2008-10-08

How to solve a credit crisis …

Posted in Personal, PlanetDebian at 12:16 CEST (+0200) by sven

Anand Kumria wrote:

If IBM were to go bankrupt, would the government step in? Unlikely. Investors would lose (money), staff — another word for investors — would lose (jobs), but customers would win (their computers would keep working). Some customers would win more than others (especially those who had the equipment on lease); if no one is collecting, why pay?

I’m wondering here where Anand got the idea that once a company went bankrupt, that you don’t need to pay to that company anymore. When a company goes bankrupt, at least in Germany the following happens: A trustee/liquidator is selected. This liquidator is then collecting the information who owes money to the company and who still needs to get (how much) money from it. The liquidator also has to check the option of selling company assets (which might include the contracts of customers that still have to pay) to fulfill the debts of the bankrupt company. After he turned all assets into money, the money is distributed among those who still have to get money from the bankrupt company.

Anyway, regarding his main argument that the (average) customer of a company (bank in this case) should never have to pay for the failed speculations of that company, I somehow have to agree with him. Someone putting money into a regular bank account or papers with fixed interest rate should never lose his money. But there are also customers buying bank shares with a chance of higher revenue than with fixed interest rate papers. These should suffer from failure of the bank management, as they more or less explicitly wanted to be tied to the success (or failure) of the bank.

However, this is mostly irrelevant, since the failure of so many “investment banks” has side affects that might cost the average inhabitant of the affected countries even more than the discussed rescue plans. One of these effects is that the banks are now much more conservative regarding lease and mortgage plans, effectively leaving many home owners with no option to fulfill previous obligations (remaining debt after a previous mortgage expired can’t be refinanced by a new mortgage), causing them to have to sell their homes to pay the first mortgage. This is in some way stupid because this causes people who were perfectly paying their mortgage rates to loose their house, while the bank which would be giving them a new mortgage could get a new and good customer, improving their income. On the other hand, if the other side effects of the current crisis cause those “good” mortgage customers to loose their jobs, they might turn into bad customers who are unable to pay their rates. All in all, this is a spiral that could cause the whole economy to break down (a small example: The bank is not giving out mortgages, so no one will build new houses so the builders loose their jobs so they don’t pay their mortgage rates anymore,…. – over simplified, but still shows what I mean). Unless the spiral is terminated in time, before too drastic things happen.

All in all, I do understand why the politicians try to rescue those banks (or at least the customers of those banks), though I think that in an economy with slightly higher regulation, there wouldn’t be the need for such a rescue plan. I know there are some german banks affected by the crisis as well (among them Hypo Real Estate and others), but the average private customer of such banks shouldn’t loose money due to the regulations we have in place.

In general, there should be some security fund which makes sure that private customers never loose money put into regular bank accounts or fixed interest papers, vice-versa, banks should calculate mortgages so that they can be pretty sure their customers are actually able to pay off their rates – it doesn’t make sense if someone starts off having to pay 500$/month for their mortgage and has to pay over 1000$ a few years (as in 2-3 years) later, because the bank raised the interest that much. I have no problem with people loosing money from shares of banks or other companies directly or indirectly through investment funds.