That's What I Thought...
columnist: Gene DeNardo

Topic: Economics
Banking Part Three: Investment

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Analysing the investment aspect of banking and how it affects the depositor. Some suggestions for a more honest and efficient approach.

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by Gene DeNardo
(centrist liberal 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 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 not be used as an excuse to bolster the bank's bottom line. 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 within the economy. 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 obviously a highly inefficient use of capital which is facilitated in a large part by the "dilution" of currency perpetuated by federal monetary policies.

But there is something different that often occurs in banking. The banker convinces the citizen to hand his money over to the bank, which enables the bank to market this money as their own, commanding a higher interest. We talked about how this is made possible by the backing of the Federal Government in the article referenced above. This inefficient and unethical practice would be eliminated if banks simply had to compete within the markets in reference to interest rates.

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 fundamentally some variation of the credit-debt transaction, a bank 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. All that is needed is true disclosure of 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. If we were able to progress to that point where investors were aware that  banks offer few avenues for obtaining interest that differ from the rest of the marketplace, competition could resume and capital would then find its most efficient path. With a bit of circular logic, we can know this is true due to the fact that it is one and the same marketplace.

One area where a bank may have some advantage would be brokering mortgages. However, this would disappear under more optimal circumstances if the banks continued their current practice of "stacking" interest rates, again using the depositor's monies as their own and subsequently multiplying the rate. I would guess that the instant this occurred someone else in the marketplace would be willing to offer the same service for a simple fee.

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 fraudulent.

It certainly is absurd 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 those it passed by. Risk must be acknowledged; when ignored catastrophes tend to occur in the markets. Federal insurance simply passes the risk of the marketplace to the taxpayer, another socialization of risk and privatization of profit. Certainly not free market ideals. But again, always primarily to the benefit of the Corporation.

Private sector insurance would certainly be an option, but it has to be noted that many of the same problems and questionable behavior is widespread within the insurance world. Certainly the following is an oversimplification and a widely incomplete summary 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 if the worst scenario came to pass, what is the point of compensation only in the form of a premium rather than the entire return?

What might be a beneficial option is a "mutual" insurance fund. Some insurance companies use the pretense of operating in this fashion but for the most part this is marketing. As corporations, their primary goal is profit not the benefit of the insured. Enough on insurance for now!

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 potentially experience the risk of the market and have the rewards skimmed off by the collusive activities of the Federal Government and the Banking monopolies as is the case at present.

If we were to seek a safe return under ideal market conditions, treasury securities would still be simple and available to anyone and we know we will always receive the numerical value of this investment, regardless of the condition of the economy. This is the ultimate federal insurance program, for what it is worth, and the way it looks the supply is endless! Other than that, banks should be made to compete with everyone else desiring our funds within the marketplace. This is impossible within the present monopolized capital markets.

It has taken centuries of hard work for the banks to place themselves in the advantageous position they occupy today. It is arguable that they have devoted more energy to seeking power than they have to fulfilling their true niche in the economic system. As hard as it was for them to wrestle control out of the hands of the people, it will be even more difficult for us to regain.

There is one saving grace. Whether or not banks mistreat our money as their private property rather than ours, the fact remains it is by law ours. We have ultimate control over our own funds. There is a considerable amount of power in that fact. Wield that power wisely!

Related Articles by Author:

Banking Part Two: Demand Deposits

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©2009 Gene DeNardo, all rights reserved. You must have written permission from the author in order to republish this work.
Published: Sunday, January 18, 2009
Last modified: Sunday, January 18, 2009

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