The Outs and Ins of Banking

You’ve heard of ‘Bail Outs,’ what the US did for banks and corporations to make sure they did not fail.  Well, now there is another approach to making sure the “too big to fail” companies receive the cash they have expended.  It is called a ‘Bail In.’

‘Bailed In’ is when creditors, including depositors, give up their assets to the bank so it does not fail.  This happens when the banks change the value of the amount they owe to creditors or depositors.  They do this by converting the amount owed or deposited into shares of bank stock.  Instead of your deposit having a $300,000 value, you now may own $3,000 bank shares if the price of one share is $100.  If fairly valued, the bank may be worth $100 per share or it may not.  If the share price is ultimately lowered, your deposit of $300,000 is no longer that much.  And the creditor is paid less than was originally loaned.  I guess you could call this reverse interest.

In 1999 banks were allowed to be investment processors for themselves and others.  It was argued that the banks could not be fair competitors to entities that could sell derivatives, stock, bond and money market funds such as broker/dealers.

In 2005, the laws were written to give banks who held derivatives (bets on the ups and downs of the markets) the privilege of being first in line to be paid if the investment banking institute became insolvent.  They would be paid first before any other creditors.  A big problem with this solution is that US commercial deposits are about $9,280 billion.  FDIC has about $25 billion to back bank deposits and there is about $297, 500 billion in derivatives.  Who is going to pay whom with what?

These regulations in favor of the banks do not favor sustainability.  So dictionary definitions of economy such as ‘effectiveness’ and ‘the whole of production and consumption by a community and prudent management of resources’ are not living up to their intended purpose.

Derivatives are not the only reason we lack sustainability in the banking system.  Our money system is based on too much interest.  Each of us may not have debt or be paying interest to any entity on our own but as a collective group we are steeped in interest. Each time we buy merchandise, we are paying a price based on the debt the seller has accrued in order to have a product to sell.  The company has to pay interest on a loan before it sells a product in order to have enough money to buy or manufacture the product.  Approximately, 30% of what we buy goes to interest.

As an individual what can we do to make changes to our monetary system?  Our largest contribution would be to process our money through local banks and credit unions, buy locally, buy sustainable products, and voice our values with our local leaders.

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