Thread started: Oct 7 2008, 5:59 PM EDT
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The problem is that banks that were detached from the process of actually approving the mortgages were taking on the risk of the mortgage payments. The creditworthiness of a mortgage and the handling of a mortgage are intrinsically local issues. You need to know how housing values are changing in the neighborhood. How likely the borrower is to keep a steady flow of income. You need to be able to talk to the borrower to deal with difficulty in making payments. One huge issue is that neither borrower nor lender know who each other are. Making a multi-trillion-dollar institution responsible for dealing with these little micro issues will not make this communication and adjustment more effective. The government should deal with institutions that have at least billions of dollars of assets. Banks with hundreds of billions of dollars of assets per "branch" (investment banks) should deal with companies and other banks that have at least a few tens of millions of assets. Banks with tens of millions of dollars of assets per branch should be dealing with individual people. It's just a matter of scale. You can't have millions of investments in a single fund. Bunch them up into banks that investment banks can then invest in _directly_, not via buying collections or derivatives on the investments.
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