Banks dirty secret

[Punchy]

Your Bank's Dirty Secret

Evan Thornley

A FEW weeks ago I ran into a mate of mine who's high up in a big bank

We got to talking about his work and our economy and I thought you'd all be interested in how it ends up.

Well if you aren't, you should be. Listen to this:

THORNLEY: So I saw that Ian Macfarlane (the Governor of the Reserve Bank) recently told you blokes that you were lending money too easily and you better be careful that people could actually pay it all back. Do you reckon he's right?

BANKER: Well the whoe (banking) industry is much more competitive these days. If we were the only ones who used strict lending criteria, we'd lose market share.

THORNLEY: I'm sure you would, but aren't you worried that he's right and that people are going to get hocked to the eyeballs and then not be able to pay it back?

BANKER: Sure, that might happen, but what choice have I got? If I lose market share, our share price will get clobbered and then all hell breaks lose.

THORNLEY: But isn't this exactly what happened in the '80s? You blokes went around lending to all sorts of clowns like Bond and Skase and everyone who couldn't pay you backand then the whole system got out of wack and fell over?

BANKER: Well, yes it is in that sense, but this is quite defferent - this time we're lending to households, not corporates.

THORNLEY: Yes, but many will still struggle to pay it back. What if interest rates go up? What if they're struggling to pay you back now and just running along at that rate for a few more months or years means that they start delaying getting the car fixed or the kids to the dentist?

If you lend people too much, aren't they eventually going to really struggle with their repayments?

BANKER: I don't think that you're getting it. The difference is, we're secured. All that corporate lending was unsecured, that's how we lost money. When they couldn't pay it back we were stuffed.

Lending on a mortgage is secured against their houses, so we can't lose.

The Reserve Bank did the sums and reckoned house prices would have to go down 30 per cent before we'd have any real risk.

THORNLEY: Actually that's exactly my point. Once people's repayments start getting harder, aren't they going to stop spending on other things? Isn't that going to risk putting us in a recession? If people are spending too much of what they owe on repayments, won't the rest of the economy suffer?

And if it does and that increases unemployment, won't that cause you blokes some grief? Don't you care about that?

BANKER: Well that's not my department. If we don't lend as much as the competition we'll lose market share, our share price will go down and then I'll be out of a job.

THORNLEY: Well, if you drive the economy into recession, won't a lot of people be out of a job?

Won't that be bad for your share price, since that seems to be all that matters?

BANKER: Well, if it happens to everyone (all the banks) then no one get's hurt.

I can't get fired for doing what everyone else does. It's not my fault, it's the whole system.

THORNLEY: Mate, I wasn't trying to pin the blame for the whole system on you. I was just checking if I'd missed anything about what's going on 'cos I reckon it's all pretty likely to end in tears and I thought you were going to explain to me why I'd got it wrong.

BANKER: No, you're probably right. But what can I do?

Well there you have it folks. Straight from the horses mouth. Your future in safe hands. Safe as Houses

Evan thornley is co-founder and director of LookSmart and director of research of the Australian Fabian Society

 

[willair]

Punchy,
i remember in early I990 when bank term deposits paid
17%.imho thats why so many investment organisations
went to the wall in those years,in any event this time around
the banks will be the only ones left holding the title trying to pick the
botom of any market is not easy.
good luck
willair..

 

[Ausprop]

"THORNLEY: Well, if you drive the economy into recession, won't a lot of people be out of a job?"

does the logic follow that we have the banks to thank for the current economic euphoria? and thus should not be despised as much as they are?

 

[Punchy]

Punchy,
i remember in early I990 when bank term deposits paid
17%.imho thats why so many investment organisations
went to the wall in those years,in any event this time around
the banks will be the only ones left holding the title trying to pick the
botom of any market is not easy.
good luck
willair..

I remember "Pyramid Building Society". They were supposed to last as long as the pyramids? Anyhow they offered interest well above market rates. When they went belly up it came to light that they loaned money to high risk clients, as such they could ask for higher than market rates for interest, in turn they offered higher returns for their depositors. I remember because my parents lost their life savings aka home deposit.

Ausprop - "does the logic follow that we have the banks to thank for the current economic euphoria? and thus should not be despised as much as they are?" - We must run in different circles. Mob rule is never pretty.

 

[Jamie]

Evan thornley is co-founder and director of LookSmart and director of research of the Australian Fabian Society

Hmm... an article written by a Director of Australia's major Left Wing "think tank" with strong ties to the Labor Party - why does it not surprise me that individual responsibility for personal debt is not mentioned once

Jamie.

 

[Peter 14.7]

There is truth though in the comment that if a recession hits banks can blame that unlike NAB at the moment with its woes.

Look at Walter Corp. Fell over depite aussie side making a profit. YOu can never pick them.

Chaos theory reigns. I remember about to buy a merdedes just before Sept 11. After Spet 11 Mercedes had heaps of orded cancelled and where keen to offer deals. Did that attack matter to the world economy as a whole. No. BUt dealers till needed cashflow over the thre months it took to sort it out.

It is often that simple.

Also it is death of a thousand cuts. one company here, one lended there and before long it all falls over like dominos. Panic sets in and everyone stops buying and more panic.

Peter 147

 

[willair]

Punchy,
the Pyramid Building Society ,Estate Mortgage,State Bank of Victoria,all
fell to the same axe,most of the new bred of investors dont even worry about those
past times,if you live in the past thats where you will stay,you learn to live with uncertainty over time in any investment.
good luck
willair.

 

[<KS>]

I read a really interesting atricle about a side effect of the Tsunami.

Apparently coastal property enquiries dropped by 85% for 3 weeks after the crisis occured....now thats pretty far reaching and I fail to believe thats a co-incidence.

I doubted the figures until a friend of mine called Stacey said that she did not recieve a single enquiry on her beach home for 3 weeks afterwards - but the 2 weeks before the Tsunami when she put it on the market she had about 6 calls/ week.

So yeah - its amazing what effects things can have that dont seem possible form so far away.

Also in regards to the banks. I have been told that if everyone in Australia went out and withdrew more than 5% of thier current savings on the same day that all the major banks would collapse. Something to do with the crazy amount of money that has be loaned out and then re-loaned.

<KS>

 

[Sunfish]

"Also in regards to the banks. I have been told that if everyone in Australia went out and withdrew more than 5% of thier current savings on the same day that all the major banks would collapse. Something to do with the crazy amount of money that has be loaned out and then re-loaned."

Are you suggesting you don't understand fractional banking?

You're in good company. Almost nobody does. The only thing I KNOW is that when I borrow from the bank, they are ABSOLUTELY NOT lending me my Aunt Maud's savings. Even Little Old Ladies are not that dumb.

So who's money? Someone owns a printing press. Guess who!!!!!

 

[nat r]

Thommo...you have lost me ...who's money are they lending you?

 

[Sunfish]

Thommo...you have lost me ...who's money are they lending you?

You're the smart arse Nat. You tell me.

If you can't explain the system we work under now, how could you understand something different?

Hands up anyone who knows anyone with more cash in the bank than they owe (OK Aunt Maud has a few K's stuck away) or more specifically, so much deposits thay would counter your borrowings. It a stupid question. Real savings are irrevelent under our fractional system.

The only thing I know is that my neighbour has not leant me the money for my mortgage. He's in debt too.

 

[quiggles]

Essentially, nat_r, and I hope your post wasn't a troll, they are lending out far more than is deposited with them.

Assume for the sake of simplicity there is one bank in town, and Joe puts in $100. The bank is obliged by law not to lend out more than (say) ten per cent of deposits. So it lends out $90 ($100-10%) to Fred, who puts it in his account . So it lends out $81 (Fred's $90, less 10%) to Sally who pays off Jill who puts it in her account. So it lends out $72.90 to George.....etc.

In the limiting case it can lend out $1000 based on Joe's original $100. They have created $900 out of thin air and hence Thommo's comment about a printing press. Of course, that requires that ther be account balances of $1000. Now if 11% is withdrawn, the bank is in trouble becasue it only ever had 10% of the funds.

but I'm sure you knew that...

 

[JP1746]

"Also in regards to the banks. I have been told that if everyone in Australia went out and withdrew more than 5% of thier current savings on the same day that all the major banks would collapse. Something to do with the crazy amount of money that has be loaned out and then re-loaned."

Are you suggesting you don't understand fractional banking?

You're in good company. Almost nobody does. The only thing I KNOW is that when I borrow from the bank, they are ABSOLUTELY NOT lending me my Aunt Maud's savings. Even Little Old Ladies are not that dumb.

So who's money? Someone owns a printing press. Guess who!!!!!

They are lending you money created out of thin air, and brought into existance as debt. Do some research on the web - subjects like money creation, etc. You'd be amazed.

Put it this way - 5 years ago (say) real estate was worth 50% less, therefore, (say) debt was also 50% less. Therefore, since then, debt level has doubled. But where did the lenders get that extra money to lend out ? You might say from other banks, overseas, etc. But where did THEY get it from ? The planet Uranus perhaps, or maybe the 5th moon of the 3rd planet in the binary star system Q42 in the Andromeda galaxy ?



Truth is, that all (or the vast majority) of that money has been brought into existance out of thin air - at the stroke of a pen - or the click of a few keyboard strokes more likely - by the banking system ...

I recall years ago when the strawberry blonde (Pauline Hanson) was running, she made some simplistic (what else) suggestion about the government bringing some cheap terminating loans into existance to help some poor but deserving venturers ... can't remember much more - it doesn't matter. What I do remember is she was laughed at silly by all the banking experts, treasurer, prime minister, etc.

How ironic that the money creation going on these days, is by a thousand magnatude, greater than what poor ol' 'Please Explain' could ever imagine !

 

[Ausprop]

spank the dirty bank!

making a profit... pfffff.

 

[Sunfish]

Essentially, nat_r, and I hope your post wasn't a troll,

And guess who bit

 

[Bill.L]

Hi all,

It is all just inflation. Same amount of goods, but the bank can lend out all this money created out of thin air. The only thing being devalued is the money itself.

The central bank gets worried about "record debt levels" huh!! If money gets created out of thin air then we would always expect record debt levels.
If debt levels start to DECREASE on a consistent basis, then that is when we have real problems(deflation).

bye

 

[aussierogue]

story highlights system flaws

The system is such that organisations (banks in this case) only care about the current years financial results. the directors only care about what bonus's they will get and how this is linked to this years profits and this years share market value.

Some of the forward think organisations even look 5 years ahead - good for them.

The problem occurs when organisations have so much fiscal power, as do the banks, and yet they have no long term perspective. recipe for boom and bust economics......

The corporate world needs to be more offay with terms like sustainability. The reward system for decison makes also need to be looked at!!

 

[nat r]

Aussierogue>

That is where the Reserve Bank comes in...it is not the role or the responsibility of the individual banks to set or control monetary or fiscal policy.

The RBA acts on behalf of the Treasury to set and maintain the desired levels.

An individual bank has a responsibilty to its shareholders to maximise rpofits and therefore shareholder value. As a shareholder in banks (and employee) I for one like the fact that senior bankers are paid on a results based system....we can all see what happens on a no responsibilty/no reward pay system....just look at any public service job !!

 

[willair]

.the problem occurs when organisations have so much fiscal power, as do the banks, and yet they have no long term perspective. recipe for boom and bust economics......??

Some people think that way, i dont think the banks will worry
1% about a 20% drop in property values in this country,
they have all the plans in place to do what ever they wish.
i invest in the aussie bank systems,just to stay on both sides of the line..
good luck
willair..

 

[aussierogue]

nat r

nat r - i respect your views - however - we increasingly expect our corporations to be good corporate citizens and this means them taking some responsibility which may not have been tradional domains of such organisations.

both executive remuneration and the short terms forcus of our system - are widely/hotly debated topics and not easliy dismissed

as a stakeholder, i would like to see many of our companies have a longer terms, sustainable approach to growth.

re remuneration - I understand where you coming from with regards to public service mentality but the flip side is ENRON. We need to find the inbetween!!