* Assuming that he did follow through with his economic proposals, which are still relatively vague, Trump’s policies would be good for deadbeats. Trump plans to greatly devalue the dollar while simultaneously running huge budget deficits in the first year or two of his presidency. Deportation of illegal aliens along with some measured reduction in the trade deficit will cause wage growth to accelerate. NGDP – nominal GDP – will go through the roof. The high inflation will reduce the value of debts and make them easier to pay off.
* According to his own account, Obama was a poor custodian of his own personal finances right up through his election to the Senate.
* You can’t sell cigarettes without getting people hooked, and you can’t make money as a bank unless some sucker takes out a loan from you.
There’s a fundamental problem with low interest rates. If you’re a bank and you’re being paid back at an interest rate of 4%, which is closer to what people had to pay in the 1960s and 1970s, it’s easier to make money than getting paid back at 1% interest rates. Mathematically speaking, if a bank needs X amount of income to survive as a business, they need 4 times the amount of loans out at 1% interest than at 4% interest.
The problem is, there aren’t necessarily 4 times the amount of people out there who are a good idea to lend to. If someone has to pay you back at 4%, a banker is more inclined to be judgmental about who that money is going to and whether they can be trusted to repay it. Low interest rates encourage stupid loans, because banks think even stupid people should be able to pay back at 1%, which isn’t always the case.
If a whole sector of the economy happens to go belly-up at once, banks will be destroyed. Case in point that I’ve been researching: Currently, a lot of banks have massive loans out to fracking and other associated oil industry companies that aren’t going to be paid back. I’ve seen an estimate that between now and September, over 140 companies will start missing payments to banks, and then those companies will begin to go bankrupt. Supposedly, banks have been telling these companies to sell off all their assets down to their office chairs before declaring bankruptcy, because when that happens, it’ll take our banking system down with it. A lot of banks didn’t bother to put aside cash reserves in case these big loans go bad because they never realized the whole fracking sector was going to die at once, and banks haven’t have enough time to build up emergency cash reserves of any significance since the price of gas began to drop.
This will mean another TARP-style bailout is going be necessary to save our banking system, and we’ll almost certainly have a big stock market crash like the one in 2008. Depending on the timing, this is going to be our October Surprise before the election.
Though I sort of relish the thought of all this blowing up in Obama’s face and staining his legacy, I’m not looking forward to the chaos. A stock market crash will deplete the value of pension funds, IRAs, etc., that many middle-class baby boomers are depending on for retirement, and their old age is going to be poorer than they expected. The collapse in gas prices is mostly Obama’s fault in the first place because of his Mideast antics with the Saudis. I hope he gets tarred, feathered, and wacked like a pinata on his way out the White House door.
* I’m a director of a community bank. For years we included in our written lending policy a reference to the “5 C’s of Credit,” which are:
-Character
-Capacity
-Capital
-Collateral
-Conditions
Banks undergo two types of examinations from the regulatory authorities – one for safety and soundness, and the other for compliance with the numerous anti-discrimination and social engineering regulations such as the Community Reinvestment Act. The two types of exams often work at cross purposes, because safety and soundness require discrimination against people with bad credit, while the category of people with bad credit includes a disproportionate number of certified victim groups.
At one of our recent compliance exams the examiners criticized our lending policy because it included the word “character.” Why? Because it was “too subjective.” They wouldn’t say it, but I suspect that they felt it enabled some sort of invidious discrimination. So, we had to amend the policy and remove the reference to character.
That the Obama administration now wants lenders to “use more subjective judgment” is a perfect illustration of the conflict between safety and soundness on one hand, and egalitarian social engineering on the other. Creditworthiness, as reflected by any one of the “5 C’s,” is not equally distributed across all demographics – underwriting loans is an inherently discriminatory activity. Any attempt to deny this is going to end in tears.
