Wednesday, March 26, 2008

Normal Credit (11) - Brown Suits

The shenanigans of these credit crunch characters cannot change reality. Banking is quite simple. Banks borrow money from one group of people and lend to another. The difference between the interest they pay on what they borrow and the interest they get on what they lend is their margin. The profits of banks depends on the size of their margin and how well they manage the risk of defaults on their loans.

House prices can go up and house prices can go down. People make mistakes, so the risk of mortgage lending can never be eliminated.

The credit crunch will destroy the dreams and ambitions of the clever people who thought they knew better. The world will be safer when mortgage lending is managed by bankers in brown suits who understand the risks of lending and whose lifestyle does not require them to squeeze enormous profits out of small margins.

The full series is here.

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