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Blog

    Ground Breaking Discoveries Across the Pond

    07/15/2010


    According to the Economist, the Financial Services Authority (FSA) has issued a consultation paper after months of study in order to determine the reason for the housing crisis. The purpose of the paper is two- fold, as the experts who wrote the paper are also expected to give recommendations on safer lending practices in the future, which, everyone hopes, will avert another catastrophic meltdown.  

    The FSA determined that rather than regulating the types of loans that banks could issue, the institutions should monitor the individual's ability to pay back. This approach, which is something that even an average child, let alone citizen, could figure out, was apparently unheard of before the crash. According to the FSA, 46% of borrowers had no money to pay off their mounting debts and were forced to jump from credit card to credit card in order to stay afloat.    

    The next golden nugget of knowledge that the FSA imparted on the world was the recommendation that lenders do an income verification for all applicants. Once again, it seems that no one had thought of this before, as a good half of all mortgages were processed without income verification. Instead, banks were required to give out bad loans and then were vilified for doing so later.  

    The argument from the other side could be that many borrowers would have been excluded from the housing market if not given loans under those conditions. According to the FSA, only 4.1% of borrowers would be turned away; a small price to pay in exchange for fiscal security. What can this teach us across the pond in the US, and more importantly, what can our lawmakers glean from these findings? The problem in the housing market was caused not as a result of a lack of regulation, but because of the over- regulation of the market, where owning a house was seen as a "right". If banks were to have their way, everyone with bad credit or no source of income would be turned away at the door, and the crisis would have been averted. The corruption and incompetence at AIG, Goldman, and others were products of the government regulation in place, not in spite of it.  

    While it is possible that new financial reforms freeing up the market may be coming through the UK Parliament in the coming weeks and months, Congress has decided to take a complete opposite direction with the new Wall Street regulation bill. This bill will not fix anything, rather, it will lay the groundwork for another financial disaster, one, which the liberals will undoubtedly claim, will be caused by lack of regulation. 

    http://www.economist.com/blogs/freeexchange/2010/07/financial_reform