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Erik Hare

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Blogs by Erik Hare

Not at Any Price
4/4/2008 6:29:33 AM

There are many reasons why banking should be boring. The most important reasons can be complicated, such as the simple fact that fancy new financial instruments actually increase instability in the entire system, or very simple, such as the need for a certain level of democracy and thus understanding in basic financial systems. But there’s one more reason that banks need to stick with the boring process of borrowing or accepting deposits at one rate and loaning at another, making money on the “spread” between them: they don’t know how to do anything else.

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Consider real estate for a moment. Now, there isn’t a bank in this entire land that made the decision to go into owning homes, but it’s happened all the same. That’s what foreclosure is all about. The bank winds up having to sell a property that it was assuming all along it would never own. How are they at selling these things? It turns out they suck even worse at it than things that they deliberately went into that they also suck at, such as derivatives.

Why can’t banks sell real estate? If you’re a realtor, you’ve probably given up asking that question. But the short answer is that they really don’t want to. The offices that handle these things are staffed at roughly 2003 levels, meaning that everyone is handling far more properties than they can possibly take care of. Realtors typically send them offers for property that they don’t even have time to accept or refuse – they simply expire in a dark cloud of frustration that sits over the doomed property.

In cities across USofA, houses stand empty. People who want them cannot reach the one person who could decide to sell it to them at any price. So these houses stay on the market, increasing the glut with each new foreclosure. The problem keeps getting worse because the people who are responsible for the problem appear to wish it would simply go away.

This isn’t the way to deal with it. When I was young, a story was told to me by an old guy who had been in banking his entire life. There was a run on the bank he worked at in the 1920s, and angry people were screaming and yelling in the lobby as the bank refused to give them their cash. After two days of this tension and frustration, the bank manager came up with a new strategy – the bank would give everyone every dime they wanted as quickly as possibly, and send them on their way. As depositors came to the bank that day, they were greeting with a cheerful and remarkably empty lobby notable for its utter lack of anger and tension. Many went home rather than demand their money. There was no run on the bank because the bank refused to allow one to happen.

It’s strange that banks are so terrible at managing real estate because the way to handle it is the same as a bank panic. They should think of this as a dress rehearsal for what will come later (if they screw this up, that is). There are signs that they are finally putting the staff into place that they need to move these things, but it's far too late to prevent further damage across the system.

Meanwhile, in cities across the USofA, houses still stand empty. They people that once lived in them seem to have disappeared from school rosters and everything else. Where did they go? Are they living with parents or children? Are they homeless? No one is yet sure. What we do know is that vacant homes are available everywhere, and no one can buy them at any price.

That’s why banking needs to be very, very boring. When it gets exciting, bad stuff happens that even a large amount of money can't quite seem to fix.

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