Friday, January 22, 2010

Bank Reform Part Trois

The banking crisis was caused, as banking crises are almost always caused, by banks lending too much money against dodgy collateral, usually property. So the way to tackle that is to restrict their leverage, insist on lower loan-to-value ratios, or intervene (via monetary policy) to try to curb credit growth.

In a post about China during the Fall of '08, I mentioned this:
For these reasons, real estate booms lead to financial crises such as the Asian crisis ten years ago and our current problems.

The simple fact is that most people take on huge leverage to buy a house, but few take lots of leverage to buy other assets. So perhaps the way to deal with this is to look at housing lending. That said nothing I know about the 1929 crash, and the ensuing Depression, had anything to do with housing.

It really is always about too much leverage.

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