The Achilles heel of the economy

  • Thread starter Nev
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  • #126
Nev
EVERYONE that I know that has credit problems got themselves into it.
I accept that imprudent borrowing by nation states and individuals is clearly a major part of the picture, but I suggest as long as banks are managed for profit the temptation to lend to the point where serious defaults are likely, will continue well into the future, especially as banks are currently immune from failure.
 
  • #127
Drakkith
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I accept that imprudent borrowing by nation states and individuals is clearly a major part of the picture, but I suggest as long as banks are managed for profit the temptation to lend to the point where serious defaults are likely, will continue well into the future, especially as banks are currently immune from failure.
It is against a banks best interest for anyone to default on a loan. They no longer receive income from the interest and in many cases they only get a partial return on whatever property they can legally take in lieu of payment. And that's assuming there's actually something for the bank to take, which isn't always the case. Sometimes they simply have to bite the bullet.
 
  • #128
Ryan_m_b
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EVERYONE that I know that has credit problems got themselves into it. You can try to shift the blame all you want, but people have almost full control over their own finances, not banks.
It is against a banks best interest for anyone to default on a loan. They no longer receive income from the interest and in many cases they only get a partial return on whatever property they can legally take in lieu of payment. And that's assuming there's actually something for the bank to take, which isn't always the case. Sometimes they simply have to bite the bullet.
I do agree with you Drakkith but I have to add another dimension to this discussion. Lots of people (in the UK at least) in the recent past were duped by banks offering credit cards and loans by the bucket load. Whilst it is those peoples' fault that they borrowed more than they could afford the problem was that banks unwisely marketed and offered money to people who had no way of paying it back, people who were demonstrably unintelligent with money. This was a failure of both unwise consumers and unwise business practice.

Since the global crash it's been a hot political topic. Since 2008 there have been a string of short-term money lenders pop up that deliberately target people with bad credit and low incomes with adverts like "if the bill is due on Tuesday and pay day is Friday, why not just take a quick and simple loan?" which get people who consistently don't have enough money into huge amounts of debt until they are eventually bankrupt and have their things repossessed.

In a perfect market situation all consumers would be rational, intelligent actors and all banks would engage in purely profitable and sensible trading. However in reality people are flawed, consumers will make unwise decisions regarding money and banks will aim to exploit.
 
  • #129
Drakkith
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You don't have to tell me about short-term money lenders, they are EVERYWHERE near the base here. I understand what you're saying, there will always be people that do exploit others, but I don't believe that most banks do. Of course your definition of the word *exploit* may vary.
 
  • #130
I accept that imprudent borrowing by nation states and individuals is clearly a major part of the picture, but I suggest as long as banks are managed for profit the temptation to lend to the point where serious defaults are likely, will continue well into the future, especially as banks are currently immune from failure.
There are two points to keep in mind here. The first is the money supply constrains the amount which can be lent. Politicians want cheap money (A.K.A low interest rates) often to postpone economic downturns, banks want cheap money because the more money available to them the more they can lend . Both banks and politicians influence the central bank which controls the money supply.

The rate at which the current money supply grows is the difference between the rate new debt is created and the rate old debt is paid off. Defaults and devaluations also influence the money supply but in a multiplicate way.

The moral hazord isn’t just the profit motive of banks. It includes the following:
-The desire of government to have cheap money.
-It is also the desire of politicians to make money cheap for the large corporations (big car companies for instance) that donate to their political campaigns.
-The desire of people who work for those companies (like auto unions) to stay employed.
-The desire of people with good credit to make money off asset price increases (AKA inflation) well people who are poor and people who save lose out.
-The desire for an electorate to postpone the inevitable pain of a market correction as long as possible.
-The desire for instant gratification (consume today and pay later)

In short, government can’t solve the moral hazord of banking because government is part of the moral hazord of banking and so are the people. Well, we should look for better banking rules we also perhaps should as individuals and business look for ways to hedge against changes to the money supply. That is reduce your exposure to money. I will though need to give some thought on the best way to do this. Maybe a combination of being long on gold futures and owning put options on stocks but I haven’t given it enough thought.
 
  • #131
Nev
Please clarify with specifics.
By "a free service to the community", I don't necessarily rule out some measure of interest on loans to fund wages and salaries etc, but that banks' operations should no longer be run for profit, with strict limits on how much capital can be employed to provide mortgages etc and loans and long-term investments to business to boost the economy. Any surplus revenue could then go to the government, rather than into the pockets of shareholders or greedy, self-serving staff by way of massive bonuses. We have already seen how gambling for a quick profit in company capital led to the dreadful Wall Street Crash and the Great Depression of the 30's, as well as the recent credit squeeze which resulted from the debacle caused by excessive lending by banks for profit, which could not be sustained, in the sub-prime mortgage market.

I see no reason why banks should not be run as a reliable, dependable service to the community with no profit motive involved, their operatives accountable to the state and hence the taxpayer, with strict rules to prevent high risk initiatives, which can so easily lead to disaster for the wider economy, as millions of jobs are lost and all that such a scenario means to the quality of life of all who are affected.

I appreciate such a radical change to the system would require worldwide consensus, but I am convinced the benefits to trade and industry and everyone's quality of life would be substantial and ongoing.
 
  • #132
By "a free service to the community", I don't necessarily rule out some measure of interest on loans to fund wages and salaries etc, but that banks' operations should no longer be run for profit, with strict limits on how much capital can be employed to provide mortgages etc and loans and long-term investments to business to boost the economy. Any surplus revenue could then go to the government, rather than into the pockets of shareholders or greedy, self-serving staff by way of massive bonuses. We have already seen how gambling for a quick profit in company capital led to the dreadful Wall Street Crash and the Great Depression of the 30's, as well as the recent credit squeeze which resulted from the debacle caused by excessive lending by banks for profit, which could not be sustained, in the sub-prime mortgage market.

I see no reason why banks should not be run as a reliable, dependable service to the community with no profit motive involved, their operatives accountable to the state and hence the taxpayer, with strict rules to prevent high risk initiatives, which can so easily lead to disaster for the wider economy, as millions of jobs are lost and all that such a scenario means to the quality of life of all who are affected.

I appreciate such a radical change to the system would require worldwide consensus, but I am convinced the benefits to trade and industry and everyone's quality of life would be substantial and ongoing.
Well, it is an admirable to want a better banking system worldwide may I suggest doing as Gaundi said and” be the change you want to see”. Now to some degree this is difficult. Carrying a debit card around is easier the carrying cash. Carrying cash around is easier than carrying gold. We often need a checking account for our job and most things today require a credit card. However, there are not for profit banks they are called credit unions. As a depositor in a credit union you are an investor in it and have a say in the organization in proportion to what you invest.

“In the credit union context, "not-for-profit" should not be confused with "non-profit" charities or similar organizations.[20] Credit unions are "not-for-profit" because they operate to serve their members rather than to maximize profits.[21][22][23] But unlike non-profit organizations, credit unions do not rely on donations, and are financial institutions that must turn what is, in economic terms, a small profit (i.e. "surplus") to be able to continue to serve their members.[24][25] According to WOCCU, a credit union's revenues (from loans and investments) need to exceed its operating expenses and dividends (interest paid on deposits) in order to maintain capital and solvency[26] and "credit unions use excess earnings to offer members more affordable loans, a higher return on savings, lower fees or new products and services".[citation needed]”

http://en.wikipedia.org/wiki/Credit_union


Now if you don’t like the business practices of a particular credit Union consider organizing a new one.
 
  • #133
149
0
By "a free service to the community", I don't necessarily rule out some measure of interest on loans to fund wages and salaries etc, but that banks' operations should no longer be run for profit, with strict limits on how much capital can be employed to provide mortgages etc and loans and long-term investments to business to boost the economy. Any surplus revenue could then go to the government, rather than into the pockets of shareholders or greedy, self-serving staff by way of massive bonuses. We have already seen how gambling for a quick profit in company capital led to the dreadful Wall Street Crash and the Great Depression of the 30's, as well as the recent credit squeeze which resulted from the debacle caused by excessive lending by banks for profit, which could not be sustained, in the sub-prime mortgage market.

I see no reason why banks should not be run as a reliable, dependable service to the community with no profit motive involved, their operatives accountable to the state and hence the taxpayer, with strict rules to prevent high risk initiatives, which can so easily lead to disaster for the wider economy, as millions of jobs are lost and all that such a scenario means to the quality of life of all who are affected.

I appreciate such a radical change to the system would require worldwide consensus, but I am convinced the benefits to trade and industry and everyone's quality of life would be substantial and ongoing.
How would business expansion be funded?
 
  • #134
JonDE
Well, it is an admirable to want a better banking system worldwide may I suggest doing as Gaundi said and” be the change you want to see”. Now to some degree this is difficult. Carrying a debit card around is easier the carrying cash. Carrying cash around is easier than carrying gold. We often need a checking account for our job and most things today require a credit card. However, there are not for profit banks they are called credit unions. As a depositor in a credit union you are an investor in it and have a say in the organization in proportion to what you invest.

“In the credit union context, "not-for-profit" should not be confused with "non-profit" charities or similar organizations.[20] Credit unions are "not-for-profit" because they operate to serve their members rather than to maximize profits.[21][22][23] But unlike non-profit organizations, credit unions do not rely on donations, and are financial institutions that must turn what is, in economic terms, a small profit (i.e. "surplus") to be able to continue to serve their members.[24][25] According to WOCCU, a credit union's revenues (from loans and investments) need to exceed its operating expenses and dividends (interest paid on deposits) in order to maintain capital and solvency[26] and "credit unions use excess earnings to offer members more affordable loans, a higher return on savings, lower fees or new products and services".[citation needed]”

http://en.wikipedia.org/wiki/Credit_union


Now if you don’t like the business practices of a particular credit Union consider organizing a new one.
^ This

Credit Unions. I love them.
I don't want the banks to be run by the government, as the OP has been suggesting. Credit Unions are perfectly fine with me. Personally I believe that if every person and every company switched to using credit unions, the economy would be much better off in the long run. They aren't perfect, I know this. It will also not solve the boom and bust cycle of the economy, but it would be a start.
 

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