economicmultipliers_48

Economic Multipliers (48)  
 
Do you know what these are?
They help CREATE wealth in systems.
Knowing what to fight for and why is a HUGE economic multiplier for the citizens of any country.
 
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I recently listened to a Presidential hopeful say that the United States needed to get rid of the Federal Reserve.

When someone says something like this, I many times think:  ‘They probably think that if every child in the United States studied hard in school, all of them would have the intellect, the steady hand and the coordination required to become a brain surgeon … and the only thing keeping all those kids from doing that is money.'

Neither statement makes any sense so I will hope that if that Presidential hopeful gets elected, they also get educated.

Now, believing we need a central banking system is not the same as saying I believe everything is working correctly.

But before I mention any of my own perceived ‘problems’ (the things I think people (and Presidential candidates) need to pay attention to and fight for), I’ll mention some ‘educational points’ (for the banking system in the United States):
  • Banks are in business to make money.  That’s what businesses aspire to do.
  • No one will ever force you to deposit your money in a bank (except perhaps the Social Security Administration or another organization that GIVES you money if everything goes electronic).  If you do deposit money, the bank will tell you what interest rate they are currently paying because you are lending them money while they are providing you with a service:  They keep your money in a ‘safe’ place while allowing you to have access to it through debit cards, checks, etc.
  • No one will ever force you to take out a business, personal, home or car loan:  Banks offer loans as part of their ‘services.’  (If someone ever does try to ‘force’ you to take out a loan, you’ve probably got a legal problem.)
  • When people take out loans, lenders normally charge interest and like to be paid back.  Lenders make their money on the interest they charge.  Lenders preserve their OWN capital when they make sure they get the money back that was borrowed.
  • Most communities have multiple banks.  Since banks have fees for various services, you should find out what those fees are and treat them like any other expense:  Do you want to ‘purchase’ the service for that fee?
Those are consumer banking basics.

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A lot of individuals in the United States have lost their homes over the last few years due to the loss of jobs and/or the loss of property value.  But that was not the biggest problem.

Intelligent people who should have known better purposely ‘rigged’ the system:  A lot of loans were made that shouldn’t have been made. A lot of money was made while making those loans that shouldn’t have been made.  Know that if someone set you up with an unaffordable loan (one that you could not afford based upon income which you never lost … i.e. you never lost your job), they actually wanted to steal from you (and the ‘system’).

The loans were made WITH THE EXPECTATION that the federal government would bail out the financial institutions … and the federal government did.  They did it for the Savings and Loan fiasco of the 1980’s, they did it for Long Term Capital Management and then they did it again.

A central banking system like the Federal Reserve System helps stabilize things even when the ‘most intelligent’ of people are behaving ‘stupidly’ or ‘greedily.'

Now, I myself don’t like imposing ‘limits’ on anything because I believe if people create great value, they should be compensated appropriately … but our ‘system’ is ‘out-of-control’ and taxpayers can’t keep paying for ‘stupidity.'

During the Great Depression (before bank deposits were insured), a few ‘wealthier than their neighbors’ bankers tried to shore up their neighbor's finances by injecting more of their own money and capital into their banks to help ‘guarantee’ deposits and loans.  They didn’t expect the ‘downturn’ to last long and when it did, that ‘capital’ was lost.

Of course the bankers recognized that they could not get wealthier if they were losing capital … so they did what any ‘reasonable’ person would do … they set up laws to make it harder for anyone in ‘their system’ to lose money.

You have to have money to be at risk of losing it so ‘this protection’ was set up at the expense of everyone who pays taxes … and particularly at the expense of people who are ‘getting by’ but can’t seem to ‘save’ any money … and THIS is where the problem lies.

If the banking industry today (or any other industry) believes that they deserve bailouts from the federal government so that they are NEVER at risk (by nature businesses are ‘risky’), I believe we need to start treating them differently.

For instance, when the banks were bailed out, many deposits that carried higher rates of interest in ‘investment vehicles’ that were NOT INSURED by the federal government were treated like federally insured deposits and the depositors were made ‘whole’ … including interest.  People who have these kinds of ‘deposits’ normally have ‘extra money.’  They are ONLY supposed to get the HIGHER interest rate because they invested in something that has a higher risk:  They could lose some or all of their money if something goes wrong:  They didn’t.  Even if (economically) it wouldn’t have been practical for them to lose ALL their money (I do believe this), they should have lost the interest and a small portion of their core investment … and this is why …

If a person who loses their job ‘taps into’ their Individual Retirement Account (IRA) so they can pay their mortgage or other bills, they can be penalized tax-wise and no bank or financial institution sends them a letter and tells them any payments they must make will be reduced because they lost their job.  Their mortgage and bills carry risk but they have no ‘extra protection.'

It’s no wonder that people are mad.

If banks and other financial institutions want to operate ‘RISK-FREE,’ they should have ‘limits:'
  • For instance, it might make sense to pass a law saying that salaries for personnel, contractors and board members at pseudo-private financial institutions that are federally guaranteed should be no more than double the compensation of the Chair of the Federal Reserve Board (including benefits).  Lots of people would say that you wouldn’t be able to find qualified people.  I think it’s much more likely that you’d be able to find qualified people who are ‘responsible’ people.
  • It might make sense to pass a law making board members of any financial institution that needs to be bailed out (where it can be proven that the bailout was a result of ‘negligence’ by the board members (different than a need because of an economic downturn or a closing of a major employer)) responsible for up to 25 percent of the institution’s losses.  This sounds like a high number but it would be designed to help prevent institutions from getting into ‘BIG’ trouble.
  • As a nation, we might want to consider ‘disconnecting’ banking from financial services (at one point in time, they were much more separate).
  • We might want to require that financial ‘derivatives’ be made simpler (if 1000 high school graduates who graduated at the top of their class couldn’t figure a derivative out, we’d assume it shouldn’t be sold) and limit the number of times any ‘derivative’ can be sold as part of a ‘bundle’ – perhaps they shouldn’t even be ‘bundled.'  If you buy one apple, you know that you’ve got an apple and you can eat it before it goes bad.  If you buy a bushel basket full of apples, you need to be much more careful about what you buy, how long the apples have been in the basket and whether they’ll be edible (or financially valuable).
  • I don’t think it would be asking too much to require that board members only be allowed to serve on one corporate board in any particular industry at any given time (and ‘group’ any business that might expect a bailout from the federal government (based on historical data) to be in a particular industry).
  • We might require banks (and other lending institutions) to give borrowers a sheet of paper that states how much they must pay every single month (listed month by month) along with a separate sheet of paper that states the exact process the lending institution will go through if payments are not made.  We could require that the latter also be posted online if the bank offers online banking.
  • If an industry or a business asks for a federal bailout, we might want to say upfront immediately that salary caps will go in place and if the industry or business wants to pay ‘bonuses,’ those bonuses can ONLY be paid if the federal government gets paid back and the business is viable for three years after that.  Appreciate that even if the federal government gets paid back, a lot of time and cost go into a bailout and that time and cost rarely is recovered.
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I’m sure you’ve figured out where I think SOME of the problems lie.

The Savings and Loan bailout taught Americans that people are rewarded for bad behavior … and guess what we now have? … a LOT more bad behavior.

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P.S.  I don’t watch much television but I’ve caught some ads recently on reverse mortgages.  If the Federal Reserve wanted to do something REALLY useful, they would put up a spreadsheet allowing people to evaluate the terms of any reverse mortgage.

If a person does not know how to amortize (calculate the payments for) a standard loan, they are NOT in a position to evaluate a spreadsheet that any financial institution would give them for a reverse mortgage.  They need somewhere to go for independent help and guidance.

A couple equity tips:
  • Don’t tap into the equity in your home (a reverse mortgage) for vacations, toys or entertainment (unless you’ve got other money elsewhere that’s making more money).
  • Expect any equity that you do tap into to be gone MUCH FASTER than you were expecting (just remember how fast kids grow up) and never expect to die soon (even if you think you are ‘really old’).