Care of Other People's Money
There is an excellent piece by Skewz today entitled Charles Schwab Gets It Right With His Simple Insights. ![[shady bank interest]](/files/businessman-interest1239478755.gif)
I recommend the piece to everyone, but I want to focus on his take-home message here, which is Schwab's point that banks need to focus on the fact that they are playing with “other people's money.”
When I was in junior high, I took a class called General Business. In it, we learned things like how to manage a checkbook and that kind of thing. They taught us that banks paid accounts interest as a way of saying “thank you” for the use of your money to do their business.
Some years later, there was a sort of shift in how banking worked. I'm not sure if it was when ATM machines were introduced (which was the more publicly visible thing) or if it was when NOW accounts came about (which though more low-key may have heralded a new era in competitive products), but at some point in there interest stopped being an automatic thing, or in many cases it continued to be given but it was dwarfed by an interest charge.
A side word about that since it's tax season. I can't say how it galls me that I have to do a 1099 for bank “income” when the bank both paid me $2.00 in interest and charged me $240 in fees. I don't get to deduct this as a loss. I instead have to meticulously keep records of this silliness, pay a tax preparer to waste time filling in fields, etc. A business can probably deduct such fees, as a cost of doing business, but not an individual, as a cost of being alive. No wonder people hate the tax code.
Why They Should Pay You
Long ago, a friend of mine wanted me to come work for his company. His advice was offered approximately this way: “You should come work for us. And you should get them to pay you a lot of money.” That second part was nice of him to suggest, and I assumed he was just caring about my welfare. Money is nice to have. But he had a stronger point to make. “Companies will believe you in proportion to what they pay you,” he explained. They might forget why they hired you, but they won't forget they are paying you a lot. And this will cause them later when you say something critical to say “I don't know why he's saying that, but we pay him a lot to say it, so we should believe it.”
As long as we're making side notes about things, it's worth noting that there is probably a lesson for us here in how to think about whether executive salaries are too high. That is, it might be the case that if we pay people infinitely much, that we reflexively believe them infinitely much just because otherwise why would we be paying them that much. This alone might be a reason to pay them less.
But, returning to our original topic, when the market changed to eliminate interest payments (by which I mean to include papering over them with fees), the loss of that simple “thank you,” perhaps meant the banks forgot they had a reason to care. It might seem only a few pennies to many of us, but in the aggregate it was certainly a large amount of money to the bank, and while it was there, it probably helped to remind the bank of our existence as people to whom a duty was owed. With that out of the way, their minds were free to forget us; hence the significance of my friend's advice—make sure they pay you a lot, since they may forget why they're paying you, but they won't forget that they are.
If we were looking for a way to regulate banks, I might start all the way back at the beginning and ask: Why should anyone be allowed to operate a bank as a profit-making enterprise? It might be there are good reasons, but then the question would be: Can there be proportional limits on the profit to be made, with requirements that bank customers see the fruits of the profits and not just “stockholders.” The problem to be solved is the ethical bind that comes when money comes into the bank from two different sources, the stockholders and the depositors, goes out to an investment, and then returns with profit.
Banking Cannot be Left to the Free Market
Lack of regulation does not always keep things free. Or, if you prefer, not all things that are free are fair, and when we speak of a “free market” we usually mean to imply some reasonable degree of fairness. The banking market, left to its own devices, does not not result in a fair, free market. We have seen that. We need to fix that.
We can, of course, fall back to the traditional free-market capitalist claim that any contract voluntarily entered into is, by definition, a fair one. We can say that whatever was promised the depositors is all that is due them, and that they signed up voluntarily, so they have to take what they get. That's a false claim, but a possible one. I'll explain.
It's false because there are a great many things right now that can only be done via a bank. Cash is getting harder and harder to use in the modern world; some places cannot take it. It's hard to receive and cash a check without a bank account. It's hard to buy many essential things without a credit card, and since many cannot qualify for a credit card, an ATM debit card is required as a substitute. Hence, signing up for a bank account is not voluntary in society, it's a practical necessity.
It's also false because it is simply not true that there are a variety of banks with a wide variety of options available. ![[Big fish eating little fish]](/files/fish21237162312.gif)
There are an ever-decreasing number of serious choices in banks, most of the small banks being eaten up by larger banks. And although the options vary, giving the contrived sense of a thriving market, they don't vary in all ways. There are a bunch of silly little variations between accounts designed to give the illusion of choice, but they don't vary in substantive ways. One way in which they do not vary is by saying that they're going to make their depositors rich if they get rich.
You might also argue that stockholders are not taking the risk, all US citizens are. This, I think, has been thoroughly debunked under the now-famous catch-phrase “Private Profits and Socialized Risk.” It has been shown that that the government, not the banks, took that risk. So I do not see any reason for private individuals to have profited in the past, nor to profit in the future. When the matter of public/socialized risk is disposed of, we can talk again. But this matter seems settled for me. A condition of FDIC insurance should be that profits by stockholders be bounded in very strong ways (or else FDIC insurance should be totally revised, which isn't a terrible idea either).
Let the Debate Begin
I should disclose that I haven't studied the matter heavily, other than the ordinary amount any thoughtful citizen would in having to live through times like these. But I think this is a matter worthy of a great deal more public debate than it has ever had, and that ordinary citizens ought not be excluded from the debate. If there are arguments to make, they need to be made to us; we need not to be told we're not qualified to involve ourselves in matters like these that affect us so much.
My position going into any such public debate is that banks, the ones used by the ordinary citizenry anyway, should only ever be allowed to be operated as non-profits. I'm willing to change my mind if offered good reason. But that's my opening bid in the debate.
If you got value from this post, please "rate" it.
Text and artwork, including
“Bank Interest” composed artwork and
“Big fish eating little fish” original artwork
Copyright © 2009 by Kent Pitman.
Public domain images,
from which “Bank Interest” artwork was composed,
were obtained from freeclipartnow.com.
TIP:
Enter the amount, and click "Tip" to submit!
RomanticPoetess
Sandra Stephens
old new lefty
marytkelly
oaxacangringa
CoyoteOldStyle
Salon.com
Comments
Regulation cannot be a dirty word any longer. And none of us can afford to not consider what you've brought up here.
What I am is a bit disturbed by 40% of the people owning over 95% of the wealth and 60% owning less than 5% as stated in the last census. Which I'm guessing widened under Bush.
So, if this chasm is seen as fair and called capitalism, then I just might be a socialist or humanist.
It might seem a tad off topic, but when you use the word socialism it immediately puts Americans on the defensive and we stop considering any proposal labeled as such.
Oops. Is that off topic? Sorry. I'm just no longer convinced that free enterprise/capitalism is the panacea we've been taught it is, despite more than doubling my money on some BofA stock in the past month.
1. I do not understand how you are paying $240 a year in banks fees. I've probably only paid $15 in fees in my entire life. When I think about all the online services that my bank provides to me so I save time and don't have to deal with the post office, etc, it simply doesn't hit my radar that that they are a problem. The power I have over my own money without paying fees at all would be mind-blowing to anyone from years ago in a supposed golden age of banking.
2. As I read many of your posts, you seem to be suspicious of profits in general. Let me frame it to you this way. From your bio and other comments, it appears you have been an IT consultant at times. Now, if it cost you more to provide your services than you get back from your customers, how long are you going to keep doing it. The answer is simple... not long. The fundamental truth of an economy is that people provide services only when they will have a net gain that they can then use to buy services from other people. Trade is always about giving up something that you value less than what you get in return. That is why voluntary trades benefit both parties. Each wanted what the other has more than what they have. Banks are no different.
Now, I suspect that someone may argue that banks are not providing a service. But, just like Ebay provides a service by matching sellers with buyers (and takes a cut), banks provide the same service to lenders (savers) and borrowers, and takes a cut. Especially by pooling the money so that I can withdraw my share of money that I lent (saved) whether the borrower has finished paying it back or not.
Now, as I think you and I have discussed before, I am willing to concede that regulations on the size of banks can have a beneficial effect by limiting the centralization of power in a small number of hands. Why? Because centralization magnifies the risk that a bad decision by a bank will reverberate and hurt both the lenders (savers) and borrowers. I also think it us stupid for the government to use taxpayers as the forced insurance agent for these risks.
1. I used round numbers for the article, and probably should have rounded down instead of up. But I do pay $15/month for one checking account and about $5 for another, in both cases because I do not meet the minimum balance. But I need these particular accounts, so I keep them. I was paying $10 for a checking with a linked savings account that cost me another $10, and I closed both of those as excessive. I don't wish to expose any further personal data about myself to justify why I pay the amounts I do. Probably it has to do with whether you maintain minimum balances that I generally don't have the luxury of maintaining. Either way, it's not related to my point.
I will note that it's hard for people to write stories about what they put up with because it inevitably leads to others “helpfully” chiming in about why it was completely unnecessary to have that hardship. To be completely honest, your comment even in its relatively mildly critical form made me wish I had not written this entire post. Not because I couldn't answer, but because I don't want to supply the necessary personal information to answer in adequate detail. And so I'm left with a feeble answer.
I generally counsel people not to reveal personal data about themselves on the web at all. I find it hard to write about political matters without saying at least a few things that are personal, but I prefer not to have to defend my choices. The whole point is that I'm not in the best position. I don't want to have to defend whether I have a right to be in that position, which is sort of what your remarks here made me feel like. It's no wonder so little is written about the hardships people endure.
I'm glad for you you're not paying high fees, please be understanding of the fact that I am.
2. I have not said I'm suspicious of profit-making, though I know it's a convenient debate strawman to claim that that is the objection. I am in favor of a fair market, and happy for people who make money legitimately. In cases of low price elasticity of demand (if I'm applying that term correctly—it's not my area of expertise so I use the terminology probably clumsily), the market doesn't operate in a way that is fair to the consumer. Those market areas need to bear special scrutiny, including profit, since it's very easy to create critical services where they simply cost what someone wants to charge and people just have to pay. Banking (my example) and health care (RIF's example) are the kind of thing I mean.
In those particular contexts, I am indeed suspicious that people who are powerless are being taken by people who are powerful. Saying I'm anti-profit isn't true and distracts from an honest point here. The people who wrote anti-trust law didn't do it because they were anti-profit, they did it because they knew the possibility of abusing power was possible. I think there's been antitrust legislation that could have been usefully enforced against banks, and that there's more regulation that probably should be written, but not because I mind seeing people be millionaires. I just want them to do it in those markets capable of being fair. I don't even care if there are non-consumer banks that have whatever rules they like; but I don't think it's fair to say that the presence of an FDIC protection on banks has no effect on either who will put their money there or on how the bank evaluates risk.
Fortunately, I can close on a point of agreement between what you said and what I think:
I think breaking up the big banks would do a world of good. I made this point in my article Rethinking Mega-Corporations (which you were already involved in commenting on).
I'll have to post at greater length tomorrow. I'm struggling with Mexico and India's negative experiences with nationalized banking systems. There must be a compromise approach. I am going some research tonight and will collect my thoughts.
I'm not sure I agree there has been any fundamental change in the way banking works. At times, banks tend to reduce fees or give interest rate incentives to keep money on short term deposit, and at other times, market conditions favor increasing fees and reducing incentives. This is not unlike what one sees in real estate, where sometimes market conditions favor sellers (a "seller's market") and at other times conditions favor buyers (a "buyer's market").
For most people, there are always alternatives available. For example, in addition to banks, there are credit unions, which are oftentimes operated more as cooperatives than as pure profit-making businesses.
I suggest closing any account that doesn't make sense for you. Although banks may choose to pick up customers through consolidation instead of marketing to individuals, severing your relationship with any business is oftentimes the best way to get that business's attention.
The FDIC charges money for their insurance, but what we have basically learned is that they don't know how to price that insurance. And so the right way to price it at that point is to tell the banks that if they want to claim that we're the backstop, they have to limit the amount of profits they take away because those profits are what we now realize should have been payments to the FDIC to cover this debacle. And until someone shows a proper way to price FDIC payments by banks, the problem is that any money a bank pays out as “profit” might not be. It might be borrowing/stealing money against a future collapse.
So I'm advocating basically saying no, you can't do that. Not while you have the full faith and credit of the United States government guaranteeing your business. That's too powerful/valuable a tool to then turn around and claim people like you because you did some cool .5% market adjustment on your rates (which, incidentally, was also a product of the government because the government, not you, was probably adjusting some other rate in order to allow you to win in that way over other products that, again, did not have that option). See my Name your own Credit Card Rate!
On the bigger point of non-profits having some superiority over for-profits in terms of meeting the needs of customers, I think Rich's answer is similar to what I would have said. Someone has to pay for the services, nothing is truly free. While Rich did not say this, I will bring up the "extreme" (not saying you advocate this). Taxing other citizens so that some citizens can have free checking accounts just seems ridiculous. That is getting way beyond the idea that society should provide a welfare safety net for the poor. So, it is certainly reasonable for there to be voluntary non-profit establishments like credit unions, etc. History has shown though that for-profits tend to attract the most customers.
The irony of the abuse argument in our current circumstances is that the abuse that is hurting the nation is that banks loaned *too much* money to people who could not pay it back. So, far from customers being abused by being denied service, they were *abused* by receiving too much. And, the government encouraged them to do so... and continues to do so by loaning the banks even more money.
My short answer: The FDIC does insure my deposits (only up to a point) with the banks paying insurance premiums, not the tax payers. FDIC does not insure the bank's stockholders.
The bank bailouts are an entirely new phenomenon and, simply put, they are wrong. Unfortunately, Obama has supported every bailout there was from before he was President (he voted for TARP) right on through to now. He should be opposed.
You should stop criticizing the banks and start criticizing Obama and Geithner.
Not that I'm advocating it or had ever even thought of it but since you raised it, if the government did tax everyone to make sure everyone had free checking, I might argue that that was (a) in the noise compared to some other things government pays for and (b) going to pay back in the long haul by allowing citizens to make good banking decisions based on what their money was doing and not by silly things like how a few bucks was going to get frittered away. At some level, you might argue that the whole banking industry has been focused on the wrong things and it's at least conceivable that taking away some of the “toaster distraction” would allow people to focus on what matters.
Obama and Geithner did not create the notion of “too big to fail” so I won't argue that their working within political realities as they see them is wrong. I might even agree under some circumstances that bailing out the banks is wrong, it's something I haven't had enough time to study. But let's suppose I did (just for the moment). Even then, there is a difference between my saying they shouldn't be bailing out the banks and my saying they are bad for bailing out the banks. It may sound like the same to you but it's important to me: criticizing people vs. criticizing policies. I can advocate a position one way or another, but my rule is that the person taking the risk gets the decision. This is tricky because we all are taking the risk, but we use a political system that concentrates our decision-making power with Obama and to some extent we live with that.
Where my criticism is generally leveraged is on transparency because I want to know why they make the decisions they do in order to understand them. But it's a given in my personal belief system that wisdom is not dogma, and that two wise people can take the same situation and come to different conclusions, even incompatible solutions, and yet both decisions can be wise. (Parents do this all the time when dealing with children.)
And, as far as I know, your deposits are 100% insured, not up to a point, if all you do is trivially break them into new accounts every time they flow over the maximum amount, because the government insures accounts, not people. I think the government only has an interest in insuring people (not accounts), with maybe special provisions for companies that need a place to store payroll and other things for well-understood finite periods of time to complete transactions, make payroll, etc. without worrying about an instantaneous crash during that process... the need for those special cases is often used as a justification for a private individual having half a dozen FDIC-insured accounts, and I don't see the government needs to do that. In fact, those banks would be much more responsive to the market if some customers—the ones with lots of cash who also happen to be the ones least at risk of being out on the street if they lose it—worried their money would be lost in a crash. That itself would have meant that the public would have insisted on banks being safer in their practices.
But you give up on capitalism too easily. All your intuitions suggest to me that you don't really understand (or believe?) the benefits that profit-driven businesses provide over government intervention.
It's too big a topic for me to defend in a brief comment, but I just note that you observe the moral hazard, and only contemplate fixing it by nationalizing banks. Why not consider privatizing the losses too, so society can get the benefit of private innovation, without the moral hazard? Instead, all your suggestions are about socializing profits in addition to losses.
As for the specific thing about banks, I think McGarrett50 is right that the TARP bailouts are not the same as the FDIC insurance; and also his question about whether free checking accounts ought to be part of the safety net. The banking services you want do have a cost, and somebody needs to pay for that. If you don't want to (or are unable to) pay for it yourself, you need to make an argument why your neighbor ought to pay for it on your behalf.
My understanding (perhaps my misunderstanding, in which case you're welcome to correct me) is that nationalizing the banks involves government ownership or management of the banks, neither of which I have here suggested even for a moment. (Incidentally, it's not that I think that's off the table, I just don't think I've raised such a suggestion here.)
More seriously, the distinction that I think you are drawing between not nationalizing banks but asserting in bold "Banking Cannot Be Left to the Free Market" and then proposing to have the government tell them what they can and can't do and how much profit is allowable to flow to stockholders is not that meaningful.
The good news is that this exchange made me remember another article I had read about the Obama/Geithner PPIP plan and its potential impact on the FDIC. So, I wrote a new post as a spin-off of this conversation.
PPIP is CCrap
Yes, Kent, you're right that you didn't explicitly call for nationalization (government ownership and management). But you wanted to outlaw for-profits, and/or restrict their profits by law. This effectively amounts to the same thing.
The "magic" of capitalism comes exactly from the pursuit of profit. A better idea needs the opportunity to offer better returns, in order for the free market to make it happen. Or else you've eliminated the motivation to cut costs, better serve your customers, etc.
As to the FDIC, you say that banks "can either accept or not" ... but that's not actually my understanding. I couldn't verify this with a quick Google search, but are you actually allowed to start a regular bank (with checking accounts and such), without being FDIC insured? I suspect that the banking laws require that you join the system. Maybe I'm wrong about that...
It might be you can't start a bank without FDIC insurance, but let me say I was not proposing that that's a good idea. I actually have a libertarian streak that shows itself now and again, as you have seen, and this is such a place. Which is another reason why I resent being pigeon-holed as someone just pushing for nationalization. I think it's perfectly fine to have non-FDIC-insured banks that decide what they will do and where the entirety of the regulation is you're told that absolutely for sure you're going to lose your money if the bank folds. (Truth in labeling is all I want in more situations than people would probably expect.) My problem is that when the FDIC is involved, I don't see any way for this to be done fairly, as I said, until there is some sort of verifiable or at least really-widely-accepted theory of value and ultimately risk that allows one to reliably set the price of FDIC insurance at something than made-up numbers. So as long as you're not to the stage of proposing something like that, it's not a political quest I'm on, I simply don't see a technical solution to this heavily constrained problem other than to place big restrictions on the bank. But I'm open to talking about what you want instead and why.
But perhaps we can focus just on banking. You seem to be making the inference that: if we want to protect the small depositors, then we need FDIC deposit insurance (true), and therefore the people who run the bank get to socialize their losses and therefore the moral hazard (false).
The problem, as McGarrett50 laid out in a comment above, is that FDIC insurance is not the same as the TARP bailout. Before this recent crisis, a perfectly acceptable alternative was to let the bank fail (into bankruptcy), hence wiping out all of the stockholders, but use the FDIC to return balances to the small depositors.
That is failing this time, because (for complicated reasons) people want to keep the banks running. They don't want them to all go bankrupt.
But this is not the same issue as FDIC insurance, and the big concern is not about small folks getting their checking account cash out.
(The bailout issue is about a working financial system to make large loans to other businesses, to offer mortgages to homeowners and car buyers, etc.)
So, I think there's no (big) problem with FDIC insurance. That isn't the main factor allowing banks to take outsized risks and have the government bail them out when it fails. There is a moral hazard problem in the US banking system, but it isn't (really) an FDIC issue.
In my (not so) humble opinion, anyway...
That's not the entirety of my point, but it's one aspect of it, and in particular it's the aspect that happens when FDIC is involved.
Also, the question is how to assure that the money being withdrawn as profit is not capital that the company needs to survive in the future. I've raised that question but neither of you has answered it.
In a situation where the company can reasonably, freely fail, that's less of an issue. But in a situation where it's an expense borne by the taxpayer to have to make good on all the accounts, that's a fair question, even if the stockholders might lose dough. The government ought not be bailing them out at all, even at the FDIC insurance leve, if those profits had not been taken.
I feel a little like talking to someone with an alcohol problem who is standing in a grocery line about to buy a $10 bottle of wine and a $10 steak and asking me for $10, then wehn I complain I don't want to buy him alcohol having him say “no, it's for the wine.” These things are all interconnected. Why is it unreasonable for receiving FDIC insurance to create restrictions on other things?
But FDIC only covers people up to $100K per bank/account. This is exactly designed to only cover the small folks with checking accounts. The people making "a lot" of money don't put their cash into FDIC-insured accounts, because those don't offer an interesting return.
So the oversight you're hoping for from the customer would never happen. FDIC protection only comes into play for people small enough that they don't have much leverage to change the bank behavior.
Kent asked: "how to assure that the money being withdrawn as profit is not capital that the company needs to survive in the future."
That's got nothing to do with profit or not. You need some idea about what a "safe" level of capital reserves are, and a given bank either meets that level, or not.
Perhaps you argue that they misjudged the level. At some point, you need to realize that all banks, even healthy ones, are subject to failure due to bank runs, which come from a lack of consumer confidence. Basically, if you really want the bank to be able to meet the demands of anyone who might theoretically withdraw their cash, then they just have to hold it all. A bank, as a business, can't exist. Or, they'd have to simply offer you zero interest, and charge a large annual flat fee to cover their operations. And then just actually put your cash in a vault.
But that's not how the banking system works. It works by taking all your deposits, and then loaning out the money to others. You could make the banks 100% safe for depositors, without FDIC, by not allowing them to make loans. But then the question is, what institution will make loans? Where does anyone get a mortgage to buy a house or a car?
If you allow banks to make any loans at all, then there's always some remote chance that their reserves, however big they are, will not be "enough".
"Why is it unreasonable for receiving FDIC insurance to create restrictions on other things?"
You're right that regulation is reasonable, and in fact banks are highly regulated. That's what things like capital requirements are about.
But your suggestions, in this original post, basically would destroy banking as a capitalist industry. That's a radical step. You basically can't restrict profits without, in effect, managing the bank yourself. You asked for bank customers to see part of the profits, "and not just the stockholders".
These aren't simple regulations to make the business work more safely or efficiently. These sorts of changes make it not really a business at all any more. It's a different kind of an organization, then. (And thus you lose the benefits that come from a capitalist free market.)
This plainly cannot be true. There are many ways to restrict profits. Even just taxation restricts profits. (I'm not proposing a taxation model here, but I merely mention it to make a point.) That doesn't lead to managing the bank. You seem to be taking the approach of saying that because a particular solution doesn't suit you, all solutions of this particularly broad class are not feasible.
In fact, my claim is the reverse. That to avoid managing a company you need to regulate it in a way that reduces certain inappropriate desires. I don't have a problem with the desire to make profit, but I do have a problem with the desire to make a profit at the expense of the public, of the depositors, or of the company's integrity itself. I think Alan Greenspan effectively admitted that the problem with the companies as they were set up is that (I'm paraphrasing heavily here, to the point of probably putting words in his mouth, but I think this was the gist of it) no one has solved the problem of how to assure that the people running the bank are not motivated to bleed the company dry in the nearterm because it's of no consequence to them what happens in the long term. There is a conflict of interest between the interests of the individuals running these companies and the interests of the companies themselves.
In any case, all regulations of any kind that force a company to spend even a dime on something it wouldn't have count in my mind as a limitation on profits. A requirement to have cash reserves is a limitation on profit (because it reduces cash available to pay as dividends). A tax is a profit limitation.
But morever, I'm not out to limit profits. I'm out to limit risk to the company through someone with a short-term goal selling out their company in the name of getting rich. So show me that's not necessary, don't tell me about how it's a problem. The problem is what already happened. What we need are fixes, not proofs that what is happening now is the right thing...
You also wrote: You asked for bank customers to see part of the profits, "and not just the stockholders".
No, I didn't ask for it. I suggested it. There is a gigantic difference in my mind and I wish you would avoid wording like this because the difference between "You asked for" and "You suggested" is the difference between a paternalistic figure talking to a child who's asked for something he doesn't deserve and a collaborator on an engineering project discussing what happens when you adjust this or that control knob on a machine. I don't think you intend to insult me in the way that it sounds, but what I worry more is that it causes you not to dig deeper and make alternative suggestions about knobs to turn because you're just assuming you have superior knowledge to me and that the problem to be solved is to convince me of that fact rather than to solve the engineering problem of making the machine work right.
Perhaps that's not what you meant. If you have a 10% tax, yes, the business gets less profit, so profits are reduced. But it still sets no absolute limit on the amount of profit that can be made. Can a bank with $1B in assets make $1B in profit? $10B? $100B?
Whereas, when you suggest that maybe profits ought to be "limited", I thought you were going to say something like "it is prohibited to have more annual profits than assets", or "no more than $1000/customer" or something. That's what "limit profits" means to me. And that's what I was concerned about and arguing against.
As for the "ask"/"suggest" comment ... I actually didn't get the difference, even as I started to read your explanation. For the first couple of sentences, in my head I kept thinking, "they sound the same to me?"
But I understand now what your concern is. Didn't mean to cause offense with the word choice. It didn't have the same connotation for me as it did for you.
Then you ask me to make a suggestion, contribute to the solution, rather than just criticizing. I'm not sure I understand the banking failure well enough yet, to have a proposal of my own. Moral hazard is a problem, so we need the banks to not be "too big to fail". I'd like some restriction or regulation, that before the taxpayers become responsible for saving a bank, it gets broken up. Banks can get as big as they want, as long as they're not too big to fail.
There's the short-term/long-term thing. I think caring about shareholders is good, but we need management to have the same incentives as long-term shareholders. I'm really, really concerned about the scenario suggested by Capital Decimation Partners, which shows a simple way to get above-market returns for year after year after year -- until losing 100% of your assets.
The answer is probably something about paying employees with stock that is restricted for years, rather than with annual cash bonuses. But I'm wary of the "fallacy of the last move", because any time you set up any rules, clever enough highly-motivated people can still figure out a way to get what they want. Changing human behavior is hard.
North Dakota has a state chartered bank. They put all their funds their, pay their bills from there, and loan to North Dakotans doing, well, whatever North Dakotans do.
Imagine each state chartering their own bank and doing this. Then imagine that they contribute some capital to owning a Federal Bank. We could be free of the Federal Reserve (as our founders wanted us to be) and we would have a financial system that is answerable on a much more local level.
Time to rethink how we do business. Great post, Kent.
Most banks charge fees. Even if you have money in savings they charge about $30 if you over draw your debit card, and that is for each transaction, so some people run up a big bill in a few days, even though they have spent very little money.
Few of us have $1500 or so needed to get free checking,etc.
Closing an account hurts one's credit rating, because having an account for many years helps the rating. I did not even know that rule and thought I should only keep an acccount if I needed it.
The credit rating system is pretty arbitrary too, penalizing people who don't borrow alot, or just want to change banks. Why do consumers have no say in this?
I agree with you about changing behavior, though as I've said in, for example, my post on revising the supreme court, sometimes you have to design paradigms around the fact that human nature will try to outsmart things. That is what leads to clamping down and placing limits—because doing anything less direct doesn't send the strong message “don't try to outsmart this.” In fact, to some degree, I hope that the fact that people (me and others) are starting to suggest really clamping down will cause people who do these things to think twice before they try to exploit every last loophole, because the next phase of the legislation is likely to overcompensate. Then again, what will probably really happen is those people will just try to ratchet up their efforts and cash out with even more elaborate ways around the system. (sigh)
The trade off is many services available at bigger banks aren't available at these banks, although in other areas they're catching up, as in electronic payments, on-line banking. You don't get the convenience of ubiquitous ATMs with a credit union that you get with a Bank of America.