Some chaps in the USA are trying to organise a protest against the government bail-outs of the big bad banks, which is simply for everybody to withdraw their money from those banks and deposit them with smaller ones instead.
The idea appears to have been endorsed by people who normally know what they are talking about, like Karl Denninger, Ed Harrison or Sackerson.
Ho hum, two problems here:
1. If people did that en masse, the government would just bail them out again. And again. These big US banks are the government to a large extent (it's not like this in the UK).
2. Depositors are not the customers of a bank, they are its suppliers. The real customers are the borrowers.
The usual reason why an industry or company dies out is because there is no more demand for its products, i.e. no more customers, and not because there are suddenly no more suppliers. So it would be far better for all those people who have borrowed money from those banks to remortgage or refinance it with a smaller banks (deposits would move across as well, but that would happen more or less automatically). And hey presto, the government would have no excuse for bailing out the big bad banks, as they would have little or no assets or liabilities left to worry about.
Just sayin', is all.
Sunday, 3 January 2010
Completely missing the point
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8 comments:
I've emailed the site drawing attention to your post to see if they can tweak their campaign.
I think you miss the point of the protest. If the government bails them out again then it shows the State is working for the bankers not the depositors.
Mark,
You make a great point about borrowers. I made the same point when I mentioned that Citi and JPMorgan have not traditionally been retail banks and their business is with corporates. They are the traditional corporate lenders.
JPMorgan is more leveraged to retail lending now via WaMu and Chase but still they are not even focused on the retail business to the degree that I believe this campaign will be successful.
The point still holds that lending is an effective channel through which to do this. Huffington and Johnson didn't focus on the borrowers for three reasons.
First, this is about giving people a sense of power where they now feel powerless in the face of crony capitalism. It is also a visible way of showing 'civil disobedience' as a message to the political elite.
Second, renegotiating loans is costly and many borrowers are underwater. That is a non-starter for most.
Second and most important, bank runs usually occur on the liability side of the balance sheet. In the case of bank runs at Northern Rock and Lehman, it was 'deposits' in the form of the inter-bank market and in the case of WaMu, it was retail deposits. So, it does make sense to attack it from this angle. You could say Huffington is almost (but not quite) encouraging a bank run - not that it would be successful for the reasons outlined above. It might succeed at Wells or BofA.
Deposits are overnight liabilities whereas loans are term transactions. It is the borrowing short and lending long part of banking (in addition to fractional reserve banking) which makes banks vulnerable. That's why if you want a bank to feel stress you do it on the liability side.
and deposit them with smaller ones instead
Missing the point all right. What they need to do with the funds is convert them to commodities and use an agreed system of debt free notes as an assist to the old barter system.
Anything at all except FRB and fiat money.
Money is a proxy for the time exchanged in the economy, not some nominal physical substance.
UWM, ta, let's see what happens.
AC1, first point, agreed but depressing. Second point, also agreed. But some people's time is worth more per hour than others', so that' why we multiply hours x value and express the end result as a unit of currency.
Ed, I accept that shifting loans is far more difficult that shifting deposits, which makes this action all the less likely to succeed :(
JH, even if you replace 'money' with e.g. 'gold' as a unit of measurement of value, you can still have 'fiat money' (I hate that expression) denominated in units of gold. History illustrates this only too well.
MW,
Yes, wage = time * productivity.
I wasn't saying everyone's time is equally valuable.
Yes. Well. I totally agree about withdrawing one's custom and taking your overdraft or mortgage elsewhere, but as the retail banking system is, absolutely, a cartel it just won't work. This is why the banks need reform as does the ability of bank A to screw up you opening an account with bank B by simply making entries on your credit history. In other words if you are about to enter into a dispute with bank A, open an account with bank B before you start.
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