Monday, March 30, 2009

Hold on to your grandkid's wallets

The money pit is hungry again, this time on the claim that banks need to go back to taking greater risks. Wasn't that part of the reason why so many of them are on government feeding tubes? Perhaps the problem is that banks are not being run in the conservative manner they were for centuries because shareholders demand record profits every quarter rather than long term capitalization. For example, under the mindset of the short term investor, laying off X workers to have a one time savings of 10% is less valuable than a 9% rate of return on assets backed up with reserves and based on sound lending. It's almost like a mental deficiency, that any big number is accepted and suddenly becomes the standard no matter how unsustainable, then when things go south the short term herd flees in the opposite direction, seeing a one time loss and believing the sky is falling. Risk and high yields are correlated, so the higher the returns to a bank, the more leveraged and risky the position. Perhaps a small rate of growth is the best for stability?

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