Beware of the Banks

Beware of the Banks

You might have noticed recently, the Banks are eager to lend money. The world is awash with cash, in various currencies, and the American Banks are eager to earn income on every dollar they can.

When one party loans money to another, opportunity is created. With capital in hand, people can do many constructive things. They can start a new business, which could become a wealth builder and a job creator. Or, they could buy a home, which usually has a very positive impact on the American Dream, as well as the American economy. Or, it could go to buy stocks on speculation (of still higher prices), as was the case of the tech stock bubble. Or, it could go to buy real estate or energy contracts to speculate, as has been the case most recently.

(But) The big Banks have changed. They no longer are caring local institutions that feel responsible for the best interest of their customers. There was a time when a bank would not lend money if they thought the borrowers were going to use the money foolishly, imprudently, or to speculate. They simply said no. But today the Banks are huge impersonal institutions, and are likely to continue this process of change, as the big ones continue to gobble up the little ones.

Many would say, ?But who cares? Isn't it great money is so available?? Well it is, but like anything else, there are limits. Sometimes more isn't better. And your reasons for what you do, and the impact it has on others, counts considerably ? all of the time.

If you have several credit cards, and the average family does, you probably get solicitations from other lenders, in addition to the offers you get from your current creditors. How about a new credit card at an interest rate of zero for six months, or 5.9% forever? Read the fine print and you will find that there are many reasons they can declare you to be no longer eligible for this rate. They can even do it for ?any reason they deem?, if you read the fine print carefully.

But typically, just be one payment day late, and your rate changes to 25-30%, or more. And if you watch carefully, you will see that they change their due dates from time to time, and frequently have their due dates occur on Saturdays and Sundays. These institutions are not our friends.

There have always been good reasons for borrowing money; there have always been bad reasons as well. Borrowing money to finance a trip to Las Vegas has topped the list of bad ideas, for as long as many of us can remember. But when speculators borrow huge sums to buy stocks, real estate, or to speculate on energy, they push prices up to unsustainable levels, and someone often gets hurt. If it is the speculator, who cares? If it is the general public, their welfare, their pension account, or their need to sell their home in an orderly market, everyone should care. But the speculators are greed driven, and they don't care. They are literally laughing ? all they way to the bank. And when they get there, the banks have a good laugh as well. Their profits have never been better. Speculating is no longer frowned on by the big banks. And we should be aware.

Thank goodness there are still community banks which behave like responsible souls, and who care about the communities they service. If you have one, use it, at least until it gets gobbled up. And if it is privately owned, so much the better, because no one can buy up their shares in the public markets and buy what would otherwise not be for sale (to the big guys).

What does this have to do with the Federal Reserve? Plenty. The Fed, and the Congress, ultimately determine which lending policies are acceptable for national banks, and what is in the public's best interest. They can strongly influence the availability and the cost of funds and they can influence the availability of borrowed money (margin) for the speculative purchase of stocks. The Fed and the Congress are in a position to limit speculation that leads to bubbles, or conversely, to aid and abet those activities. In recent years, the Fed and the Congress have not been looking out for John Q. Public. In fact, the banks have made huge campaign contributions, and have heavily ? and very successfully ? lobbied for the effective repeal of usury laws which were used to protect the general public.

So we advise, beware of the new breed of super-sized American banks, and don't count on the Fed or the Congress to care about your best interest. And while we are at it, we would advise campaign finance reform as well. Let's have the congress surrender their sweet deal pension program in favor of going on social security. Take them off their `special deal?, and social security will get fixed pronto. In other words, it's always good to be paying attention to who your friends really are.

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