reflects recent economic sluggishness. But it is also structural — a result of this country’s failure to reform entitlement programs, curtail wasteful spending and tax at a reasonable level. It is both satisfying and partly justified to blame this disaster on greedy Wall Street executives and the inattentive Washington regulators who enabled them to build what we now know was a financial house of cards. Wall Street has lived beyond its means, but so has Washington. Both did so, in part, because consumers and voters on Main Street wanted it that way. They craved cheap credit to spend on imported goods, and they resisted tough tax and spending decisions. That, too, must change, lest this generation’s costly excesses end up crushing opportunities for its children and grandchildren.

Wait a minute — this is an election year, isn’t it?

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2 Responses

  1. So how come the government spending decisions are about “entitlement programs”? What the government has spending all that money on is the military and prisons. And they continue to do so. And I don’t see anyone making serious arguments about why it cannot continue to do so. I’d love to see someone make a serious case for why it might be better to spend more on health, education and welfare and less on prisons and armies. Just once. Because by and large it has been conservative governments harping on about bloated government programs that have run up bigger deficits.

  2. JoVE, entitlement seems to be the word of the week, at least in the North American capitals.

    I’d also add arts and culture to your list, along with health, education and welfare. Should be interesting to see what the Liberal platform adds up to tomorrow.

    “Because by and large it has been conservative governments harping on about bloated government programs that have run up bigger deficits.”

    Curious, isn’t it?!

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