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Saturday, October 29, 2011

Banking

On the way home from my neices' 2nd birthday party I was flipping radio stations and heard two stories relating to banking that got me thinking about the way banks work or don't work these days.

Banks exist as a place for people to store their wealth, right? I put my money into a bank because it feels like a safer place for it to be than under my mattress. I am also given an incentive to put my money in a bank because I can earn interest on the deposits I put there. Banks then traditionally earn a profit by loaning out my money at a higher rate of interest (set in part by the interest rates regulated by the Fed)  than they pay me to keep it there. As that money is repaid, the bank is able to keep a positive balance on their ledgers and loan out more money, thus earning more money. As the bank does better, they can then offer a higher rate of interest on the deposits to its customers, thus earning more customers, attracting more money, and the bank can grow. I think it is safe to call that the "social banking contract."
So we had a problem at the turn of the 21st century, because banks got greedy, and broke that contract.  Banks got bigger by merging/taking over each other, thus lowering the number of banks in existence.  For instance, I went from banking with BayBank to BankBoston to Fleet Bank to Bank of America, all in a nine year span. With each merger/acquisition, the interest I received went down, and the fees I paid went up. Banks began charging me to keep my money there (maintenance fees) to access my money (ATM and teller fees and check writing fees) and to deposit my money (fees if not direct deposited, minimum balance fees, overdraft fees, etc...). Not only that, but then, when I got a loan from my bank, they bundled it together and sold it with other loans to other financial institutions who began betting on my ability to pay it back. Though I paid mine off, in an attempt to generate more income from interest, banks made loans to people who were not as able to make their payments, especially on mortgages, and, well, we know what happened next...All because modest profits weren't enough.

In the aftermath of the financial meltdown, the federal government bailed out the very same, overly large banks that led us into the problem, and then, in an attempt to get people to borrow more (because, of course, the peoples' spending is what needed to be fixed...), the Fed lowered interest rates, thus lowering the rates banks offered on their loans. This lowered their profits, which made the banks who were traded on the stock market lose value/market share, so bank leadership needed to keep their profit margins up. So they lowered interest rates offered on the accounts people maintained, and raised the fees associated with banking to new levels. So ATM fees went from $.50 to as much as $4 from each bank if using an out-of-network ATM. So even though rates for borrowing are low, rates for savings are even lower. (So much so that Capital One is running ads advertising a rate "3x higher than the national average," and that amounts to .85%.) So, customers begin to look for other places to put their money rather than banks.  The increased fees also serve to drive customer resentment up, for while they may tolerate fees if they are earning interest, they aren't "interested" (ha ha) in getting whacked twice. 

And, on top of that, banks are less willing to loan out money to people, (feeling burned by their own sub-prime scheme--oh the irony) AND are foreclosing on people's homes in manners that would make George Bailey fling himself off a bridge. Combine that with the "high" unemployment rate and the Occupy Wall Street is born as a movement, as the banking system is broken.  But it would be so easy to fix.

Interest rates need to go up. 

If the Fed raises rates, even just a little bit, banks can charge higher interest rates on loans, as the Prime Rate would be higher. They would thus be incentivized to loan more money. This would place banks in competition for customers' cash deposits, which would cause them to raise the rates they offered on savings accounts, CD's, even checking accounts. If they were making a profit off of loans, they could (but likely won't) lower their fee structure.  Thus, money begins to move around in our system again.

Oh, and Congress needs to make Credit Default Swaps illegal, and prohibit the sale of mortgage loans issued by banks. And banks need to be less freakin' greedy. And maybe smaller.

Simple.