“I’m just asking banks to be smarter and act in the interest of their shareholders, by ensuring their secured loans are actually secured by sufficient collateral.”
Suggest you buy a bank. If you do not like what banks do then do what I did and short them.
The value of anything can only be determined by what some body will pay for it. What is a current market price?...Prices change all the time? Your proposed solution is completely about regulated markets. Who does that.
Know what, why don’t we save time? Let me tell you that if you read Thomas Sowell’s Basic Economics or read Walter Williams lectures you will not seem so completely out of it. Economics is not a require subject. Too bad.
I am not talking about regulated markets. I am talking about banks not lending money based upon a price that they know cannot be sustained.
For example, if during the height of the dotcom boom, I had a stock that was selling at $400 a share, but even if the company had earnings and growth beyond our wildest dreams they could never possibly support a price over $80 a share, would you lend me $400,000, for 30 years, if I put up 1,000 shares as collateral? Probably not.
In the same way, if homes prices in a particuarly inflated market are rising at 25% per year, while incomes are only rising a 4% a year, a crash in home prices is inevitable. The fact that I gave a loan for the market price in 2005 is not going to help me when in 2009 the price has dropped 40%.
Banks need to evaluate sustainable values of houses when giving mortgages. IMHO, they would be smart to tell borrowers, “You can pay what ever you darn well please for that home, but we are only going to lend you what we think it will definitely be worth 10 years from now.”
I don’t want goverment regulation, I just want smart capitalism to replace the dumb capitalism of the past 10 years or so.