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!!!


LceeL said...

Whatever happened to working on a salary? Why are bonuses even necessary? And please don't say to attract the best and brightest - the 'best and brightest' have just about bankrupted us. Of course, the HAVE enriched THEIR lives, but at the expense of mine.

There was time time in this country when "Saving", putting money in the bank, was seen as virtuous. Thrift was respected. And putting money in the bank was how you saved up for retirement - how you were going to supplement your Social Security. Or you put money into your pension plan at work AND saved money in the bank.

Banks did banking - REAL banking - your money accrued interest (compounded daily) - and you could see a solid future for yourself.

Where the hell did all that go?

Into politicians' pockets. Into Banking Executives pockets. Into bank portfolios of "Investment Grade Securities". But not into mine.

moneythoughts said...

Lou, you are right about so much of what you wrote that there is no need to correct a thing.

The Board of Directors of many banks, as well as other corporations, rubber stamp what senior management wants to do. They are picked for board seats because the know how to get along and go along. : ) Shareholder value gets gutted as happened to so many of us.

Robert said...

Also our economy has become addicted to low interest rates. When interest rates are low, money in the bank doesn't make much sense in terms of earnings. In low interest rate times, people make more money if they buy at the start of various bubbles in housing, stock or what ever.

Higher interest rates could return more balance to the economy, but it would also slow down the current economy adding significantly to unemployment as well as more people being upside down in their homes. This would happen after such low rates have been the norm for so long.

The economy has become addicted to low interest putting us in a "damned if you do damned if you don't" situation.

The Fed may try to back off a bit on money supply to let interest rates slowly rise, but unemployment remains high even at these low rates. We've kind of backed ourselves into a corner.

I prefer the painter analogy, we've painted ourselves into a corner. We're partially to blame, but also they've (meaning the rich and many politicians) have held most of the paint brushes.

Cloudia said...

Why is this allowed to continue??!!

Aloha from Honolulu :)

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