Another Look at Our Banking System

With Wall Street and the Banking System at the heart of our current economic meltdown, I think it would be good to take another look at our banks in terms that are not normally used.  I’m not an economist, so this might be pretty crude, but it really is important to think about banks as businesses, and not failsafe financial institutions.

First, when you put your money in a savings account, you are not a “depositor.”  You are actually the lender, letting the bank borrow your money to invest.  Your return on this investment is the percent yield you earn on your account.  Banks then will lend this money to businesses or people who want to buy a home.  They charge these people a higher amount of interest than they are paying you.  This is called leverage, which is using borrowed money to make money.

The big question now, is why don’t we look at a bank’s finances and what they are planning on doing with our money when we put it in a savings account?  If we went to get a loan, they would look at all of our records and make sure we had a sound plan for the money.  We just deposit our money into any old bank without a question asked.

The main reason for this is the FDIC, which used to only insure interest bearing accounts (savings) but now insure non-interest bearing (checking) accounts as well.  They also just upped their limit from $100,000 to $250,000.  The reason the FDIC exists is to protect us, the depositors in a bank, in case it goes under.  As long as we have less than $250,000 in that bank, we know the Federal Government will make sure our money is safe.

The unintended consequence of this insurance is that the bank can basically gamble with the first $250,000 of every savings account.  They can put it in all sorts of speculative products because they know if all their investments go bust, the goverment will be there to pick up the tab.  It’s like me going into a casino knowing that if I lose my first thousand dollars, the casino will give it back to me.  The real world does not work this way.  Why then, do we think it’s alright for the people who are supposed to be keeping our money safe to do this?

If banks were not backstopped by the Federal Government, they would have to take less risks, or no one would deposit their money with them.  Without depositor money, a bank cannot make loans to make a profit.  Rather than just putting our money in Any Bank USA, we would make sure that they were making safe investments and know the risks that are involved.  This would weed out the speculative and aggressive banks before the seeds of a banking collapse are sown.

The idea of the FDIC sounds great to the consumer if we think of banks as the keepers of our money.  If we view them as borrowers and business partners, we see the FDIC program makes no sense.  It just allows the banks to gamble with our money and make the taxpayer pick up the tab when their bets go bad.  We need to stop relying on government institutions to protect us and to start making informed decisions of what banks we will lend our savings.  This will help stop bank speculation and keep them honest, and be a part of preventing a crisis like this from happening again.

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