Of course, there is no point locking the barn door now, since the horse has bolted. I’m talking about those billions of dollars and euros being spent to save banks. In a nutshell, what caused the market meltdown were banks selling products and approving loans that came with an enormous risk, and unfortunately, that risk became reality. Sure, there were lots of people out there that should have never been given a loan, because they didn’t understand what an adjustable rate mortgage (ARM) is. But, of course, bankers pushed those loans down people’s throats to get a commission and generate revenue. And here is where I think the industry is missing something. Who is liable for the dangerous products the banker sold?
If you buy a coffee maker, or a toaster, or a lawn mower, pretty much anything, the manufacturer is liable for any injuries that product may have caused. As far as I can see, this is always focused on “bodily injury”… why? If someone loses the house, car, or job, because the “bank product” just imploded, isn’t that another injury caused by negligence?
“This plastic bag is not a toy.” or “Do not place animals into the microwave.” Duh. Everybody understands that. (At least I hope so). Where is the disclaimer on those “banking products” that hardly anybody (including the bankers themselves) understands. Where does it say “this derivative has a risk score of 89 (out of 100)” on a scale that says “you could lose that money”? Would people be more careful if they knew what they were getting into? I think so. But they just took the banker’s word for it. No data was made available to back up those claims.
Where was the bank’s risk management? Oh right, it was focused on the customer. If there was a product liability for banks, I’m sure the bankers would have been a little more hesitant with those loans. The data was all there, but nobody wanted to look. I’m hoping that the lawmakers in those governments in the US, the EU, Japan, Korea, and others, that are bailing out the financial institutions at the moment, are considering to extend the current liability law into the financial world.
If I’m reading this description from Wikipedia with banking products in mind, that would make a good start.
“The most fundamental rationale for strict liability is to force producers to internalize the external costs they impose on society. By placing liability for all injuries caused by a product on its manufacturer, the manufacturer is forced to take into account, when deciding whether and how much to produce the product, the harm caused by it. If this internalized harm is so great that the manufacturer cannot profit from producing the product, it will discontinue the product, or sell it only at a higher price to consumers who value it especially highly (in economic terms, modify its activity level). In this way, strict liability provides a mechanism for ensuring that the societal good of products in the marketplace outweighs their societal harm.”
Disclaimer: I’m no financial specialist, just an observer.
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