…Hundreds of Yards Further (or Banking Crises And Memory)

Kevin Drum leads me to Jonah Goldberg’s piece on ‘the Bankers have learned from their mistakes‘…which led directly to my spitting hot tea out my nose, because that was one of the funniest things I’ve ever read.

In my misspent youth, I took a job as a systems guy at a savings and loan here in LA. Before very long – not because I was wonderful, but because the place was so disorganized – I wound up running the commercial property that they owned (and there was a lot of it…). In that context, I spent a lot of time with our very experienced auditors at Deloitte, and went to a bunch of real estate finance seminars and conventions.

At a conference, one banker told a joke…

A real estate developer and his banker are going elk hunting in the Alaska outback. They charter a plane, and as they are preparing to take off, the pilot explains to them that the carrying capacity of the plane will only allow them to bring back one elk each.

A week later the pilot returns to their bush camp, and discovers that each hunter has two elk carcasses. He explains to them that there’s no way he’ll try fly out carrying that heavy a load.

The banker starts peeling off hundred dollar bills and offering them to the pilot. The developer starts adding to the pile of cash, and pretty soon, greed takes over for sense, and the pilot is strapping the carcasses to the airplane’s skis.

They back the plane up to the very edge of the clearing, rev the engine, and start to take off. The plane is airborne at the end of the clearing, but can’t clear the trees, and smashes into the ground.

The developer and the banker crawl away from the burning wreckage, and one turns to the other and says “That was hundreds of yards further than we made it last year!”

This was just before the S & L crash…

If you think that the problems we’ve had in the last year or so are novel, go read Martin Meyer’s great book ‘The Bankers.’ I still recall a great quote from that book…from an older New England banker about the new crop of Harvard MBA’s running the banks back in the 1970’s “These young bankers. They’re quite good at making loans. Quite good. Not so good at collecting on them, though.

So no, Jonah, we haven’t learned from this time, and yes, we do need to look hard at the ways we regulate banks (note that in my view some of the problems come from regulations – the issue isn’t just more or less regulation, it’s better and worse regulation).

10 thoughts on “…Hundreds of Yards Further (or Banking Crises And Memory)”

  1. Alas, while I don’t trust the bankers, I’m not sure I trust Congress to regulate sensibly, either.

    This is the same Congress containing Waxman, who drew himself up in righteous outrage to DEMAND PUBLIC EXPLANATION for why Caterpillar and other companies had DARED to announce write-downs after Congress changed the tax laws on them… until, apparently, someone with some brains whispered in his ear that, hey, they’re legally obligated to do so.

    I wish I were just being witty, here, but I’m not. After long periods of alternating Republican and Democrat idiocies, trust in government is running pretty low. Predictably, the government response is shock and anger.

  2. How come nobody ever questions why the regulations we already have in place failed so resoundingly? Isn’t that the first place to start? I mean, we established long ago that these guys will willingly go off the side of a cliff if allowed (hence the regulations in the first place), if the regulations don’t work now why will they work going forward?

    The answer is accountability, on both sides. Banks and bankers need to go out of business, go broke, and go to jail if they break the law. Regulators need to be fired and investigated for possible cozy relationships if they fail to do their jobs. And politicians need to stop encouraging bankers to do stupid things when its profitable, bailing them out when it fails, and then lambasting them to cover their own behinds (and gain a bit more power).

  3. Well, leaving aside the question of finding a Congress smart enough to write decent regulations, Mark, I think the reality is: Situations change, and regulatory regimes only last so long before needing to be overhauled.

    The market is a never-ending source of metaphors, but you could plausibly consider the market to be a distributed device designed to seek out any loopholes and unintended consequences in any regulatory regime. Well, it’s done that both by the development of new financial instruments, and because the financial landscape– internationally and domestically– has changed dramatically.

    It’s pretty clear that new regulation is necessary. It’s pretty clear to me also that it is a direct, even a vital, interest of the United States to maintain pre-eminence in the global finance sector. It’s not clear to me that the current crop of geniuses in Congress is up to the task. Unfortunately, that’s too subtle a point for many people on the left to grasp, who often stop listening and just assume I’m an anarchist against all regulation everywhere.

  4. Ah, where is a Joseph Kennedy when you need him. I don’t think Harvard is capable of producing such men anymore.

  5. The bankers have learned nothing. The government has learned nothing.

    Corollary: Any solutions to this problem must avoid requiring either banks or regulators to have learned anything.

    Putting derivatives back under normal bankruptcy laws, for instance, requires neither bankers nor regulators to be smarter. But it does limit contagion. Making banks smaller, as in Sen. Kaufmann’s $100 billion limit, requires no learning. Etc.

    An proposal that depends on “we/ they will do better next time” is a con and a lie, with either rampant stupidity or ulterior motive behind it.

  6. Meanwhile, in Europe, the good news is the PIIGS have learned from their mistakes (as have U.S. States like Cal-E-Fornia, Michigan, &tc)…

    As long as there are perverse incentives and a shifting of risk, which arguably we’ve been increasingly doing for over a century, well…

    We probably need to move back to a situation where if some institution messes up, they have to bail themselves out: The effort organized by J.P. Morgan in ’07 should be the model.

    Unfortunately what people learned from that episode was they needed an institution to deal with such problems if they arose in the future. That began the path of separating risk from responsibility, among other consequences.

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