Could Credit Unions Be the Solution to Economic Stability?

[BilPrestonEsq]

Probably some large corporations would figure out that they could get investment capital by offering interest on savings and the most powerful would act as central banks. Would you want to actively destabilize lenders that became that powerful?

Well it wouldn't really be like a savings account though (given my scenario) because you would have to be able to get your money out whenever you want. The reserve requirement would be 100% instead of 10% for all banks. Corporations couldn't have savings accounts or C.D.s to raise investment capital since they can't guarantee you'd get it back. Though you could invest still in companies at your own risk. 100%, crazy right, I mean what's the difference between loaning out 90% of the reserves and counterfeiting. The deal I have with my bank is that I put money in I take money out whenever I want. Suppose everyone tries to get there money out of the bank at once, out of bank of america?Game over, money turns to dust. I remember when this last meltdown happened and banks where being bought out and closing their doors and watching on the news people lining up outside their banks clueless to the consequences. So our economy relies on an illusion. You could say that a 100% reserve requirement would stunt growth but atleast the growth that did occur wouldn't be artificial.

 

[russ_watters]

If the reserve requirement were 100%, how could people ever buy houses? There wouldn't be enough credit available.

 

[brainstorm]

Well it wouldn't really be like a savings account though (given my scenario) because you would have to be able to get your money out whenever you want. The reserve requirement would be 100% instead of 10% for all banks. Corporations couldn't have savings accounts or C.D.s to raise investment capital since they can't guarantee you'd get it back. Though you could invest still in companies at your own risk. 100%, crazy right, I mean what's the difference between loaning out 90% of the reserves and counterfeiting. The deal I have with my bank is that I put money in I take money out whenever I want. Suppose everyone tries to get there money out of the bank at once, out of bank of america?Game over, money turns to dust. I remember when this last meltdown happened and banks where being bought out and closing their doors and watching on the news people lining up outside their banks clueless to the consequences. So our economy relies on an illusion. You could say that a 100% reserve requirement would stunt growth but atleast the growth that did occur wouldn't be artificial.

You seem to think there is some fundamental difference between a central bank and a large corporation that invents customer-friendly lending/saving policies to stimulate business. If a large bank diversified its investments over a wide spectrum of assets for a long period of time, why wouldn't it lend out 90% of its reserves? It would lend out as much as it believed would be repaid. If it believed default was likely (or that foreclosure wouldn't render a resale value sufficient to cover the lent amount), it would lend very little or none of its reserves, no?

If the reserve requirement were 100%, how could people ever buy houses? There wouldn't be enough credit available.

They could save or owners could finance an amount beyond an initial (down)payment.

 

[russ_watters]

They could save or owners could finance an amount beyond an initial (down)payment.

In other words, most people couldn't.

 

[BilPrestonEsq]

You seem to think there is some fundamental difference between a central bank and a large corporation that invents customer-friendly lending/saving policies to stimulate business. If a large bank diversified its investments over a wide spectrum of assets for a long period of time, why wouldn't it lend out 90% of its reserves? It would lend out as much as it believed would be repaid. If it believed default was likely (or that foreclosure wouldn't render a resale value sufficient to cover the lent amount), it would lend very little or none of its reserves, no?

Where are they getting this money from?

 

[BilPrestonEsq]

Well it wouldn't really be like a savings account though (given my scenario) because you would have to be able to get your money out whenever you want. The reserve requirement would be 100% instead of 10% for all banks. Corporations couldn't have savings accounts or C.D.s to raise investment capital since they can't guarantee you'd get it back. Though you could invest still in companies at your own risk. 100%, crazy right, I mean what's the difference between loaning out 90% of the reserves and counterfeiting. The deal I have with my bank is that I put money in I take money out whenever I want. Suppose everyone tries to get there money out of the bank at once, out of bank of america?Game over, money turns to dust. I remember when this last meltdown happened and banks where being bought out and closing their doors and watching on the news people lining up outside their banks clueless to the consequences. So our economy relies on an illusion. You could say that a 100% reserve requirement would stunt growth but atleast the growth that did occur wouldn't be artificial.

 

[BilPrestonEsq]

That's not to say a private company or bank can't loan out their money. They just can't loan out your money.

 

[brainstorm]

In other words, most people couldn't.

In a free market, prices are set at the intersection of supply and demand curves. So, one way or the other, houses would be traded in the absence of bank-financing.

Where are they getting this money from?

In your gold-standard economy, they're getting it wherever gold can be gotten. They either mine it out of the ground or offer labor in exchange for gold.

That's not to say a private company or bank can't loan out their money. They just can't loan out your money.

When you save your money at a bank by buying deposit certificates, the interest you're getting paid is compensation to lend out your money. When you want to withdraw money at any time without leaving a reserve, you use a checking account with no minimum balance. Those typically don't pay interest. To get interest, you agree to a minimum-balance savings account. To get higher interest, you agree to CDs with penalties for early withdrawal. These various bank products create incentives for people not to withdraw money. Banks with large numbers of deposits estimate the likelihood of withdrawals and debt-defaults and plan reserves and debt-collection policies accordingly.

Are you saying that FDIC does not really have a sound basis for insuring all deposits up to $100K or $250K or whatever it is these days? Do you think FDIC should lower the amount it insures? Do you think this would stimulate banks to keep higher percentages than 10% in reserve?

 

[WhoWee]

Are you saying that FDIC does not really have a sound basis for insuring all deposits up to $100K or $250K or whatever it is these days? Do you think FDIC should lower the amount it insures? Do you think this would stimulate banks to keep higher percentages than 10% in reserve?

Was the printing press re-possessed?

 

[BilPrestonEsq]

To brainstorm: I made my response confusing, my bad. You posted this:

" You seem to think there is some fundamental difference between a central bank and a large corporation that invents customer-friendly lending/saving policies to stimulate business. If a large bank diversified its investments over a wide spectrum of assets for a long period of time, why wouldn't it lend out 90% of its reserves? It would lend out as much as it believed would be repaid. If it believed default was likely (or that foreclosure wouldn't render a resale value sufficient to cover the lent amount), it would lend very little or none of its reserves, no?"

I got confused with the part in bold then I read it again. Are you calling their investment capital, reserves? If this money that you called reserves was actually just their profit they can do whatever they like. If this money is reserves as in the money that people place in there checking acounts then that's not ok, because there would be the 100% requirement.
Basically if you have a checking account you and everyone else that's a customer of the bank has to be able to get their money out whenever they want. And that last part that I underlined, exactly, how are lenders going to create a destructive housing bubble in that case? It wouldn't happen, it would be a bad business choice to lend out money to people that can't pay it back. But you did use the word reserves which is what confused me. So there could still be private lenders that make loans for profit but they wouldn't be willing to make bad decisions. So banks can still exist and make money under these regulations they can still loan money too. You would just have to pay for the convenience of the things they can offer, keeping your money safe, managing your money, online transfers,etc. and they can use that money to make loans to make more money, they are not going to loan to just anybody though obviously because now they would have something to lose. The FDIC I think should still be in place incase the bank gets held up or some other unforeseen event. There could be a federal fund in place, created from budget surplus. So no new money could ever be created from nothing. Thats the bottom line. This would effect all kinds of things, for instance: the ability of countries to go to war with each other, because who would have the money for that!

 

[brainstorm]

If this money is reserves as in the money that people place in there checking acounts then that's not ok, because there would be the 100% requirement.

I'm not a banker, but I assume that when a large bank has many checking accounts from many different clients, it can bank on a certain amount of those accounts not being withdrawn over a given period of time. E.g. if someone has $5000 in a checking account, it would be unlikely for that person to take out more than, say, $2000 in the next week so $3000 can be used for low-risk activities. As I say, I really don't know this business but my impression was that banks minimize risks for individuals by spreading it out across a large number of accounts.

how are lenders going to create a destructive housing bubble in that case? It wouldn't happen, it would be a bad business choice to lend out money to people that can't pay it back.

I haven't yet bought into the explanation that a housing bubble can be avoided by not lending to borrowers considered to have a higher risk of default. The reason I think this is that the recent bubble was the result of this very risk-aversion that you are talking about. Specifically, property appreciated more for certain houses in certain areas because buyers saw these as "good neighborhoods" where they thought their investment would be insulated against depreciation. As a result, such properties appreciated faster and gained more value than they would have if lower-valued properties had not been kept so depressed. So the very fact of risk-aversion and real estate investment by location created the conditions for a bubble to develop simply by raising expectations of property values and rate of appreciation. These properties were and have been appreciating at an inflated rate for quite a while.

they are not going to loan to just anybody though obviously because now they would have something to lose.

No, they try to assess income stability and guarantee repayment by forecasting ability to repay of the term of the mortgage, but how can you predict that someone will hold a job in an economy where people can retrain for new jobs and undercut more experienced workers by taking entry-level salaries? What do you want to do, restrict people's ability to change careers? If so, talk to labor unionists - they might be for this as a means of job-protection. Personally, I think it would be stifling to freedom and creativity to have multiple careers in one's lifetime.

The FDIC I think should still be in place incase the bank gets held up or some other unforeseen event. There could be a federal fund in place, created from budget surplus. So no new money could ever be created from nothing. Thats the bottom line. This would effect all kinds of things, for instance: the ability of countries to go to war with each other, because who would have the money for that!

People can invest privately in militias and they can do so using other resources than money. No one seems to be able to understand that those with access to resources have the capacity to volunteer those resources for causes that they deem worthy. If the steel industry would want to collaborate with military engineers to produce weapons, and the volunteer labor was there to do so, they could make it happen, no? Isn't this exactly how the military industrial complex was launched during WWII?

Personally, I would rather see voluntary investment of resources and labor going toward less destructive activities than war, if such voluntarism emerged. Of course, war has the traditional function of generating debt and repayment, which replaces voluntary labor with obliged labor, which may be more secure economically in some ways, but why not attempt to prosper first without sacrificing freedom?

 

[BilPrestonEsq]

I'm not a banker, but I assume that when a large bank has many checking accounts from many different clients, it can bank on a certain amount of those accounts not being withdrawn over a given period of time. E.g. if someone has $5000 in a checking account, it would be unlikely for that person to take out more than, say, $2000 in the next week so $3000 can be used for low-risk activities. As I say, I really don't know this business but my impression was that banks minimize risks for individuals by spreading it out across a large number of accounts.

You really need to think about this again. I understand the logic of what you are saying, but really think about this one. If the customers of a bank for whatever reason lose confidence in their bank think about the consequences. Also realize that this is inflationary. Not to mention dishonest. This is not their money to risk. The only way this works is through disception. I bet your next idea would be that if I bank experiences a bank run they could just borrow the money from another bank. Again incredibly deceptive. What's funny to me and sad is that this has already happened, and these ideas are not mine, this is how it used to be at one point in time. I didn't even realize how difficult this is to understand without a historical perspective.

I haven't yet bought into the explanation that a housing bubble can be avoided by not lending to borrowers considered to have a higher risk of default. The reason I think this is that the recent bubble was the result of this very risk-aversion that you are talking about. Specifically, property appreciated more for certain houses in certain areas because buyers saw these as "good neighborhoods" where they thought their investment would be insulated against depreciation. As a result, such properties appreciated faster and gained more value than they would have if lower-valued properties had not been kept so depressed. So the very fact of risk-aversion and real estate investment by location created the conditions for a bubble to develop simply by raising expectations of property values and rate of appreciation. These properties were and have been appreciating at an inflated rate for quite a while.

Interesting observation. A combination of the two perhaps. The housing bubble was more complicated than irresponsible lending but it is a major factor. That is just another topic though at the same time it is directly related to what I am talking about. It's kind of overwhelming to bring the details of that into the mix.

No, they try to assess income stability and guarantee repayment by forecasting ability to repay of the term of the mortgage, but how can you predict that someone will hold a job in an economy where people can retrain for new jobs and undercut more experienced workers by taking entry-level salaries? What do you want to do, restrict people's ability to change careers? If so, talk to labor unionists - they might be for this as a means of job-protection. Personally, I think it would be stifling to freedom and creativity to have multiple careers in one's lifetime.

Stifling to freedom and creativity to have multiple careers in one's lifetime? It seems like your making the opposite point there? Why would you not be able to switch careers? Why can't a company hire whoever will do the best for them? Forgive me if I am not making the connection between what your saying and lending to people who can't repay their loans.
If you have the ability to pay a loan in its conception what is stopping you from making the right decisions necessary to change careers and still pay your loan?

People can invest privately in militias and they can do so using other resources than money. No one seems to be able to understand that those with access to resources have the capacity to volunteer those resources for causes that they deem worthy. If the steel industry would want to collaborate with military engineers to produce weapons, and the volunteer labor was there to do so, they could make it happen, no? Isn't this exactly how the military industrial complex was launched during WWII? Personally, I would rather see voluntary investment of resources and labor going toward less destructive activities than war, if such voluntarism emerged. Of course, war has the traditional function of generating debt and repayment, which replaces voluntary labor with obliged labor, which may be more secure economically in some ways, but why not attempt to prosper first without sacrificing freedom?

The military industrial complex has been around for as long as central banks. This is not a new thing. War profiteering is only possible when you have a government that can pay for a war. Now where are they getting all this money from? Borrow it? War bonds? The money still have to be paid back with interest. So where does that money come from? Raising taxes? Well now your paying for the war with interest. What does anyone stand to gain in a war monetarily? What incentive would tax payers have to stand behind such an effort?

 

[brainstorm]

You really need to think about this again. I understand the logic of what you are saying, but really think about this one. If the customers of a bank for whatever reason lose confidence in their bank think about the consequences. Also realize that this is inflationary. Not to mention dishonest. This is not their money to risk. The only way this works is through disception. I bet your next idea would be that if I bank experiences a bank run they could just borrow the money from another bank. Again incredibly deceptive. What's funny to me and sad is that this has already happened, and these ideas are not mine, this is how it used to be at one point in time. I didn't even realize how difficult this is to understand without a historical perspective.

It's ironic that I am personally disenchanted with a deficit funded consumption economy, and I personally don't like being in debt nor do I think others should be saddled with it either, since it is basically a form of indentured servitude to creditors. Yet I don't know how much reserves are reasonably needed to ensure withdrawal. I suppose you're right that checking accounts can't be lent out, except maybe in the time it takes to cash them. Lending out savings should require accepting that your deposit could eventually be paid off in collateral, in the event there is widespread default on loans. That way, you could lose your savings but take someone else's collateral (foreclosed house or repossessed vehicle, for example) in lieu of your (lost) money.

Stifling to freedom and creativity to have multiple careers in one's lifetime? It seems like your making the opposite point there? Why would you not be able to switch careers? Why can't a company hire whoever will do the best for them? Forgive me if I am not making the connection between what your saying and lending to people who can't repay their loans.
If you have the ability to pay a loan in its conception what is stopping you from making the right decisions necessary to change careers and still pay your loan?

You misunderstood my point. I said that when a bank lends money by estimating ability to repay based on prospective income security, they're assuming that you won't get laid off in 5 years. My point was that this is a bad assumption because it is cheaper for companies to hire someone new at a lower wage and layoff an older employee to save money. So, yes, people can change careers but there's no guarantee of what their income will do in the coming 30 years or so that they are paying off a mortgage.

The military industrial complex has been around for as long as central banks. This is not a new thing. War profiteering is only possible when you have a government that can pay for a war. Now where are they getting all this money from? Borrow it? War bonds? The money still have to be paid back with interest. So where does that money come from? Raising taxes? Well now your paying for the war with interest. What does anyone stand to gain in a war monetarily? What incentive would tax payers have to stand behind such an effort?

War bonds are a concrete example. What it comes down to is that when people want to put labor and materials into an enterprise where there is no existing money to invest, they can simply barter for shares of the profits by recording their contribution to the effort. Imagine you are a Roman military commander who invests his legions in conquering some province. Once you bring the enemy to submission, you can take all their land (resources), and take the people as slaves (the proverbial "rape and pillaging"). In contemporary culture, this kind of imperialism is frowned upon so it is done more subtly, by slowly pushing people to the point of accepting loans and working for you to repay them. That way, the only intimidation is by threat of bankruptcy or other consequences of failing to repay debts.

 

[WhoWee]

You misunderstood my point. I said that when a bank lends money by estimating ability to repay based on prospective income security, they're assuming that you won't get laid off in 5 years. My point was that this is a bad assumption because it is cheaper for companies to hire someone new at a lower wage and layoff an older employee to save money. So, yes, people can change careers but there's no guarantee of what their income will do in the coming 30 years or so that they are paying off a mortgage.

One strategy to guard against uncertainty is to arrange payment over a longer period of time than necessary. This provides for the lowest payment possible for times of unemployment, lay offs, or job change. Then, during normal times make additional principal payments to retire the debt early.

http://www.realestatebuysellexchange.com/calcadditionalpay.html

 

[BilPrestonEsq]

It's ironic that I am personally disenchanted with a deficit funded consumption economy, and I personally don't like being in debt nor do I think others should be saddled with it either, since it is basically a form of indentured servitude to creditors. Yet I don't know how much reserves are reasonably needed to ensure withdrawal. I suppose you're right that checking accounts can't be lent out, except maybe in the time it takes to cash them. Lending out savings should require accepting that your deposit could eventually be paid off in collateral, in the event there is widespread default on loans. That way, you could lose your savings but take someone else's collateral (foreclosed house or repossessed vehicle, for example) in lieu of your (lost) money.

Wow, ever try to write something on here and then it logs you out and you lose everything.
Let me try again:

Personally I would rather the bank deals with that part(dealing with defaults) and I'll keep my cash. Even if the requirement is 75% and they loan out 25% it is still inflationary. There is still money being created out of thin air. If there is 10 people all with $100 dollars in there account($1000 in total) and the bank loans someone $250 when that loan is paid back there will be $1250 now in total. This will devalue everyone else's $100 dollar deposit. The bank will make money and the person who receives the $250 will make money and everyone else gets screwed. That's how it is now except on a MUCH bigger scale obviously. And please if I am missing something let me know because my disenchantment has turned to sickness.

You misunderstood my point...it is cheaper for companies to hire someone new at a lower wage and layoff an older employee to save money. So, yes, people can change careers but there's no guarantee of what their income will do in the coming 30 years or so that they are paying off a mortgage.

It could be argued that a lot of companies value that kind of experience. But we are talking about the ability to get loans. Either way the possibility of losing your job is higher in this real world(as opposed to the hypothetical we are talking about) considering lack of credit effects our consumer economy. Just keep spending, buy stuff you don't need and it will all be ok(pats you on the head)

War bonds are a concrete example. What it comes down to is that when people want to put labor and materials into an enterprise where there is no existing money to invest, they can simply barter for shares of the profits by recording their contribution to the effort. Imagine you are a Roman military commander who invests his legions in conquering some province. Once you bring the enemy to submission, you can take all their land (resources), and take the people as slaves (the proverbial "rape and pillaging"). In contemporary culture, this kind of imperialism is frowned upon so it is done more subtly, by slowly pushing people to the point of accepting loans and working for you to repay them. That way, the only intimidation is by threat of bankruptcy or other consequences of failing to repay debts.

You know this really deserves it's own thread because when I wrote what I wrote I was thinking about the ways you could possibly profit off of war(the raping and pillaging part) but I wonder how that affects the 'winner' later down the road.(thats why I didn't include those examples) If you take all of your enemy's resources and kill them all, you would ruin the businesses in your own country supplying those same resources in repayment for the war bonds you purchased.(whether or not those resources where sold and cash was given out instead) Just an example but worthy of a new thread definitely. It seems the that the laws of conservation apply to economics as well.

 

[WhoWee]

You know this really deserves it's own thread because when I wrote what I wrote I was thinking about the ways you could possibly profit off of war(the raping and pillaging part) but I wonder how that affects the 'winner' later down the road.(thats why I didn't include those examples) If you take all of your enemy's resources and kill them all, you would ruin the businesses in your own country supplying those same resources in repayment for the war bonds you purchased.(whether or not those resources where sold and cash was given out instead) Just an example but worthy of a new thread definitely. It seems the that the laws of conservation apply to economics as well.

"Raping and pillaging" aside, it's not unreasonable to (at minimum) want to recover expenses after winning a war. Unfortunately, it never seems to work that way - except for select private contractors (see all of the posts on PF regarding Iraq).

 

[jsgruszynski]

The book value of a company is made clear in the accounts which can usually be inspected and are often published.

Ah. Marxist Economics. Should have known.

 

[WhoWee]

Ah. Marxist Economics. Should have known.

The main problem with the OP is it would remove all incentives.

 

[TheodoreLogan]

If trading in company capital on the open market was banned, there could be no more boom and bust cycles caused by dramatic changes in fickle confidence, while an investor could still sell his shares in a company, but only for their real, book value and not for a fictional market price. If banks were no longer run for profit, there could be no more catastrophies caused by reckless profiteering in the banking community. If interest on loans, which is a major deterrent to enterprise and produces nothing of value, was banned, business would receive a huge boost. Finally, if a common global currency was established, the benefits to international trade would be enormous.

The only barrier to such changes is the popular delusion that trading in money can somehow make more money, when in fact such a trade is a rapacious parasite which feeds on the flesh of the real wealth-creating world of work and, by its nature, resists all efforts to treat or control it.

Trading in company capital does not create boom and bust cycles on their own. The banking system does indeed create a boom and bust cycle by ways of deflationary and inflationary influence from the Fed. Interest would not be so much of a problem if the money lent out by banks was their own. If banks are allowed to loan out money that is held by depositors, then in the face of massive defaults brought on by deflationary pressures, the bank then loses the depositors money, not theirs. This is a problem. Banks must then be bailed out by the taxpayer. This leads to inflation. So basically the money needed to bail out banks "too big to fail" comes from the depositors and the rest of the taxpayers, and leads to the devaluation of currency through inflation brought on by the bailout. The banks always win. The taxpayers always lose. It would seem that taxpaying citizens work for the banks, not the other way around. Also considering that on say a $200,000 fixed rate 30 year mortgage at 5% interest, you end up paying $186,000 in interest alone. This interest wouldn't seem as bad if the money that was loaned to you belonged to the banks and not the depositors. There is very little risk in banking considering if you are a banker you are loaning other people's money, and if you make loans that default and you go bankrupt, the taxpayers will bail you out. So interest does not create anything of value, unless the money you loan out is yours. Then you are supplying a service, through your own capital. If you loan out your money, well, there is risk involved, so making a profit off such a commodity(money) would be very reasonable. When you loan out other people's money that is a different story.
The stock market on the other hand is a risky venture and it is known when investing that you may not get your money back. The stock market is a great thing IMO. The idea that anyone may choose a company or companies that show the most promise to make the most profit in their eyes, and then invest in that company is a great idea! The stock market is not a parasite, I would agree that the banking system is a parasite, because it provide's nothing at all to the taxpayers or it's customers, and is just plain deceptive in 'it's' claims.
The stock market by itself is a great way for businesses to get investment capital. It is also a good way for someone with a knowledge of business to make some money by providing a necessary commodity to growing businesses(money).

 

[WhoWee]

Trading in company capital does not create boom and bust cycles on their own. The banking system does indeed create a boom and bust cycle by ways of deflationary and inflationary influence from the Fed. Interest would not be so much of a problem if the money lent out by banks was their own. If banks are allowed to loan out money that is held by depositors, then in the face of massive defaults brought on by deflationary pressures, the bank then loses the depositors money, not theirs. This is a problem. Banks must then be bailed out by the taxpayer. This leads to inflation. So basically the money needed to bail out banks "too big to fail" comes from the depositors and the rest of the taxpayers, and leads to the devaluation of currency through inflation brought on by the bailout. The banks always win. The taxpayers always lose. It would seem that taxpaying citizens work for the banks, not the other way around. Also considering that on say a $200,000 fixed rate 30 year mortgage at 5% interest, you end up paying $186,000 in interest alone. This interest wouldn't seem as bad if the money that was loaned to you belonged to the banks and not the depositors. There is very little risk in banking considering if you are a banker you are loaning other people's money, and if you make loans that default and you go bankrupt, the taxpayers will bail you out. So interest does not create anything of value, unless the money you loan out is yours. Then you are supplying a service, through your own capital. If you loan out your money, well, there is risk involved, so making a profit off such a commodity(money) would be very reasonable. When you loan out other people's money that is a different story.
The stock market on the other hand is a risky venture and it is known when investing that you may not get your money back. The stock market is a great thing IMO. The idea that anyone may choose a company or companies that show the most promise to make the most profit in their eyes, and then invest in that company is a great idea! The stock market is not a parasite, I would agree that the banking system is a parasite, because it provide's nothing at all to the taxpayers or it's customers, and is just plain deceptive in 'it's' claims.
The stock market by itself is a great way for businesses to get investment capital. It is also a good way for someone with a knowledge of business to make some money by providing a necessary commodity to growing businesses(money).

Investments have risk. Money deposited in a bank are considered safer and protected by the FDIC to a limit. The rule of thumb is the greater the risk - the greater the reward.

There is nothing (other than a lack of sufficient capital) to prevent any person from loaning money directly to a company or another person with the hope of a return. If a person wanted to conduct an ongoing business of loaning money to a variety of people - that might require Government approval and regulation (adds cost).

 

[TheodoreLogan]

Investments have risk. Money deposited in a bank are considered safer and protected by the FDIC to a limit. The rule of thumb is the greater the risk - the greater the reward.

There is nothing (other than a lack of sufficient capital) to prevent any person from loaning money directly to a company or another person with the hope of a return. If a person wanted to conduct an ongoing business of loaning money to a variety of people - that might require Government approval and regulation (adds cost).

Ok... I am not sure whether you are agreeing or disagreeing with me though?

What specifically are you commenting on, or what specifically do you agree/disagree with?

Thanks.

 

[WhoWee]

Ok... I am not sure whether you are agreeing or disagreeing with me though?

What specifically are you commenting on, or what specifically do you agree/disagree with?

Thanks.

The banks serve many purposes. For depositors, it's a safe place to store cash and earn a small amount of interest. Also for clients, a way to write checks or make electronic payments. Also for clients, a way to finance large purchases.

If earning a fee for these services makes the bank a "parasite" - then I disagree. On the other hand, I would describe check cashing businesses as "parasites".

 

[TheodoreLogan]

The banks serve many purposes. For depositors, it's a safe place to store cash and earn a small amount of interest. Also for clients, a way to write checks or make electronic payments. Also for clients, a way to finance large purchases.

If earning a fee for these services makes the bank a "parasite" - then I disagree. On the other hand, I would describe check cashing businesses as "parasites".

Well it's not the fees that make them (banks) a parasite. It is that they are loaning out their depositor's money, with interest, at no risk of their own. That is the problem. If a large bank goes bankrupt because of massive defaults they lose their depositor's money, not their own money. This is obviously a problem seeing as all the accounts that the bank holds will be wiped out. The savings of many people are wiped out. This has a major negative effect on the rest of the economy. If a bank is 'too big to fail' they will be bailed out by the taxpayers.
This bailout will create inflation, devaluing the money in all savings accounts. So in this instance the depositor and the rest of the taxpayers lose money through inflation and taxes. What does the bank lose? Imagine if you could invest in the market and never lose. Imagine if you could invest other people's money in the market, make a profit and never lose your money, even if you lose everyone else's! Sweet deal!

 

[WhoWee]

Well it's not the fees that make them (banks) a parasite. It is that they are loaning out their depositor's money, with interest, at no risk of their own. That is the problem. If a large bank goes bankrupt because of massive defaults they lose their depositor's money, not their own money. This is obviously a problem seeing as all the accounts that the bank holds will be wiped out. The savings of many people are wiped out. This has a major negative effect on the rest of the economy. If a bank is 'too big to fail' they will be bailed out by the taxpayers.
This bailout will create inflation, devaluing the money in all savings accounts. So in this instance the depositor and the rest of the taxpayers lose money through inflation and taxes. What does the bank lose? Imagine if you could invest in the market and never lose. Imagine if you could invest other people's money in the market, make a profit and never lose your money, even if you lose everyone else's! Sweet deal!

Individuals and businesses default on loans quite often - the Government doesn't typically assume the risk without a prior agreement. The bank bailout is not the norm.

 

[TheodoreLogan]

Individuals and businesses default on loans quite often - the Government doesn't typically assume the risk without a prior agreement. The bank bailout is not the norm.

The bank bailout is not the norm

This site seems to prove otherwise.http://www.propublica.org/special/government-bailouts"

Defining what the 'norm' is can be a little tricky. If you say "bailouts don't happen everyday" then I would agree. If you say that "bank bailouts are not the norm", well that leads to a need to define what the 'norm' really is.

the Government doesn't typically assume the risk without a prior agreement

The FDIC was created to assume this risk. The FDIC insures deposits up to $250,000 currently. Before the FDIC, bank runs could cripple a bank and the economy if the bank was large enough. Because of the FDIC you no longer have to worry about losing all your money in bank runs, instead you have to worry about the tax dollars needed to supply this fund since only about 1.15% of the deposits insured by the FDIC are held in a fund created by insurance premiums payed by all member banks. So, the government (taxpayers) does actually assume all the risk on all deposits up to $250,000. Therefore the government/taxpayers do assume the risks taken by the banks themselves.

 

[WhoWee]

The FDIC was created to assume this risk. The FDIC insures deposits up to $250,000 currently. Before the FDIC, bank runs could cripple a bank and the economy if the bank was large enough. Because of the FDIC you no longer have to worry about losing all your money in bank runs, instead you have to worry about the tax dollars needed to supply this fund since only about 1.15% of the deposits insured by the FDIC are held in a fund created by insurance premiums payed by all member banks. So, the government (taxpayers) does actually assume all the risk on all deposits up to $250,000. Therefore the government/taxpayers do assume the risks taken by the banks themselves.

The FDIC insures deposits - collateral typically guarantees loans - behind promises to pay.

 

[WhoWee]

Defining what the 'norm' is can be a little tricky. If you say "bailouts don't happen everyday" then I would agree. If you say that "bank bailouts are not the norm", well that leads to a need to define what the 'norm' really is.

If you look closely at the list, you'll see the Savings and Loan bailout in the 1980's. IMO - it was the precursor of today's banking and derivatives problems. Again IMO as I don't want to rehash - although well intentioned (as they often are) Congress unleashed Wall Street onto small S&L's at great consequence to tax payers. We'll label this IMO also - when the regulators looked at S&L's, they took a peak at pension funds and were scared senseless.

More opinion - the interest rates dropped and the stock market took off - pensions funds were salvaged and the housing bubble swelled. If you want to blame someone for bad banking practices - start with Congress (again IMO). ...nothing like a Friday afternoon rant.

 

[TheodoreLogan]

The FDIC insures deposits - collateral typically guarantees loans - behind promises to pay.

What happens when the collateral loses it's value? Like in the case of the U.S. housing bubble where from 2005-2009 home prices dropped nearly $100,000 dollars. This is one example. Do you support the banking system as is? It seems you are defending the lack of accountability for banks that become insolvent.

edit: I thought I should include this graph http://mysite.verizon.net/vzeqrguz/housingbubble/"

 

[TheodoreLogan]

If you look closely at the list, you'll see the Savings and Loan bailout in the 1980's. IMO - it was the precursor of today's banking and derivatives problems. Again IMO as I don't want to rehash - although well intentioned (as they often are) Congress unleashed Wall Street onto small S&L's at great consequence to tax payers. We'll label this IMO also - when the regulators looked at S&L's, they took a peak at pension funds and were scared senseless.

More opinion - the interest rates dropped and the stock market took off - pensions funds were salvaged and the housing bubble swelled. If you want to blame someone for bad banking practices - start with Congress (again IMO). ...nothing like a Friday afternoon rant.

Of course. Congress gave the power to the banks in the first place. Congress makes it possible for this to continue as well. If Congress makes the laws, and we vote for congress members, than it is really our fault for not paying more attention!

 

[WhoWee]

What happens when the collateral loses it's value? Like in the case of the U.S. housing bubble where from 2005-2009 home prices dropped nearly $100,000 dollars. This is one example. Do you support the banking system as is? It seems you are defending the lack of accountability for banks that become insolvent.

Let's consider some loan dynamics.

Who was the loan originator? Was the loan economically feasible? Was the mortgage bundled and sold?

How much downpayment was required? What percentage?
Next, what was the interest rate and was the it fixed or variable? How many years on the note 10, 20, 30, or other? Was the loan written "interest only" with a re-finance requirement or other hybrid?

Were the payments based upon the borrowers ability to re-pay - what percentage of income? Were income levels verified? What was credit history of borrower? How many payments were made before foreclosure?

Did the depreciation of the asset exceed the original downpayment requirement? Did the depreciation of the asset exceed the combined value of the original downpayment and the actual payments made on the loan?

There are a lot of factors to consider.

 

[TheodoreLogan]

Let's consider some loan dynamics.

Who was the loan originator? Was the loan economically feasible? Was the mortgage bundled and sold?

How much downpayment was required? What percentage?
Next, what was the interest rate and was the it fixed or variable? How many years on the note 10, 20, 30, or other? Was the loan written "interest only" with a re-finance requirement or other hybrid?

Were the payments based upon the borrowers ability to re-pay - what percentage of income? Were income levels verified? What was credit history of borrower? How many payments were made before foreclosure?

Did the depreciation of the asset exceed the original downpayment requirement? Did the depreciation of the asset exceed the combined value of the original downpayment and the actual payments made on the loan?

There are a lot of factors to consider.

Well, that is really besides the point. We already know how much it costs the taxpayers to bailout these companies as provided by the link I posted. So my question "What happens when the collateral loses it's value?" is really more of a rhetorical question since we already know what happens. It is in black and white. It will be interesting to see what happens in the future once the inflation brought on my massive bailout spending is realized. This will cause home prices to rise rather dramatically I would imagine.
They will only rise as much as people are willing to pay for them, I know that. I will have to close my eyes to avoid the carnage! So, do you support the banking system as is? You never really answered that one. You still seem to be a 'defender of current banking principles'. You are losing the battle for the majority though, I must warn you. On second thought... the American people have a terrible memory!

 

[WhoWee]

Well, that is really besides the point. We already know how much it costs the taxpayers to bailout these companies as provided by the link I posted. So my question "What happens when the collateral loses it's value?" is really more of a rhetorical question since we already know what happens. It is in black and white. It will be interesting to see what happens in the future once the inflation brought on my massive bailout spending is realized. This will cause home prices to rise rather dramatically I would imagine.
They will only rise as much as people are willing to pay for them, I know that. I will have to close my eyes to avoid the carnage! So, do you support the banking system as is? You never really answered that one. You still seem to be a 'defender of current banking principles'. You are losing the battle for the majority though, I must warn you. On second thought... the American people have a terrible memory!

No, I went through the process for a reason.

If a house has a value of $100,000 and a loan is written with $0 downpayment, with no credit check-no doc, with a variable interest rate on an interest only loan requiring re-financing in 10 years, the income is not verified (possibly inflated to get a bigger house), and the payments represent 50% of the income - the loan will probably default if anyone of many variables trigger.

The "borrower" will make variable rate interest only payments (they build $0 equity and the loan equals the value of the house) for years 1 - 10. If they are able to make the payments, they will either refinance or the loan might convert to some form of conventional mortgage. We'll assume the borrower that makes 120 payments will not be a problem. They consider the first 10 years to have been (tax deductible) "rent" and they continue to pay for 30 more years.

The problem loan is the one that defaults after 6 months because of a fluctuating interest payment, or loss of part of the income, maybe a new baby, a different car payment, the realization that furniture is needed in a house - who knows?

Now the bank has a problem - but not the borrower - remember there is $0 invested and only a few interest only (tax deductible rent) payments. The bank must go through a costly foreclosure process and recover the property. The bank may also be faced with repairs and a cost to re-market and re-sell. If the property maintains a valuation of $100,000, the bank might breakeven upon resale. However, if the property lost 25% of it's value when the market dropped - the bank absorbs the entire loss.

On the other hand, if the borrower was required to make a 10% to 30% downpayment - on a conventional 30 year fixed mortgage the end result might be different. First, the borrower would have an investment and probably would have made a greater effort to make sure the property was affordable. Second, the downpayment reduces the risk to the bank. If the borrower loses income - a restructuring of the loan might be possible.

Here's the "problem". The downpayment requirement would slow the real estate market and basically eliminate Wall Street and the mortgage brokers from the mix. It would also be declared "not fair" to low income people - force them to buy something they can afford (we'll label that my opinion).

 

[TheodoreLogan]

Here's the "problem". The downpayment requirement would slow the real estate market and basically eliminate Wall Street and the mortgage brokers from the mix. It would also be declared "not fair" to low income people - force them to buy something they can afford (we'll label that my opinion).

I knew what you were getting at. This is the lack of accountability I am referring to.
I don't disagree with your last post. What I originally posted, that you disagreed with, has become confused.

The banks serve many purposes. For depositors, it's a safe place to store cash and earn a small amount of interest. Also for clients, a way to write checks or make electronic payments. Also for clients, a way to finance large purchases. If earning a fee for these services makes the bank a "parasite" - then I disagree. On the other hand, I would describe check cashing businesses as "parasites".

Individuals and businesses default on loans quite often - the Government doesn't typically assume the risk without a prior agreement. The bank bailout is not the norm.

The FDIC insures deposits - collateral typically guarantees loans - behind promises to pay.

Your last post does not support your previous posts here. If what you're saying is that a down payment requirement is necessary to stabilize the housing market and help to stabilize the banking industry, then I would agree, but that is only one part of a much larger problem. What you pointed out as being the problem is only one of the many consequences of a banking system that won't be allowed to fail. Bailouts are also not limited to housing bubbles. So it is not sufficient to say, "Here's the "problem". The downpayment requirement would slow the real estate market and basically eliminate Wall Street and the mortgage brokers from the mix". It is 'a' problem, but not 'the' problem, 'the' problem if fixed would solve this one and many others. But again it is the lack of accountability that makes this possible. That is the problem. That is what makes $0 down loans possible, that is what creates an incentive to make such risky loans, and as many as allowed by law.

 

[Nev]

Further to my earlier comments about capitalism in general, it seems to me we should never allow investors to sell on a whim for profit or from a sense of concern or panic, even if inviting share offers or the state of a company's finances are fraudulently engineered.

We all know how a flourishing company can be driven out of existence by the withdrawal of its working capital amid rumours of impending disaster-which is precisely what happened to many at the time of the Wall Street Crash. Of course stock exchanges, which only survive and make huge fortunes for some, by virtue of the right to sell for profit, would cease to exist in their present form.

All business is based on trust, but if companies and their employees can have no trust in the loyalty and commitment of their investors, their future can never be sure, whether or not their operations remain viable, bearing in mind, in a competitive world every company will always face risks-which its shareholders surely should share with no option to withdraw their investment. In any case, most businesses, once firmly established, go on for years-unless grave ethical issues arise or something dire takes place in the financial services sector due to the current system!

Only by radical change can we hope to obtain greater stability and greater wealth for the future.

 

[WhoWee]

Further to my earlier comments about capitalism in general, it seems to me we should never allow investors to sell on a whim for profit or from a sense of concern or panic, even if inviting share offers or the state of a company's finances are fraudulently engineered.

We all know how a flourishing company can be driven out of existence by the withdrawal of its working capital amid rumours of impending disaster-which is precisely what happened to many at the time of the Wall Street Crash. Of course stock exchanges, which only survive and make huge fortunes for some, by virtue of the right to sell for profit, would cease to exist in their present form.

All business is based on trust, but if companies and their employees can have no trust in the loyalty and commitment of their investors, their future can never be sure, whether or not their operations remain viable, bearing in mind, in a competitive world every company will always face risks-which its shareholders surely should share with no option to withdraw their investment. In any case, most businesses, once firmly established, go on for years-unless grave ethical issues arise or something dire takes place in the financial services sector due to the current system!

Only by radical change can we hope to obtain greater stability and greater wealth for the future.

my bold
You believe "we should never allow investors to sell on a whim for profit or from a sense of concern or panic"? Have you ever made an investment? Are you willing to let someone else decide whether you should take a profit or loss?

Also, your comment that "a flourishing company can be driven out of existence by the withdrawal of its working capital amid rumours of impending disaster-which is precisely what happened to many at the time of the Wall Street Crash" - are you talking about the cancellation of working lines of credit or bridge loans?

 

[Nev]

- are you talking about the cancellation of working lines of credit or bridge loans?

All I was talking about was the panic selling which triggered the Wall St Crash and the Great Depression of the 30's.

The question of credit or loans from banks is another matter altogether.

 

[WhoWee]

- are you talking about the cancellation of working lines of credit or bridge loans?

All I was talking about was the panic selling which triggered the Wall St Crash and the Great Depression of the 30's.

The question of credit or loans from banks is another matter altogether.

How does one investor selling a share of stock to another investor (regardless of price or motivation) reduce working capital?

 

[Nev]

How does one investor selling a share of stock to another investor (regardless of price or motivation) reduce working capital?

The problem with the right to sell is that a spiralling downturn in confidence as with the Wall Street Crash can lead to the point where no one is willing to buy and the whole edifice comes tumbling down.

If no one is allowed to sell their shares there is less risk to a company's working capital, given the fact that a listed company currently has no control over the value of its shares and therefore its access to funding to maintain its operations.

 

[WhoWee]

The problem with the right to sell is that a spiralling downturn in confidence as with the Wall Street Crash can lead to the point where no one is willing to buy and the whole edifice comes tumbling down.

If no one is allowed to sell their shares there is less risk to a company's working capital, given the fact that a listed company currently has no control over the value of its shares and therefore its access to funding to maintain its operations.

Why would anyone ever buy a share - if they needed permission to sell it (or keep it)?

 

[Drakkith]

The problem with the right to sell is that a spiralling downturn in confidence as with the Wall Street Crash can lead to the point where no one is willing to buy and the whole edifice comes tumbling down.

If no one is allowed to sell their shares there is less risk to a company's working capital, given the fact that a listed company currently has no control over the value of its shares and therefore its access to funding to maintain its operations.

Nonsense, a company has a 100% validated way to increase the value of it's shares. BE SUCCESSFUL!

If I buy stock in a company it is exactly the same as getting together with a group of people, pooling our money together, and starting a business. If you aren't willing to risk failure, then don't do it. If you do not want to deal with the ups and downs of the stock market, DON'T use it. You always have that option when you own a company.

Also, the buying and selling of shares does NOT mean that a company has no funding. Profits from the business are the primary source of funding for companies. The owners of the company (The primary shareholders I mean) can use their shares to get more funding to expand or fund other projects by selling them, giving others a larger share of owership of the company in return for cash.

 

[russ_watters]

If no one is allowed to sell their shares there is less risk to a company's working capital, given the fact that a listed company currently has no control over the value of its shares and therefore its access to funding to maintain its operations.

Also:

You do understand that once the company sells the shares, they no longer have any impact on the company's working capital, right? All that panic buying and selling by investors changes nothing about a company's cash holdings. Outstanding shares do not provide a company with capital!

 

[Drakkith]

Also:

You do understand that once the company sells the shares, they no longer have any impact on the company's working capital, right? All that panic buying and selling by investors changes nothing about a company's cash holdings. Outstanding shares do not provide a company with capital!

Just so I am clear with what you mean, the company itself as a whole isn't gaining any money because of buying and selling shares, it is only the individuals who own the shares that make or lose money correct?

 

[WhoWee]

Just so I am clear with what you mean, the company itself as a whole isn't gaining any money because of buying and selling shares, it is only the individuals who own the shares that make or lose money correct?

When the shares are first issued by the Company - the funds are retained by the Company. All trades between investors after that (based on the value - usually determined by company performance) are separate from the company.

Another way to look at it - an artist sells a painting and keeps the proceeds. The collector/buyer takes possession and ultimately sells it to another collector. The money exchanged between the 2 collectors is not shared by the artist - but the collective work of the artist impacts the value of the piece. The difference is the artist doesn't pay dividends to the collector(investor) as the Company might.

 

[Drakkith]

I see, thanks WhoWee!

 

[WhoWee]

If trading in company capital on the open market was banned, there could be no more boom and bust cycles caused by dramatic changes in fickle confidence, while an investor could still sell his shares in a company, but only for their real, book value and not for a fictional market price. If banks were no longer run for profit, there could be no more catastrophies caused by reckless profiteering in the banking community. If interest on loans, which is a major deterrent to enterprise and produces nothing of value, was banned, business would receive a huge boost. Finally, if a common global currency was established, the benefits to international trade would be enormous.

The only barrier to such changes is the popular delusion that trading in money can somehow make more money, when in fact such a trade is a rapacious parasite which feeds on the flesh of the real wealth-creating world of work and, by its nature, resists all efforts to treat or control it.

To get us back on topic - the result of your actions would be to eliminate incentives to invest - IMO. Why would an investor take a risk?

 

[Nev]

To get us back on topic - the result of your actions would be to eliminate incentives to invest - IMO. Why would an investor take a risk?

A share in potential profits, by way of dividends, should be sufficient incentive to invest in a company or new venture, as it already is for many shrewd investors, whether or not their investment succeeds.

 

[WhoWee]

A share in potential profits, by way of dividends, should be sufficient incentive to invest in a company or new venture, as it already is for many shrewd investors, whether or not their investment succeeds.

That would eliminate start ups - wouldn't it?

 

[daveb]

Since I work for a startup, I would say it doesn't eliminate them, but it would surely reduce the number of them. For example, startups that are R&D based (such as the one I work for) would probably still be around, since the potential payoffs for the investors would be larger for successful R&D (due to lack of or negligible initial competition). The ones that might not start at all would be those trying to capitalize on a growing or established market (since effective competition makes success more difficult).

 

[WhoWee]

Since I work for a startup, I would say it doesn't eliminate them, but it would surely reduce the number of them. For example, startups that are R&D based (such as the one I work for) would probably still be around, since the potential payoffs for the investors would be larger for successful R&D (due to lack of or negligible initial competition). The ones that might not start at all would be those trying to capitalize on a growing or established market (since effective competition makes success more difficult).

I should have clarified my point - that start up and growth companies often need to re-invest profits - not pay dividends - and attract investors because of share appreciation.

 

[daveb]

Well, since we don't have a device ready for commercial distribution, I can't speak about profits, and where they'll go, but you're right in that regard.