Obama: Banks Need Tougher Regulations Because They Want To Make Money

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Written By:
Rob Port

Oct 25, 2012
6:24pm

President Obama wants you to believe that the financial crisis which occurred at the dawn of his term in office was the result of banks seeking too much profit.

“But, look, these financial institutions are in to make money and that’s why we need some smart regulations and this is an example of the difference in this campaign because my opponent says he wants to roll back all those regulations,” president Obama told Jay Leno last night. “These folks are not going to [stop making risky loans] just out of a sense of guilt of what happened previously or because suddenly they feel charitable.”

That’s a pretty strange argument to make. Let’s analyze it for a moment.

I think we can all agree that the epicenter of the financial crisis was the subprime loan mortgage. Banks made loans to people who had a low probability of paying them back, and then proceeded to bundle and sell those loans across the mortgage markets. It was a house of cards, and it collapsed.

But the question is, why did the banks make those loans? Obama is right, they were certainly pursuing profits, but what made lending to subprime borrowers profitable? If we look beyond mere banking industry greed, we see that what made the subprime mortgage bubble possible was a raft of federal policies that were aimed at lowering lending standards to promote home ownership.

The government incentivized, and even mandated, subprime loans and then backed the banks making them with the government sponsored entities Fannie Mae and Freddie Mac which combined owned or secured, at the time of the financial collapse, some 51% of the nation’s $12 trillion mortgage market.

Yes, the banks greedily pursued profits from making “risky bets” (as the president put it) on subprime loans. But they did so at the beck and call of the federal government.

Here’s the truth about bankers: They always want profits. In fact, it is that pursuit of profits that makes government promotion of lending unnecessary. Banks want to make loans because banks make money off of loans. So banks, left to their own devices, are going to make as many loans to people or businesses or organizations as they think have a good chance of making good on them.

What the banks won’t do, without government intervention, is make loans to subprime borrowers. Had the federal government resisted interventions into the lending markets, the subprime bubble would never have happened.