January 26, 2009
At least when it comes to the financial system:Britain was just three hours away from going bust last year after a secret run on the banks, one of Gordon Brown's Ministers has revealed.City Minister Paul Myners disclosed that on Friday, October 10, the country was 'very close' to a complete banking collapse after 'major depositors' attempted to withdraw their money en masse...But 60-year-old Lord Myners was accused last night of being 'completely irresponsible' for admitting the scale of the crisis while the recession was still deepening and major institutions such as Barclays remain under intense pressure...Ruth Lea, economic adviser to the Arbuthnot Banking Group, said last night that it was 'highly irresponsible' for Lord Myners to reveal the scale of the problems because it could serve to further wreck already fragile levels of confidence.There is something almost ghoulish about being constantly reminded that one should not tell the truth, because if people knew the truth, the entire economic world would collapse around them.That might seem a little hyperbolic, but I assure you it's not, because Ms. Lea doubtless speaks for many in positions of authority who would criticize telling the truth about our modern banking system if their doing so would not simply draw more attention to the problem. But even then, they see the wrong problem: they see confidence as a cause, rather than an effect, of a functioning banking system.The cause-effect difference is obvious if one puts it in a little different perspective. Let's say that you discover that your friend's husband is cheating on her with his secretary. Because she is ignorant, your friend has complete confidence in her marriage. Telling your friend the truth will likely wreck her marriage - her confidence in it will be destroyed. To not tell your friend the truth means that she will be deceived and betrayed, not only by her husband but her friend, until that day that she pays him a surprise visit at the office and learns the truth for herself. You will not have saved your friend's marriage by withholding the truth from her, nor will you likely be able to save your friendship if she discovers your duplicity(1). While in ignorance, your friend may have confidence in her marriage, and it may even have the appearance of being functional (this is the government's attitude: it is better for you to live happily in ignorance) but it is a sham that will - must - someday fail.The major result of the government valuing this ignorance/confidence as a cause of sound banking is that it must generate that confidence through all manner of symbolic measures - interest rate adjustments, guarantees, even show trials - designed to 'save' the marriage by keeping the betrayed partner ignorant of the truth. To stand Churchill on his head, in banking, falsehood is so precious that should always be attended by a bodyguard of lies.The weakness of the comparison is obvious in the actual solution, that the husband should be faithful to his wife: you obviously cannot control his actions, you can only choose from bad alternatives. But there is no such excuse in the case of government, for banks have not the husband's free will: as creatures of government they do what they do at the behest of government and under the auspices of government. They only exist because banking laws create them.The real solution to the problem of confidence in the banking system is to create a banking system that doesn't need it in order to function(2). Such a system naturally creates confidence, not by ignorance and propaganda, but by experience. Any solution that relies on manufactured consumer confidence to keep the game going is an ignorant and betrayed wife: at some point her misplaced confidence will give way to the painful truth.Britain was three hours from discovering that truth, and the U.S. maybe six that day. But the truth will come out, eventually, with all the screaming and thrown lamps it deserves.(1) especially if you are the secretary.(2) To do so is simple. Not easy, but simple. The Fed and fractional reserve banking should be eliminated and all deposits lent out should be time deposits, meaning that you lend the bank x dollars for x years at x rate with no expectation of early withdrawal. "Your" money is not in the bank, so don't show up asking for it. If you want the bank solely to hold and protect your money - i.e. if you want it on demand - then you pay the bank for that privilege, just like you pay the storage facility to hold all those old clothes you might fit into again someday.
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alm77 (anonymous) says...
So banks would only have CD holders and borrowers? And many people *do* pay to put their money in the bank during the short term (the very short term). When I worked for a local bank in Iowa, I was two seats down from the CFO at our monthly stakeholder's meeting (even the tellers got big checks when the bank did well, it was awesome) and the accountant listed the areas of income. Guess what was the #1 source of income? Overdraft fees. The CFO nearly fell off of his chair, leaned over to the girl between us and said "That's VOLUNTARY! Anyone can balance their checkbook to avoid that fee!" Stupid's not only *not* illegal, it's profitable. I agree with you for the most part, but I would also say it would be safe to consider the average daily balance of all deposits when calculating your holdings, as well as fee income (or "stupid tax").
January 27, 2009 at 11:50 a.m. ( permalink | suggest removal )
alm77 (anonymous) says...
Oh, and I've always thought collateral was laughable. I've seen repossessed cars and heard about repossessed homes as well.
January 27, 2009 at 11:55 a.m. ( permalink | suggest removal )
El_Borak (Bill Hoyt) says...
Amy, you're not supposed to be reading this. I don't want to be responsible for your rabbit stew nightmares ;)"So banks would only have CD holders and borrowers?"What you might have is more akin to CDs and safe-deposit boxes, and borrowers. Those who wish to lend their money at interest must for that interest give up its use for a defined period. Those who wish their money on demand would have the equivalent of a safe-deposit box with all their money in it*. As you note, banks can make a perfectly good - I would say risk-free - living charging fees for moving that money around. The bank is then a storage facility for "demand" money and a broker for "loan" money.The bedrock problem with modern banking, its instability, arises solely from it trying to combine these functions: it lends out money and claim that it can be withdrawn at the same time. Eliminate the combination of these two and you have eliminated bank runs, 'called' loans, and institutional leverage, which are the problems that have historically plagued banking and now threaten to sink entire economies.I can't think of any other industry that acts like banks do, which might be why we've never heard about a run on a storage facility threatening to bankrupt an entire nation.* Which I suspect is the average person's understanding of a bank anyway.
January 27, 2009 at 6:54 p.m. ( permalink | suggest removal )
alm77 (anonymous) says...
I remember when we did loans we were only allowed so many on the books depending on our assets. Now the reason I know this is because I worked in the mortgage department, BUT being a small town bank, we didn't keep the mortgages and as a matter of fact, we specifically had the loans underwritten to Citimortgage and other big banks' standards. Our goal was to originate the loan (and collect the closing costs as profit) and then sell the mortgage to the corporate bank (for an awesome profit) no later than 60 days. The point is, we had to get rid of the loans so that our asset/accounts receivables were within a certain margin. I don't know what that margin was though. Also, how does one value it's assets? This was my point when talking about collateral. These prices are inflated anyway; less like ignorance and more like all out denial. (If you want to talk about inflated prices, I can attest to anyone right this minute that when our mortgage officer said "Hey Appraiser Jim, I need this house to come in at around $170,000 or so.." they always mysteriously came in right where we needed it to, but that's a different discussion for a different day) So, based on that experience, would it not make sense that bigger banks have more (inflated) assets than smaller banks and would be more harmful to the economy than many small banks who are more easily assessed (accurately?) for value? I guess what I'm saying is that to take your analogy, ignorance in small amounts sprinkled here and there isn't as harmful. It's more of a flirting than a full on affair.
January 27, 2009 at 7:30 p.m. ( permalink | suggest removal )
alm77 (anonymous) says...
Oh, and I'm already trying to figure out a way to sell the house and buy paid-for land and a trailer. ;) I just put the family through a 30 Day Veg, so now we can being eating *like* rabbits... how convenient!
January 27, 2009 at 7:32 p.m. ( permalink | suggest removal )
El_Borak (Bill Hoyt) says...
"...and more like all out denial."Agreed. And everyone knew it was denial and didn't care."So, based on that experience, would it not make sense that bigger banks have more (inflated) assets than smaller banks and would be more harmful to the economy than many small banks who are more easily assessed (accurately?) for value?"Yes, but. Big banks have bigger problems and are themselves bigger problems for exactly the reasons you mention, and you can add to that the problem of institutional leverage. But small banks can create different problems, such as loans concentrated in homogeneous lender demographics - like houses in a neighborhood - that tend to go down in value at the same time. If the price of oil crashes, every isolated bank in Houston could go under* because all their loans could go south simultaneously when all their borrowers are laid off. Big interstate banks can avoid that problem by balancing homes in Houston with car loans in Seattle and credit cards in Maine.* That's exactly what happened during the Depression: small (especially rural) banks failed when people demanded their money and the banks had to call loans that could not be paid because of low commodity prices.
January 27, 2009 at 9:26 p.m. ( permalink | suggest removal )
ladylaw (Terry Bush) says...
I like the husband wife analogy a lot. Except what is going on with the banking system is more along the lines of a husband who has many wives - not just one mistress - and who then tries to excuse himself by pointing out that in some countries polygomy is the rule. I.e. "What I have done is perfectly legitimate; it is YOU who have the problem and you should just learn more about how well this system can work!" And for the record, I ALWAYS want to know the truth. I would rather face an unpleasant truth then live with pleasant lies. It's harder, to be sure, in the beginning. But a life built upon pleasant truths is not a real life nor is it real happiness. So, by all means, always tell me...! Good luck selling the house alm. For me, I'm trying to figure out how/where to cram more bodies (who can help pay the mortgage) in the home I already have half paid off, and may have to convert a suburban lawn into a mini-truck-farm come spring.
January 28, 2009 at 8:42 a.m. ( permalink | suggest removal )
alm77 (anonymous) says...
Oh, I was just kidding about selling the house. Somedays though I spend a lot of time trying to figure out how to pay it off considerably faster. Maybe converting the garage and renting it out wouldn't be a bad idea. I'm betting it's against the city code though....
January 28, 2009 at 9:10 p.m. ( permalink | suggest removal )
alm77 (anonymous) says...
Oh, and Bill, about the smaller banks being locally invested, well, that's why we have the FDIC. And it would continue to work and work well with these small banks. Better one city of small banks than a national bank, I would think. Didn't the Apostle Paul say something about not having any debt? Now we know why....
January 28, 2009 at 9:16 p.m. ( permalink | suggest removal )
El_Borak (Bill Hoyt) says...
"Better one city of small banks than a national bank, I would think..."And you would be right. In fact, it's only a small bank and not a national bank that they CAN rescue, which is why big banks get quietly yet forcibly merged into other big banks. The FDIC has a mere $50b in funds, Citibank alone has 15x that in assets. Citibank will be broken up - watch for this theme, because it will be an indication of whether I'm reading this right in a macro sense - into constituent parts and sold off, and one "bad bank," filled with all the crappy burritos they have accumulated, will eventually be allowed to do a Lehman-like dive off their posh Wall Street HQ.
January 28, 2009 at 10:44 p.m. ( permalink | suggest removal )
mtoplikar (Matt Toplikar) says...
Here's a very good, easy-to-understand video on the history and current state of our economy and banking system.It's called "Money as Debt"http://www.filmsforaction.org/film/?Film=247&Title=Money_As_Debt
January 29, 2009 at 3:38 p.m. ( permalink | suggest removal )
DOTDOT (anonymous) says...
Crappy burritos are easy to understand. Matter of fact, lunch at Chipotle is talking back right now. And I was thinking about LB the whole time.If you have accomplished else, my friend, be assured you have forever ruined crappy burritos for me.
January 29, 2009 at 3:44 p.m. ( permalink | suggest removal )
alm77 (anonymous) says...
thanks toplikar, I almost fell asleep at the end, but it did explain a lot. Not sure that the solution presented in the video is viable, but the illustration for the current way things work was right on.
January 29, 2009 at 5:55 p.m. ( permalink | suggest removal )