The “extend-and-pretend” strategy, employed by banks in leaguewith government agencies, in the U.S. as well as Europe, continuesto benefit many cash-strapped borrowers and bank shareholders fornow. Financial institutions aren’t forced to recognize losses ontheir books and borrowers can hold onto their properties at leastfor a while longer. Government regulators conveniently look theother way so banks aren’t forced to write down portfolios byrecognizing defaults and engaging in foreclosures. At all costseveryone collectively wants to avoid setting off a panic over thefragility of the global financial system. So we hear the pr spinabout how the banks are strong again—just they aren’t lendingmuch—all the while the FDIC quietly takes over more financialinstitutions—saddled with bad residential, land, construction loans—on a weekly basis.
At the same time, the Federal Reserve keeps interest ratesartificially low to prop up the banks further--they basically takefree money from the fed and lend what they can at higher interestrates, which helps them shore up depleted reserves and keep theirbusinesses going.
Investment bankers, meanwhile, gnash their teeth over pendingregulatory reform and tax changes that “will make business moreexpensive.” The pr spin is they won’t be able to take as manyreasonable risks to finance enterprises to encourageentrepreneurial growth and advance the economy. But their realconcern is over how transaction activity may be constrained—eatinginto promotes and transaction fees, especially for high riskactivities where personally they’ve had little downside with thepotential for big upside.
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