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Schizophrenia Running Wild

The “extend-and-pretend” strategy continues to benefit many cash-strapped borrowers and bank shareholders for now.

By Jonathan D. Miller | Updated on June 28, 2010

The “extend-and-pretend” strategy, employed by banks in league with government agencies, in the U.S. as well as Europe, continues to benefit many cash-strapped borrowers and bank shareholders for now. Financial institutions aren’t forced to recognize losses on their books and borrowers can hold onto their properties at least for a while longer. Government regulators conveniently look the other way so banks aren’t forced to write down portfolios by recognizing defaults and engaging in foreclosures. At all costs everyone collectively wants to avoid setting off a panic over the fragility of the global financial system. So we hear the pr spin about how the banks are strong again—just they aren’t lending much—all the while the FDIC quietly takes over more financial institutions—saddled with bad residential, land, construction loans —on a weekly basis.

At the same time, the Federal Reserve keeps interest rates artificially low to prop up the banks further–they basically take free money from the fed and lend what they can at higher interest rates, which helps them shore up depleted reserves and keep their businesses going.

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