We are witnessing the collapse of a once great nation. It isn't the proclaimed wickedness of allowing gays to marry or pornography or the lack of religion in the public square, as asserted by the fanatical Christians. No, it is the collapse of a great nation because of several actions that have come together in what you might call a perfect storm.
Prior to the turn of the 20th century, banks had to have their own hard assets, mainly gold or silver backing their money they loaned out to customers. They made their money from the interest they charged to use the banks money. For people who deposited their money, usually gold and silver, with a bank to hold in safe keeping actually paid a service fee to store their money with the bank because it was more secure than under the mattress or in a cookie jar. They call this type of bank a Reserve Bank. The cost varied depending on the amount you stored at the bank. This meant that when you wanted your money out of the bank, they had your actual money in the bank to give back to you, for a fee. If everyone wanted their money at the same time, a run on the bank, there would be enough money to give to everyone. The bank only had to worry about the money they loaned out and if the customer would pay it back, since it was the banks money, not the depositors money.
A new type of banking occurred centuries ago in Europe that took depositors money and invested it either by loaning it to a customer or purchasing interest in a business or loaning it to a government/royalty and would then charge interest on the money loaned. This earned the bank additional revenues without having the required asset of gold or silver owned by the bank. By Mid 19th century most banks in the world were operating as this form of bank, which is called Fractional Banks and started to use depositors money to loan out to others, thus putting at risk some of the depositors money if the loans went bad.They would keep a small FRACTION of the depositors money in reserve to cover the normal demand for money by their depositors.
Much of the money your bank would lend would be to other banks that then loaned it out to customers or other banks. Now you can see that the same dollar is being loaned over and over again at the same time, thus creating a false money supply. In order to do this, they needed a central bank to flow the money back in forth between banks. America went through several forms of central banks until the Federal Reserve was formed as a partnership between private bankers and the government. The government being the lender of last resort. So in this way, the money supply was in a sense privatized within the commercial banking system.
This system worked OK as long as the depositors had faith and trust in the bank that their money was in. However, if enough people lose faith in their bank and want their money back at the same time, "Run On The Bank," the bank will not have enough money to give back, so it becomes insolvent and closes. The depositors loose all their money since it was not insured. This is what happened at the start of the Great Depression of 1929. Much of the reason for the depression is the Fractional Banking system and the banks loaned out or invested in very high risk loans and stocks that went bust, so they lost the depositors core deposits. When that became known by the depositors they would of course run to the bank and try to get their money out before it closes its doors.
The New Deal contained a law that created FDIC, Federal Depositors Insurance Corporation. It is a quasi government agency that requires banks to pay an insurance premium to the FDIC to cover their depositors money, should the bank fail. The FDIC in turn invests this money in government bonds, the same as the Social Security Trust Fund, in which it earns interest to build the fund up. The government is the guarantor of last resort for the FDIC. Should it have a run of failed banks, as it has had lately, then the treasury department will loan tax payers money to the FDIC to cover those tax payers and corporations deposits.
Periodically when the economic system gets lop sided, meaning the haves have too much of the wealth and the have nots have too little, then this false money the banks claim to have fails and currency has to correct itself to a level that is more close to the precious metal in vaults that the nation holds to support the value of the nations GDP. This was the case with the roaring twenties when the disparity of wealth was high. The house of cards economies of the world started to self correct, currencies started to devalue, stocks tanked, and their was a run on the banks which they could not cover. So they went bankrupt and people, as well as businesses lost their money in those banks.
There were also laws that mandated that banks be local and not large national corporations. The idea is that if it is local, then their interest is in the depositors and not their corporate share holders and Wall Street brokers. However, starting in 1980 the conservatives when in power started to dismantle these safe guards by reversing these laws under deregulation legislation.
First was the savings and loan banks to collapse. Why? They were initially established as the prime mortgage holder for real estate. People would deposit their money and then the bank would loan just for real estate purchases by its customers. The interest rates were rather stable. You paid about 6% on mortgages and received about 4 or 5% interest on your deposit. It was a win-win situation. But when they deregulated, they started to act as investment banks and taking more of the depositors money and loaning it out on riskier loans such as some commercial developments and also in the stock market. Eventually greed took over and these banks over extended their portfolio and could not pay the interest owed to the depositors nor even some of the actual depositor's money. They started to collapse like dominoes, thus the end of Savings and Loan companies.
Today there are several objectives that need to occur in order to get our economy back on a growth cycle.
We need to bring back the legislation that prohibited banks from risky investments and loans from the depositor's money as well as their own cash.
There needs to be a limit on how many times the same dollar can be loaned through inter-bank transactions. This would help stabilize the money supply to a more real level and could reduce any inflationary potential inherent with fractional banking and the huge increase in money supply without assets backing it that then devalues the currency.
Bank must have a higher reserve ration to cover deposits.
Reconsider the Fed and should there be a different central bank system?
It is too late to go back to the local bank system. But you can modify how these big banks operate so they emulate more closely to the local bank structure. Cap how large they can get.
Separate retail commercial banks and investment banking. They must not be together in the same company and be totally different industries.
Prohibit banks from participating in the insurance industry.
Insurance companies need to return to mutuals and not publicly traded. When that was the case, policy rates were much more stable and the policy holder earned the interest on their premiums that exceeded payouts on claims. Insurance was a better buy that way. In some cases the earnings would offset as much as 25% of the premium you paid in. That made insurance, all insurance, much more affordable.
WAKE UP AMERICA. GET INVOLVED. SAY NO TO THE CRAZY TEA PARTY. GET SANITY BACK.
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