The Banks Win, Again(nytimes.com)
nytimes.com
The Banks Win, Again
http://www.nytimes.com/2012/03/18/opinion/sunday/the-banks-win-again.html
27 comments
Capitalism can't work properly if risk-takers are insulated from the consequences of bad bets. The #1 priority should be making sure that no institution is "too big to fail" next time we get what is effectively a global margin call.
And yet, that'll get you labeled a "socialist" in most parts of the country.
Only if you misunderstand who is insulating the banks from risk and advocate for more governmental restriction.
The capitalist would advocate for the government to stop unconditionally underwriting mortgages under the guise of promoting home ownership.
The capitalist would advocate for the government to stop unconditionally underwriting mortgages under the guise of promoting home ownership.
haberman said "The #1 priority should be making sure that no institution is "too big to fail"". That is what martythemaniak was saying was oft called socialism.
If you have means other than government interaction to control the size of business, I'd love to hear it. (Unless you're saying that huge, pivotal companies failing and damaging the lives of all those around it should be encouraged and welcomed. But that's what these two are saying needs to be avoided.)
If you have means other than government interaction to control the size of business, I'd love to hear it. (Unless you're saying that huge, pivotal companies failing and damaging the lives of all those around it should be encouraged and welcomed. But that's what these two are saying needs to be avoided.)
> And yet, that'll get you labeled a "socialist" in most parts of the country.
Where? Actual citations needed, not just handwaving about "conservatives".
I note that the tea party is very opposed to bank bailouts.
Where? Actual citations needed, not just handwaving about "conservatives".
I note that the tea party is very opposed to bank bailouts.
Yes - even though that is not logical, the label "socialist" is used in most parts of the country to smear people who are true capitalists.
The train of thought on Fox News goes like this: banks are private business, if they go bankrupt, FDIC takes over deposits, FDIC is government, government is socialism - so if you allow banks to fail you are socialist.
The train of thought on Fox News goes like this: banks are private business, if they go bankrupt, FDIC takes over deposits, FDIC is government, government is socialism - so if you allow banks to fail you are socialist.
The policy he advocated can be spun in a way that sounds socialist. Phrased the way he did it though? No, that's not going to get you labeled "socialist" anywhere.
Capitalism can't work properly when single entities control enormous parts of a market.
Historically, this hasn't happened a lot without the help of government. See http://www.youtube.com/watch?v=tdLBzfFGFQU and http://www.investopedia.com/articles/economics/08/hammer-ant.... The only one in tech that I can think of at the moment would possibly be Facebook and even then, there are tons of competing social networks.
The banks made unqualified loans to people and made money.
The banks sliced and diced these toxic loans (derivatives) and sold them as Triple A investments... and made money.
The banks then bet against those toxic investments and made money.
The banks had their clients invest in these toxic instruments, and made money.
The banks were then bailed out by the taxpayers and made money.
The banks now own all the foreclosed property.
>Sliced and diced these toxic loans (derivatives)
These aren't derivatives, you're referring to CMOs which are structured products.
These aren't derivatives, you're referring to CMOs which are structured products.
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They only win because we let them. If the majority of people weren't so politically indifferent, there would be a higher probability of change. The highest vote count on PlainSite (http://www.plainsite.org) under Banking & Finance is...20.
It seems like there's no way for the majority of people to care.
I wish I could explain this better, but... I've been living in the Midwest area for the past few years. The day-to-day lives of the people here are just so incredibly different from the vibrant and politically-active crowd in NY, or the tech scene in SF.
My wife's father is in a desperate struggle to prevent his family from going bankrupt. He owned a business that designed and built pole barns and other buildings (in fact, he built a restaurant for one of his clients). Just before 2008, it was doing so well that he actually quit his day job. Then the economy tanked, and all of his signed contracts became meaningless. The clients literally just bailed. Anyway, he suddenly found that he had a lot of business debt (which unfortunately was personal debt) and no way to pay it off since no income was coming in. Needless to say, he and his family have been in a rather poor situation for the past few years.
What's my point? Well, here's what I've noticed: everyone around here seems to be dealing with a "disaster situation". Not necessarily due to 2008; just in general. The people here seem to mostly be in "oh-crap" situations. Most of them have more debt than they can handle. The students barely care about doing well in school (and have a massive amount of debt from it). Most people have poor credit.
What I'm saying is... There just seem to be so many problems that people have to deal with nowadays. Average people. I don't know why; the problems certainly aren't due to any single reason. It's a combination of globalization and the current economic situation, I think. But regardless, people just can't seem to spare the time to care about anything except survival and drowning their concerns via alcohol or pot.
Not everyone is like this. I'm just saying most people seem like this, to me, from my point of view here in St Louis Missouri (and previously Michigan). I realize that this is hardly a statistically significant viewpoint. I'm just trying to understand why our government is so focused on the rest of the world, when there are so many crisis-level issues that face the day-to-day lives of average American citizens.
It's not that these people are lazy, either. My wife's father is one of the hardest workers I've had the pleasure of knowing. Though... people do seem to make bad decisions without realizing it (e.g. taking on personal debt to support business operations). So I know they're not blameless -- and in fact, when the situations are examined with a critical eye, most would conclude that it was entirely their fault that they are in these "oh-crap" situations. Nevertheless, the fact is that they are in terrible personal situations, and we must study the implications of that.
I look around and see that so many average people around here seem to be spending most of their lives simply surviving: dealing with some sort of personal disaster, or paying off student debt, or... etc. Yes, they messed up. But it's unreasonable to expect them to care about nebulous long-term issues when every day is a constant struggle simply to keep their head above water.
I don't know what to do about this; I'm not even sure anything can be done. I, too, wish more people cared. But we'd be foolish to not try to examine the reasons why people aren't caring, and to ask ourselves, "Why is this so? Are people merely lazy? Is it because they feel powerless? Or is it due to their day-to-day situation? How can we change this? Can it be changed?"
I wish I could explain this better, but... I've been living in the Midwest area for the past few years. The day-to-day lives of the people here are just so incredibly different from the vibrant and politically-active crowd in NY, or the tech scene in SF.
My wife's father is in a desperate struggle to prevent his family from going bankrupt. He owned a business that designed and built pole barns and other buildings (in fact, he built a restaurant for one of his clients). Just before 2008, it was doing so well that he actually quit his day job. Then the economy tanked, and all of his signed contracts became meaningless. The clients literally just bailed. Anyway, he suddenly found that he had a lot of business debt (which unfortunately was personal debt) and no way to pay it off since no income was coming in. Needless to say, he and his family have been in a rather poor situation for the past few years.
What's my point? Well, here's what I've noticed: everyone around here seems to be dealing with a "disaster situation". Not necessarily due to 2008; just in general. The people here seem to mostly be in "oh-crap" situations. Most of them have more debt than they can handle. The students barely care about doing well in school (and have a massive amount of debt from it). Most people have poor credit.
What I'm saying is... There just seem to be so many problems that people have to deal with nowadays. Average people. I don't know why; the problems certainly aren't due to any single reason. It's a combination of globalization and the current economic situation, I think. But regardless, people just can't seem to spare the time to care about anything except survival and drowning their concerns via alcohol or pot.
Not everyone is like this. I'm just saying most people seem like this, to me, from my point of view here in St Louis Missouri (and previously Michigan). I realize that this is hardly a statistically significant viewpoint. I'm just trying to understand why our government is so focused on the rest of the world, when there are so many crisis-level issues that face the day-to-day lives of average American citizens.
It's not that these people are lazy, either. My wife's father is one of the hardest workers I've had the pleasure of knowing. Though... people do seem to make bad decisions without realizing it (e.g. taking on personal debt to support business operations). So I know they're not blameless -- and in fact, when the situations are examined with a critical eye, most would conclude that it was entirely their fault that they are in these "oh-crap" situations. Nevertheless, the fact is that they are in terrible personal situations, and we must study the implications of that.
I look around and see that so many average people around here seem to be spending most of their lives simply surviving: dealing with some sort of personal disaster, or paying off student debt, or... etc. Yes, they messed up. But it's unreasonable to expect them to care about nebulous long-term issues when every day is a constant struggle simply to keep their head above water.
I don't know what to do about this; I'm not even sure anything can be done. I, too, wish more people cared. But we'd be foolish to not try to examine the reasons why people aren't caring, and to ask ourselves, "Why is this so? Are people merely lazy? Is it because they feel powerless? Or is it due to their day-to-day situation? How can we change this? Can it be changed?"
"school (and have a massive amount of debt from it). Most people have poor credit."
And there's me. I think you're right to an extent. One mistake, or stroke of bad luck, and you're almost under water. At the very least, you are almost sure to feel like you have absolutely no opportunity to better your situation. (Me also, and my argument of what "Occupy" is about, the lack of opportunity...)
The greater argument of "socialism for the rich, capitalism for the poor" also fits the student loans scenario. You can't go bankrupt on them. Period. I've paid what I borrowed and still owe more than I borrowed, and now I've lost my job.
I'm hoping I do well and can pay what I owe. But damn, what's this going to actually cost me?
And there's me. I think you're right to an extent. One mistake, or stroke of bad luck, and you're almost under water. At the very least, you are almost sure to feel like you have absolutely no opportunity to better your situation. (Me also, and my argument of what "Occupy" is about, the lack of opportunity...)
The greater argument of "socialism for the rich, capitalism for the poor" also fits the student loans scenario. You can't go bankrupt on them. Period. I've paid what I borrowed and still owe more than I borrowed, and now I've lost my job.
I'm hoping I do well and can pay what I owe. But damn, what's this going to actually cost me?
> If the majority of people weren't so politically indifferent, there would be a higher probability of change.
I think of it as temporal theft. The theft being private losses socialized via bailouts, govt deficits to prop the economy, and QE. It occurred at time t, but the loss isn't felt till t+n, so there's a lag during which most people grumble but mostly are indifferent.
t+n will be when either:
1. Prices begin to hyperinflate commensurate with the multiple rounds of Federal Reserve QE. This could happen if Bernanke, Krugman, et all turn out to be wrong about the ability to hyperinflate the currency into a liquidity trap without commensurate price rises, then contract the money supply again as the economy emerges from the liquidity trap, thereby avoiding price hyperinflation. It could also happen if their exit strategy is wrong.
2. Foreign governments stop buying US debt en mass, forcing higher interest rates to entice buyers (or more Fed buying, further increasing money supply, see #1), leading to a slowdown and recession or depression.
3. Despite the Fed's best efforts to the contrary, a deflationary debt collapse domino effect happens anyway, possibly started by the European PIIGS taking the Icelandic route and defaulting on their debt to private banks, and ending with US states doing the same thing, leading to another recession or depression. Most unlikely scenario.
There's nothing free in this world, and those losses are going to paid for by someone, one way or another. The financial system has already ensured it won't be them. When it happens the majority of people won't be so indifferent anymore.
I think of it as temporal theft. The theft being private losses socialized via bailouts, govt deficits to prop the economy, and QE. It occurred at time t, but the loss isn't felt till t+n, so there's a lag during which most people grumble but mostly are indifferent.
t+n will be when either:
1. Prices begin to hyperinflate commensurate with the multiple rounds of Federal Reserve QE. This could happen if Bernanke, Krugman, et all turn out to be wrong about the ability to hyperinflate the currency into a liquidity trap without commensurate price rises, then contract the money supply again as the economy emerges from the liquidity trap, thereby avoiding price hyperinflation. It could also happen if their exit strategy is wrong.
2. Foreign governments stop buying US debt en mass, forcing higher interest rates to entice buyers (or more Fed buying, further increasing money supply, see #1), leading to a slowdown and recession or depression.
3. Despite the Fed's best efforts to the contrary, a deflationary debt collapse domino effect happens anyway, possibly started by the European PIIGS taking the Icelandic route and defaulting on their debt to private banks, and ending with US states doing the same thing, leading to another recession or depression. Most unlikely scenario.
There's nothing free in this world, and those losses are going to paid for by someone, one way or another. The financial system has already ensured it won't be them. When it happens the majority of people won't be so indifferent anymore.
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Is there a service where you can deposit money that doesn't increase a bank's power to lend?
For example, a non-bank service where you pay a monthly fee to get the the convenience of a debit card and checking, but your deposit doesn't contribute to a bank's reserves, which enables banks to lend and thus empowers the banking system. A service like this wouldn't have the overhead of banks because it wouldn't have to support lending or investment divisions.
Simple (https://simple.com) comes close in that it provides a debit card, but it uses banking partners to store deposits and makes money off the deposits rather than from a monthly fee.
For example, a non-bank service where you pay a monthly fee to get the the convenience of a debit card and checking, but your deposit doesn't contribute to a bank's reserves, which enables banks to lend and thus empowers the banking system. A service like this wouldn't have the overhead of banks because it wouldn't have to support lending or investment divisions.
Simple (https://simple.com) comes close in that it provides a debit card, but it uses banking partners to store deposits and makes money off the deposits rather than from a monthly fee.
> Is there a service where you can deposit money that doesn't increase a bank's power to lend?
That's the most significant way banks make money. It costs money to have branches, tellers, and armed guards (let alone websites, security teams, forensic-level accounting, marketing, ATMs everywhere, electricity, etc). The way that banks cover all this overhead is to take your deposit at 0% or 1%, then lend it out at 5% (mortgages) to 15% (personal loans). The difference between 0% and 15% gets split between covering bad loans that don't get paid back, and keeping the lights on.
It's not that the deposit department supports a loss-making lending division; it's that the two are inseparable.
If you wanted a bank that didn't lend out deposits, you'd have to pay a hefty monthly fee for the privilege. It'd be more like a safety deposit box than a "bank" in the way we know of them today.
That said, check out credit unions if you prefer a more local banking option that is less likely to make extremely leveraged bets. There are good and bad sides of credit unions, but many people who dislike traditional banks prefer credit unions.
That's the most significant way banks make money. It costs money to have branches, tellers, and armed guards (let alone websites, security teams, forensic-level accounting, marketing, ATMs everywhere, electricity, etc). The way that banks cover all this overhead is to take your deposit at 0% or 1%, then lend it out at 5% (mortgages) to 15% (personal loans). The difference between 0% and 15% gets split between covering bad loans that don't get paid back, and keeping the lights on.
It's not that the deposit department supports a loss-making lending division; it's that the two are inseparable.
If you wanted a bank that didn't lend out deposits, you'd have to pay a hefty monthly fee for the privilege. It'd be more like a safety deposit box than a "bank" in the way we know of them today.
That said, check out credit unions if you prefer a more local banking option that is less likely to make extremely leveraged bets. There are good and bad sides of credit unions, but many people who dislike traditional banks prefer credit unions.
It's not that the deposit department supports a loss-making lending division; it's that the two are inseparable.
That's the way things have been done, but I don't believe the two are inseparable.
You can eliminate much of the overhead you mention by not having branches and thus no need for tellers or armed guards. For ATMs, you could partner with something like the Allpoint ATM network (http://www.allpointnetwork.com) -- I believe Simple does this.
Because you are not lending money or making investments, you reduce your overall risk and requirements.
You're right though, it would be like a safety deposit box -- a digital safety deposit box that's linked to your debit card. A service like this would be disruptive.
That's the way things have been done, but I don't believe the two are inseparable.
You can eliminate much of the overhead you mention by not having branches and thus no need for tellers or armed guards. For ATMs, you could partner with something like the Allpoint ATM network (http://www.allpointnetwork.com) -- I believe Simple does this.
Because you are not lending money or making investments, you reduce your overall risk and requirements.
You're right though, it would be like a safety deposit box -- a digital safety deposit box that's linked to your debit card. A service like this would be disruptive.
So far, I don't see the value proposition. People who don't like big banks use credit unions. Credit union deposits are insured to $250,000, so any risk created by lending is not borne by the consumer. There are plenty of credit unions that still offer free checking with no (or a very small) minimum balance. [1]
The only way you could possibly make money to cover your still-not-insignificant costs (you still need all the accounting, marketing, etc, plus paying Allpoint's access fees---they charge a fee to institutions for the privilege of access, there's no free lunch here) is to charge a monthly fee. [2] You're competing against free, and the "we're not a big bank" marketing card has already been played by the credit unions (there is an ongoing radio campaign that plays on just that point).
[1] E.g., https://www.navyfederal.org/products-services/checking-savin...
[2] You could also sell data about your consumers or do other questionable things, but that won't help your "better than a bank" cause.
The only way you could possibly make money to cover your still-not-insignificant costs (you still need all the accounting, marketing, etc, plus paying Allpoint's access fees---they charge a fee to institutions for the privilege of access, there's no free lunch here) is to charge a monthly fee. [2] You're competing against free, and the "we're not a big bank" marketing card has already been played by the credit unions (there is an ongoing radio campaign that plays on just that point).
[1] E.g., https://www.navyfederal.org/products-services/checking-savin...
[2] You could also sell data about your consumers or do other questionable things, but that won't help your "better than a bank" cause.
Banks, and the financial industry in general, exert an enormous amount of influence over the government -- the Occupy Movement and articles like these are indicators of the disgust that has been brewing against the current system, but most feel powerless to do anything about it.
Much of a bank's power comes from people depositing their paychecks -- take away the deposits, and you take away the power (http://en.wikipedia.org/wiki/Bank_run).
More people don't do this because banks are so convenient and there are few good alternatives. Even credit unions partner with banks so using them doesn't really help.
A digital safety deposit box that's linked to your debit card could provide the convenience of a bank, without empowering the banks.
Much of a bank's power comes from people depositing their paychecks -- take away the deposits, and you take away the power (http://en.wikipedia.org/wiki/Bank_run).
More people don't do this because banks are so convenient and there are few good alternatives. Even credit unions partner with banks so using them doesn't really help.
A digital safety deposit box that's linked to your debit card could provide the convenience of a bank, without empowering the banks.
I believe you are not looking for an alternative bank; you are looking for an alternative currency. The Federal Reserve gives explicit rights to private banks to not have to worry about whether the US Dollars in their possession are 100% backed up by actual reserves of US Dollars. In fact, they encourage banks to not be able to pay you back, through fractional reserve banking, if everyone were to withdraw their deposits. The Federal Reserve has a complete monopoly over how the US Dollar is managed in electronic form. I'm not even sure that a bank that refuses to participate in fractional reserve banking will be allowed to operate, or at least that you will be covered by the official deposit guarantee in case they go bankrupt.
I realize there really are no alternatives, which makes my advice somewhat useless, but by using US Dollars (or any other state paper currency) you are supporting the current monetary system (which includes the private banks).
The problem isn't really the banks, it's our current monetary system which gives tremendous power to the banks. We created this mess ourselves.
First we create a monetary system in which private banks are instrumental in both distributing and creating new currency, making it possible for them to reap huge gains and grow abnormally large. Then we get angry at the banks when they use this power for financial gain. How about not giving them this power in the first place?
I'm reading a very interesting book on monetary systems called "Paper Money Collapse" by a German named Detlev Schlichter who worked in the financial sector for 20 years. We're used to the system working this way, but a thorough explanation of the system - like the one in this book - really shows what a strange and cumbersome system it is we've created. It's as if on the area of the production of goods and services we've come to the conclusion that it's best to let private companies produce these, as the state is simply too inefficient to accomplish anything the market is able to. But in the area of money production we still advocate a state monopoly.
First we create a monetary system in which private banks are instrumental in both distributing and creating new currency, making it possible for them to reap huge gains and grow abnormally large. Then we get angry at the banks when they use this power for financial gain. How about not giving them this power in the first place?
I'm reading a very interesting book on monetary systems called "Paper Money Collapse" by a German named Detlev Schlichter who worked in the financial sector for 20 years. We're used to the system working this way, but a thorough explanation of the system - like the one in this book - really shows what a strange and cumbersome system it is we've created. It's as if on the area of the production of goods and services we've come to the conclusion that it's best to let private companies produce these, as the state is simply too inefficient to accomplish anything the market is able to. But in the area of money production we still advocate a state monopoly.
As progress marches forward, products need to be made obsolete, whole industries need to vanish, and government institutions need to be voted out of existence, to make room for new growth. And we have very poor means for doing so gracefully; no one wants to start over, go back to school, and learn a new career, all on their own dime. So we get bureaucrats, unions, corporations, and citizens themselves protecting obsolete institutions which are a drain on real economic activity.
If we don't have mechanisms for absorbing failure on a vast scale, to re-inject capital and redirect human talent to productive output, we're going to continue incentivizing people to put up with broken systems, whether it's BofA or TSA. I frankly don't care whether it comes from top-down or bottom-up: our society needs to feel comfortable with regularly firing organizations and finding other ways for its employees to feed their families.
It's easy to focus on the rich assholes who pulled the strings and robbed the public treasury. But there will always be jerks who game the system; what really matters is identifying what they hold over us that allows them to get away with it.