Analysing the investment aspect of banking and how it affects the depositor. Some suggestions for a more honest and efficient approach. by Gene DeNardo
(libertarian)
Sunday, January 18, 2009
"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." Henry Ford
In the article, Banking Part Two: Demand Deposits, we discussed a primary function of the banking industry, storage of the depositor’s funds. Equally important is the brokering link banking provides in the investment transaction, the connection between creditor and debtor.
It is a prerequisite for honest banking that we differentiate between these two functions. The depositor’s request for simple storage of his monies must be honored as agreed upon: as storage rather than investment. On the other hand, when the request is to experience risk and earn return, the bank certainly can offer some assistance, although not substantially different from other investment brokers.
And, this point in itself deserves some clarification. It is often thought that the bank itself is the payer of interest to the depositor. In most cases, this is not true. Interest is paid for the "utilization" of capital. In contrast, a "fee" is often paid for the service of connecting the creditor and his funds to a debtor who needs funds to carry out a productive venture. In effect, this would be a "finder’s" fee.
It is unlikely in a "truly free market" that capital would change hands over and over, like it often does in our "directed economy", before it is actually put to work. This is a highly inefficient use of capital which is facilitated in a large part by the "dilution" and direction of currency perpetuated by federal monetary policies. There is only one purpose of this redundant transfer system: unwarranted commissions to unnecessary middlemen.
There is an essential element of present banking practices that differs from brokering. The bank, using FDIC insurance as the facilitator, convinces the citizen to hand his money over, which enables the bank to market the depositor’s money as their own. While the depositor feels he is protected by the illusion of insurance that FDIC provides, the bank invests his money in common market risk, collecting the greater return while passing the risk to the taxpayer through the FDIC program. This inefficient and unethical practice would be eliminated if banks simply had to compete within the markets like everyone else.
They are able to avoid most competition with the help of the largest bank monopoly, the Federal Reserve Bank. The Reserve doles out monies, a good amount of it new monies at below market interest rates to its favorite beneficiaries. By this action, profit is built into the system and outside capital providers are left at a marked disadvantage. This system also disadvantages not once but twice, one of the largest suppliers of outside capital, the depositor investor. Not only is he kept in the dark about where his money is actually going and what it is really worth to someone else, but he can never compete with the source money, the Federal Reserve. None of these nefarious actions should ever be confused for real work or actual productive activity.
Since investment is always some variation of the credit-debt transaction, a bank or bank like firm is a natural place for this linkage to occur. The individual investor may connect with the individual debtor or a group [mutual] can be created and interact with either one debtor or any variation. What sorely is needed is true disclosure of the terms and risks along with strict performance of contract law.
The depositor/investor needs to know exactly where the funds are going and what the cost of the transaction will be. Beyond that, it is simply a matter of collecting information and deciding where the best place for investment might be. As soon as the investor discovers the bank offers no different avenues for return than the rest of the marketplace, in fact it is the same marketplace, competition can resume and the depositor’s capital will find its most efficient path.
One area where a bank may have some advantage would be brokering mortgages. However, this would disappear if the banks continued their current practice of "stacking" interest rates, using the depositor’s monies as their own and subsequently multiplying the rate. In a true free market, how could the current interest system ever compete with a true mortgage "broker", who would be willing to connect groups of investment/depositors with groups of homebuyers for a simple fee? Competitive interest properly belongs to the owner of the capital, not someone who merely passes other’s capital through their hands, and a market free of privilege would bear this out very quickly.
This is all due to proper alignment of risk. The creditor bears all risk and hopefully receives return, the debtor pays interest and builds equity or grows capital and the broker, the intermediary, simply obtains a fee for his service. The fee could certainly be contracted as a portion of interest if all parties agree, but the current status quo practice where the depositor supplies the funds, the Feds provide the insurance and the banks reap all the reward is simply legalized fraud.
It certainly is pointless for the Federal Government to offer insurance on these market investments and it would only tilt the table towards whatever industry it chose to insure and punish who it passed by. Risk must be acknowledged; when it is ignored catastrophes occur in the markets. Federal insurance simply passes the risk of the marketplace to the taxpayer, a blatant socialization of risk accompanied by privatization of profit.
Private sector insurance would certainly be an option, but many of the same problems and questionable behavior is widespread within the insurance world. Certainly this is an oversimplification but what sense does it make to insure principle and not seek the identical return? If one must maintain the same quantity of principle in order to replenish the original investment if the worst case scenario came to pass, what is the point of compensation only in the form of a premium rather than the entire return? Any less of a posted "reserve" for an investment would be a further passing of the risk while still collecting the premium for protection.
What might be a beneficial option is a "mutual" insurance fund. Some insurance companies use the pretense of operating in this fashion mostly as a reference to past practices. Still, it must be realized that risk never goes away and must be accounted for in an honest manner.
When we peel away the bank’s illusion of secure return we find the everyday world of market investment. There is no sane reason for citizen depositor/investors, whether laborers, entrepreneurs, professionals or retired to experience the risk of the market and have the rewards skimmed off by the collusive activities of the Federal Government and the banking cartel. Depositors must be given free choice as to whether they prefer storage of their funds or the risk of investment with the possible and full return that the market may or may not provide.
It has taken centuries of hard work for the banks to cement themselves into the monopolizing position they are in today. It is arguable they have devoted far more energy to seeking power than they have to fulfilling their practical niche in the economic system. They will do whatever it takes to maintain this dominant position, including threats of "economic collapse" and mantras like "too big to fail". Obviously, they have they have the force of the state behind them.
We still have some degree of choice. A deposit is not a deposit until we consent to transferring our funds from our person to the bank’s property. We must all do what is best for our own economic survival, none of us should sacrifice our personal financial welfare for some theoretical concept, but that shouldn’t stop us for really thinking of the best options for our personal capital. What you don’t decide, will be decided for you.
Debt, on the other hand, once the debtor commits to the debt, is not consensual. You must pay your debt or suffer the consequences, all of which are detrimental to your general welfare. Debts are primarily owned by banks and banks not only profit but owe their very existence to debt. Without debt, banking as we know it would cease to exist. Debt is a contractual commitment to honor and uphold the existing oppressive financial system.
Do everything in your power to get out and stay out of debt. You and the world will be better off for it.
The views expressed
in this article are those of Gene DeNardo only and
do not represent the views of Nolan Chart, LLC or its affiliates.
Gene DeNardo is solely responsible for the contents
of this article and is not an employee or otherwise affiliated
with Nolan Chart, LLC in his/her role as a columnist.
Posted By: Jake, the champion of the constitution
Date: 2009-01-18 22:33:45
whoa, you are a smart dude, i think you just explained why my mattress is slowly getting softer :)
I don't mean to stick words in your mouth, but would you agree with the following?
You wrote "The creditor bears all risk and hopefully receives return, the debtor pays interest and builds equity or grows capital and the broker, the intermediary, simply obtains a fee for his service. "
So the creditor is really the depositor/taxpayer (since interest is taxed on 1099 forms, gov't doesn't want to miss out there!)Â Â However they have no idea that their funds are "at risk"
The debtor is now the bank, and it doubles as the broker, collecting fees on all types of transaction or services like cashiers checks, wires, bounced checks, etc, etc.
One last thing is I think you wrote "principle" a bunch of times when instead you meant "principal"
Hi Jake, the fee I was trying to explain would be a "broker's" fee.
The depositor is the true creditor. The debtor is whoever recieves the loan "through" the bank, say a home buyer or business owner, etc. The bank is neither the creditor or debtor for the simple reason it is never "their" money, it is always the depositor's.
The "interest" they charge is fraudulent, because interest is paid on capital that is "at risk" and it is the depositor's money that is at risk not the bank's. So the bank should get a fee for bringing together the creditor-depositor just like an investment house would, true interest isn't justified. Â
 They get around this by having the FDIC insure or really convince depositors that their deposit is safe. This enables the difference in interest which the bank collects even tho they have taken on zero risk [FDIC is the taxpayer and it is they and the depositor who are at risk, which is the same person!].
 It is really the perfect system if you happen to be a bank!
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