http://knowledge.wharton.upenn.edu/article.cfm?articleid=2282
There is evidently a difference of opinion on the Wharton faculty...several key members believe that there was not enough "penalty" in the ww financial crisis (and/or the U.S. government response to it) to deter the kind of risk practices that caused all the problems in the first place (article attached). We still have some of the large institutions that were "too big to fail". Citi would probably be a good example.
As many of you know, Jeremy Siegel is considered the best finance professor on that faculty. His perspective on this debate is that the crisis has caused enough suffering among corporate executives, shareholders, and others to deter overly "hazardous" financial practices. He goes on to add that many of the financial products and practices that contributed to the crisis have passed from the scene: the subprime mortgage market has dried up; financial institutions have curtailed "binge investing" with borrowed money, etc. Rather, Siegel sees the main problem today as "insufficient risk taking." Money isn't there for good investments...
I strongly recommend the article as it is most interesting to see the differing opinions of the best finance professors in the world on the "Great Recession", its causes, and what's next.
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I couldn't agree more with Jeremy Siegel. Recently, I went to Chase Bank to apply for a credit card and got declined. The banker also told me that they don't have student loan program any more like they used to have. Student loan is less risky than mortgages, at least I think this way. The bank even cut out this program. Just imagine when people apply for mortgages, how many applications will be declined, even the interest rates are set low to attract more people to apply for loans and mortgages.
ReplyDeleteWhat we need right now is to encourage more spending, not restrict it. JP Chase Morgan is so called "the best financial institution" right now. From my personal experience, banks' restrictions on consumer spending are at the opposition direction of our current economic goal. They wouldn’t even take reasonable risks to promote the economy.
Janine
I cautiously embrace Siegel's comments:
ReplyDeleteJPMorganChase definitely is approaching the recession cautiously by reducing risk in many ways. Perhaps they have gone too far and will lose customers in the process, or they are obtaining the least risky of society and leaving the more risky to other companies. JPMorganChase is currently the best bank because the CEO, Jamie Dimon, works his butt off to manage risk, which led him to take actions back in 2006 to mitigate the effects of this crisis.
One must consume Siegel's words wisely. More risk taking could do good, but exactly how much should be taken? Are there any systems that can inform on that matter? Right now is a hectic time. The effectiveness of the stimulus package is a questionable matter. The long term is obvious, but timing is everything. At large corporations like Bank of America and JPMorganChase, a single decision affects the bottom line significantly. One wrong move, can get you fired and/or damage the firm's strategic position. Ken Lewis chose to allow more risk than Jamie Dimon. How right are they? Only time will tell...