mege said:
So assuming your presumptions all true - what's the solution? Eliminate banks?
You don't have to get rid of banks altogether, you just need to modify them. The role of a bank is a crucial thing in the modern age, and banks do have the potential to create good structuring of society by focusing on ways of allocating important resources to where they are needed.
What we need to do is return control back to the people for credit creation. Right now a private set of banks loans the country money, and this organization is allowed to control all aspects of this credit creation.
Along with this, we also need to pick a currency that is not subject (or at least minimized to) the nature of abuse like many fiat currencies (ends up being backed by nothing, eventually becomes worthless, from this causes absolute chaos) but is also is not based purely on something like a gold standard.
The other thing is to stop encouraging debt. Debt is the tool that is getting everyone, whether it is a government or a family in really deep trouble. This has to extend to the banks: they should be able to be leveraged at the rates that they are, it's a time-bomb waiting to go off and as we have seen from 2007/2008 it can have the affect on more than just a few financial institutions.
If you want to stop encouraging debt, it means you want to encourage saving. If you serious about this you raise interest rates. Interest rates reward savers and punish borrowers. These savings create capital that can be used to fund ventures of capitalism.
Also in line with the above paragraph, if you want to encourage saving, you base tax on consumption and not on income. Savers should be rewarded, and this is a way to do that.
If banks loaned money at the same rate that it lent money, there would be zero incentive to actually be a bank. From a simpler stance - this is just buying bulk at a reduced rate. Consumers see this same effect on CDs, etc. When you're putting millions/billions into treasuries of course the returns are going to be better than buying a $100 savings bond - else why would there even need to be banks to save in? So, yes - it is totally proper for a larger entity to be able to obtain currency at a lower rate. Without mercantilism at some level - the system falls apart due to non-differentiation of scale.
Let's look at what is happening at the moment.
The Federal Reserve has currently lent out trillions of dollars in backdoor deals to a range of institutions all over the world at near 0% interest. The institutions can then take that money and lend it out at at least 3/4% interest. They could do this in a number of ways but that's for another discussion.
So basically if they borrow money at say 0.1 or 0.01 percent and charge 3% interest on say 10 billion dollars, then in one period of lending they make roughly 3% of 10 billion which is 300 million dollars.
Now if you ever do a financial mathematics course, you are taught that the markets will always go to a situation of no-arbitrage. This means that the market will eventually correct itself so that profits like these won't be made.
Now the Federal Reserve has promised to keep rates low for at least 2 years. With these kind of deals, the no-arbitrage rule does not apply, and these institutions are making completely risk-free transactions.
With this kind of environment you encourage financial speculation, not saving. You punish the people putting money in their pension or bank accounts by giving them no return and you allow others access to ridiculously cheap credit who by any standard means should not have access to this.
The idea of risk is that for higher risk you charge higher interest rates. That is why people like governments and oil companies can borrow so cheaply: they are (or were) most likely to pay the money bank. It's also why credit cards have higher interest. The credit requirements to get access to government bond type liquidity is not the same as what you need with a credit card application.
But this doesn't mean governments always get this kind of treatment. If they act like an irresponsible person who never pays their bills, they end up being downgraded just like we all do, and this is what is happening.
Also I need to ask you: "What do you think the role of a bank should be?". To me the role of a bank should be to allocate resources to the best of its ability for the need of society to function and progress. Clearly this is not the case.
Don't get me wrong - I think the system is screwed up due to the some of the steering the government has done (subprime home loans, etc), but I think too much stock is being put into some conspiracy theory that bank managers set this all up to make consumers subservient. However, I do share the sentiment of above (without some of the implications) - individuals need to learn to manage debt better. If they understand the system, then everyone is better off. Currency is a good bought and sold and stocked just like anything else in a market (even internally to a country) - but I'd wager 90% of folks don't think of it that way and see currency just as money. I still go back to - what's the point of these protests? What are they hoping to accomplish - debt forgiveness? These are really just 'screw the system' sit-ins that have no real motivation for specific goals. Some of these same egalitarian 'help' policies are why we're in this mess in the first place.
That is one thing that I think people do need to realize which you have pointed out is that they need to get out of debt. We can't just blame one group of people or a few institutions: we are all in some way a contributor to this. It's a great point and I think others should take heed of this message.
I agree with you that a lot of these protests will not accomplish anything. These people need to walk the walk by stopping getting into debt and supporting the system. If enough people stop borrowing money, it will have quite a profound effect on the system.
The irony of your question about 20% of the economy being the financial sector: we'd probably have far less total wealth if it weren't for the practices of the financial sector. So when the markets naturally evolved that bureaucratic system, it's still more wealth for everyone than without. Does that mean it's perfect? Absolutely not, but saying that it's an intrinsic negative I believe is very wrong and not counting what it's done for the economy as whole (warts and all).
But where is the wealth? Who has it? Who is it benefiting? Do you honestly think that the wealth is really shared among everyone?
