Tuesday, June 21, 2011
Too Big To Fail Is An Ever Present Danger
There is an article on the Internet about banks and the reserve requirement. What is a reserve requirement? Quite simply a reserve requirement is a percentage of money that a bank must keep on hand in cash or free reserves. This simply means that a bank must at all times hold some on it money, money that is on deposit, back and that that money can not be loaned out. The Basel III Agreement wants banks to hold on to 14% in reserve, but the banks want to only hold 7%. Naturally, the less money the bank keeps in reserve the more they can lend and the more money the bank can earn. Banks must make money otherwise they can not operate and they go under or they are sold to a larger bank that then assumes their deposits and loans (assets and liabilities). The CEOs of banks get a bonus based on the earnings of the bank or perhaps on growing their earnings. The strong incentive to make more money is the carrot they all chase. Unfortunately, there are ways to game the system and not even hold the 7% reserve requirement. It is also unfortunate, in my opinion, that the death penalty is off the table for what I like to refer to as "economic treason". Destroying our domestic economy and taking millions of families down to poverty because a select few want to be super rich is no way to run a railroad. But, the super rich influence the politicians who make the laws and so unless there is overwhelming public outcry for reform, nothing will be done to overt the next financial crisis. People that hold cash in the present banking environment are not stupid. The super rich that collect art that sells for millions of dollars are in essence putting cash under the mattress. The only difference is that there cash is on their walls and not under their mattress. Liquid assets is something more people need to give some thought to because the banking system in the United States is being run for the benefit of senior bank management and not the good of the shareholders or their depositors. The geniuses that did away with the Glass-Steagall Act of the 1930s, surgically removed the protections that prevented a major financial crisis as we experienced in 2007-08. With the end of Glass-Steagall, everyone is on their own now. The banking laws are a bad joke. Too Big To Fail is an ever present danger!!!