Don't Bank On It

In my last two blog postings, I wrote about the importance of small businesses to our American economy, and the need to “buy local” and support our neighbors economically.  Business and economics are not my normal areas of continuing discussion.  But poll after pundit keeps saying that jobs and the economy are the #1 priority on the minds of Americans and the dominant 2012 election issues.  So these continue to seem appropriate areas of reflection for this and some subsequent postings as we begin to head into 2012.

Which brings us to the subject of the American banking industry.  Banking, and more specifically lending, is really a ridiculous business proposition, in my opinion.  A great aura is built up to make us believe that getting credit or a loan is a “reward,” an anointment a banker makes certifying our good financial character.  The whole banking persona is geared to make us believe that “they” are the dominant player in our relationship, and we are the subservient ones begging for their endorsement.  But this is all crap.  They hold the purse (temporarily); but the borrowing public holds the purse strings.

As a young adult, I thankfully came to an early conclusion that bankers needed me at least as much, if not more, than I needed them – assuming I was willing to reasonably live within my means.  The worst liability a banker has is cash sitting in the vault unused.  The deposit side of a banker’s ledger yields no income to the banker; it is simply their debt to their depositors.  Bankers only make money by lending or investing that money – to non-bankers like you and me.  And there are plenty of bankers/credit companies looking to loan their money.  So when I take out a loan, on which I am willing to pay the bank interest (income to them), who is doing whom the real favor?

The problem is, during the last three years of economic crisis brought on by the biggest banks, that “mutual interest” has been forgotten.  Those big banks who irresponsibly went headlong into risky investments and paper profits from worthless mortgages have tried to recover not through newly-found good business practices and management, but by taking one-way handouts, creating new nickel-‘n-dime side income (fees), and trampling on good customers.

Americans have always had a hate affair with the banking industry, often with good cause, going back to our earliest founding.  Our forefathers resisted establishing any national bank, or concentrating the banking industry into too few hands.  In the early 1900s, the American economy was dominated, if not ruled, by the mega-rich of Wall Street, not unlike today.  President Theodore Roosevelt tried to break up this monopoly somewhat, but it took the extreme depression of the 1930s to finally break this banking stranglehold on the economy and on Congress, resulting in some of the best regulatory legislation from that decade to keep these financial titans in check from risky speculation.  Unfortunately, the 1990s eliminated many of those and other newly-needed restraints, resulting in the free-wheeling rush to unsubstantiated paper profits that created the 2008 banking crash.  Three years later we still have not cleaned up that mess; apparently this substantial recession has not provided Congress with the sufficient gumption to reinstate the regulatory controls truly needed.  Wall Street bankers and their lobbyists are still playing fast and loose, all in the name of “free enterprise” (which is not free), while paid-for friends in Washington inexplicably go along with them.

If ever a meeting of diverse minds between Tea Partiers and Occupy Wall Streeters could ever find common ground, irresponsible banking would seem to be the issue to do it.  In the meantime, Bank of America – probably now the worst run company in America’s worst run industry – continues to be the leader in arrogantly shooting itself in the foot.  Seemingly every week new stories emerge about mortgages improperly foreclosed, new fees imposed to make up for “lost” (i.e. “blown”) income, and an arrogance to its customer base that no amount of p.r. can ever disguise.  Other big guys are just as bad, but a bit less obvious.

The truth is, banks are just not the same as other normal manufacturing / retail / service businesses.  Why?  Because first and foremost their “inventory” is other people’s money held in trust, not their own.  If a private investor wants to wildly speculate with his/her own money, go for it – hopefully do well, or eat the consequences, your choice.  But my bank is holding my money to facilitate my bookkeeping and bill paying.  And for a small interest income on my deposit, I am also OK with the bank making some profit on their own through their larger reasonable interest fees.  But they need to stop thinking that this is their money to use as they please.  I am a depositor, not an investor in their bank.  Their first job is to ensure that their fiduciary responsibility to me is secure.

Since responsible government regulation does not seem to be able to manage these banking CEOs, what is left?  Well, some people have shown that the consumer marketplace still has some power to work.  Recently, a very public online petition organized by one young fed-up lady in Washington, D.C. garnered over 350,000 signatures; the ensuing publicity halted an industry-wide move towards a planned $5/month debit card usage fee.  More people are pulling their money out of these big banks and moving it to smaller, local community banks and credit unions, where people rather than just balance sheets still seem to matter.  And people are borrowing less and saving more; in the short term this hurts our overall consumer economy but may force bankers to get back to honest basic business.

The problem with the bank bailout attempt was that it was done through the banks and led by banking industry veterans.  It was a wrong mindset.  If we had gone directly to the public holding problematic mortgages and worked with them directly instead of the bankers, we would probably already be out of this economic mess.  The idiocy of banking is that when a loan is paid off (or even foreclosed), banks have to immediately go find new borrowers for that same money, else no profits are to be had.  (Just look at all the mailers asking me to take out new credit cards and refinance my mortgage in the midst of this supposed no-credit recession.)  Conceptually, loan money is never paid back, but is in a constant state of lending.  If the bankers had just skipped foreclosures, left people in their houses, and made any kind of refinancing deal possible with troubled buyers (who cares whether they pay it back anytime soon as long as some monthly payments are coming in), then deposits would still be lending, profits would still be coming in, the housing industry would still be reasonably intact, and the economy would be injured but doing reasonably well.  Our paper-based economy would still be going strong.

Mass foreclosures due to non-creative bankers mentally stuck in an old and bad business model of their own creation engenders neither sympathy nor a sense of responsibility on my part.  So take your business elsewhere and get out of their game.  Buy locally from small banks whenever you can.  There are still options.  The consumer marketplace still works.