I actually agree with most of those points, and I’ve made many such criticisms myself. So perhaps larger banks are forced into a position where they rely too much on credit scores at one stage. Still, credit unions won, despite having much less political pull, while significantly larger banks toppled. Much as I disagree with the policies you’ve described, some of the banks’ errors (like assumptions about repayment rates) were bad, no matter what government policy is.
If lending had really been regulated to the point of (expected) unprofitability, they could have gotten out of the business entirely, perhaps spinning off mortgage divisions as credit unions to take advantage of those laws. Instead, they used their political power to “dance with the devil”, never adjusting for the resulting risks, either political or in real estate. There’s stupidity in that somewhere.
Still, credit unions won, despite having much less political pull, while significantly larger banks toppled.
In some cases this was an example of the principal–agent problem—the interests of bank employees were not necessarily aligned with the interests of the shareholders. Bank executives can ‘win’ even when their bank topples.
The principal-agent problem should always be on the list of candidates, but it can occasionally be eliminated as an explanation. I was listening to the This American Life episode “Return to the Giant Pool of Money”, and more than one of the agents in the chain had large amounts of their resources wiped out.
The question of whether an agent’s interests are aligned with the principal’s is largely orthogonal to the question of whether the agent achieves a positive return. The agent’s expected return is more relevant.
There were many agents involved in the recent financial unpleasantness whose harm was enabled by the principal-agent problem. My intended examples did not suffer that problem. I could have made that clearer.
I actually agree with most of those points, and I’ve made many such criticisms myself. So perhaps larger banks are forced into a position where they rely too much on credit scores at one stage. Still, credit unions won, despite having much less political pull, while significantly larger banks toppled. Much as I disagree with the policies you’ve described, some of the banks’ errors (like assumptions about repayment rates) were bad, no matter what government policy is.
If lending had really been regulated to the point of (expected) unprofitability, they could have gotten out of the business entirely, perhaps spinning off mortgage divisions as credit unions to take advantage of those laws. Instead, they used their political power to “dance with the devil”, never adjusting for the resulting risks, either political or in real estate. There’s stupidity in that somewhere.
In some cases this was an example of the principal–agent problem—the interests of bank employees were not necessarily aligned with the interests of the shareholders. Bank executives can ‘win’ even when their bank topples.
The principal-agent problem should always be on the list of candidates, but it can occasionally be eliminated as an explanation. I was listening to the This American Life episode “Return to the Giant Pool of Money”, and more than one of the agents in the chain had large amounts of their resources wiped out.
The question of whether an agent’s interests are aligned with the principal’s is largely orthogonal to the question of whether the agent achieves a positive return. The agent’s expected return is more relevant.
There were many agents involved in the recent financial unpleasantness whose harm was enabled by the principal-agent problem. My intended examples did not suffer that problem. I could have made that clearer.