Our neighbors decided on an unusual get together just before Christmas — our local Chinese restaurant on Elvis night.
Our seating plan offered me a situation I usually don’t find myself in – close proximity to a senior accountant — and in those situations, I usually revert to type and begin asking questions, like any good journo.
While our tubby singalike from the Midlands belted out some very good renditions of the King’s oeuvre, I decided to get serious for a moment, and take advantage of whatever knowledge he might have about the world financial crisis. During Love me Tender, I leaned over and whispered, “So what should we be doing about the banks?”
Bonus announcements
It’s a fair question to ask – and I ask it of almost everyone who might have some ideas — because in the UK, where I live, no one in charge seems to has a clue. It seems an especially pertinent question for today, when JP Morgan and other big Wall Street banks are on the verge of releasing the figures of the record bonuses they’re expected to pay to their highest fliers.
In the US, just since last April, all the major banks have reported bumper year-end results. Nevertheless, they have cut lending to businesses by $100 billion, even though getting credit moving again was the original purpose of the transatlantic bailouts. Meanwhile, bankers have reverted to engaging in the high-leverage risky practices such as subprime mortgage lending that placed the world in jeopardy.
Obama is shortly to announce his levy on banks to claw back some $70 billion of the $700 billion taxpayers spent to bail them out, and in the UK, Gordon Brown has announced a 50 per cent tax on bank bonuses. Meanwhile, the largest bailed out US banks are spending millions of the money they received from us, lobbying to kill legislation that may regulate many of the reckless practices that got them into trouble in the first place.
‘Shouldn’t we just stop some of these practices, since we now own the banks?’ I asked my neighbor.
'Well, it’s complicated,' he said. 'You have to give these people incentives to go on and make money.'
What are banks for?
Perhaps it is because I'm largely ignorant of world economics, but it doesn't seem to be the slightest bit complicated to me. It seems to me that what I’m really asking has to do with the real purpose of a bank and what its suppose to do with money, and also with the nature of the social contract.
In 1774, two years before America declared its independence, the very first Building Society was created in Birmingham, Great Britain.
A building society was, as its name suggested, an organization devoted to helping people build a house, and virtually every town in Britain had one in its name. Local people would join the society and put the money in as a pool; your savings would be loaned to one of your neighbors to build his house, and he would turn around and do the same for you. Although all of the society members, in a sense, ‘owned’ the Bulding Society, a building society was self-terminating. Once everyone in the neighborhood had a house, the society would be dissolved.
So in that sense, they were like a mutual or savings and loan, but with a self-destruct button. Those in charge at the time understood that their only purpose was to act as a community pool of money. A building society only needed to make enough money to cover its operational costs, not to make a profit.
Terminating societies continued to exist until 1980s – at which point, the banking laws in the UK were amended. Building societies were allowed to turn into banks. Most of them convinced their members to surrender their individual mutual rights in exchange for shares, and a number were swallowed up by larger banks. This was the ‘greed-is-good’ era of Margaret Thatcher, when numerous people, with their eye on a quick buck, joined building societies solely in order to gain voting rights, and subsequently pressured the other members to ‘demutualize’.
Suddenly, the emphasis was not in providing a service to members, but to generate profit for its shareholders. With that, as one study discovered, the pricing policies on demutualized societies grew less favorable for customers and more favorable to shareholders. The community cooperative had lost any semblance of its original function and turned into a pirate.
In America, largely because of the recent bailout, all the smaller community banks in America — who avoided these risky practices and more closely resemble a building society — are finding it impossible to compete, and are being swallowed up or closed down.
The problem is that modern banks have forgotten the basic reason for their existence as a cooperative pool of money, fairly distributed and we have lost any semblance of confidence in them because the mutual nature of the exchange has been entirely lost.
Move your money
Frustrated by the fact that Congress isn’t fixing things, publisher Ariana Huffington came up with an ingenious solution. Recently, she created a movement called Move Your Money, which urges Americans to move their money out of the large banks and into the local community banks. The idea is that if enough people move their money out of JP Morgan, Chase, Citibank, Bank of America, Wells Fargo, Goldman Sachs or Morgan Stanley, we will send a huge message to Wall Street and to the White House that we can no longer tolerate a bank that ignores the public interest. The Move Your Money website (www.moveyourmoney.org) lists all the smaller neighborhood banks that exist in your local area.
In the UK, Richard Branson and Virgin have announced their intention of setting up an alternative bank. So one of the first of the uncomplicated things we can do is move our money to smaller, less greedy banks.
Benefit of tit for tat
I was fascinated recently to see an experiment set up by the University of Leicester’s psychology department. They programmed two computers to be selfish and to engage in performing certain well-worn tasks, with no real benefit to working together.
Nevertheless, after a while, the scientists found that the computer programs began taking turns in perfect coordination. After initial uncoordinated interactions, as soon as the pair begin to coordinate efforts by chance, they began a duet of tit for tat.
Before long, they begin taking turns, and in perfect synch. The programs had worked out that by getting into coordinated turn-taking, they were both better off.
"This locks them into mutually beneficial coordinated turn-taking indefinitely," said the scientists.
Using evolutionary game theory and simulations, Professor Andrew Colman and Dr. Browning found that a similar variation of 'tit for tat' after their computer simulations evolved in at least two genetically different types.
From their work, they believe they've discovered that all living things have evolved to work better when they work together and take turns fairly.
Banks have become like the machines in the Matrix — a pointless, destructive law unto themselves. Nevertheless, they might learn something important from a couple of dumb computers.
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Thanks, what an informative article. I've been shopping for food from my local region (Santa Fe, New Mexico) for a couple years, now I know that I'll be doing the same with my money. Goodbye, WellsFargo.
Hi Lynne
Found this article really interesting especially the reminder of why building societies were created in the first place and how far removed we are from that now. I love the move my money idea and will look into it. Be joining you on Jan 30th for the intention experiment.
Best wishes
thanks for the blog on Banks, I have felt the same way as you for years. I am moving my money to a credit union.
Very timely, thanks for posting this Lynne. Yes, the bank thing is on everyone's mind. I've got my money in a credit union as I had trouble long before this issue became "mainstream". I'm actually GLAD it's all coming apart as I believe we can do better than this as a collective. This will stimulate some creative thinking about alternative lending sources...as they say "necessity is the mother of invention". There are some other ways to get financing such as micro lenders...there are a few in the US and expanding. Ode magazine features these entities regularly.
We're more powerful as a group than we think. It's time to use that power to build a better world for ourselves and coming generations (I have 2 sons and I'm concerned for their future). While the right wing crys "socialism" we would do well to ignore that nonsense and keep going (!).
Obama is on the right track...when these corporations act like children, treat them like it. It's clear they are still drinking the koolaid in never never land and need to wake up. Personally, I won't hold my breath waiting for THAT to change...just keep making adjustments that benefit the community. That feels good too!
I heard a good idea.Here is a variation of it.Make those corp's give the bonus money back to the tax payers.Give it to those at the retirement age.1 million dollars each.With this money they have to buy a new,energy efficient home and buy a new vehicle from an american car company.It would stimulate the economy by putting people back to work.The possitions newly open by those retiring,building new houses and new cars.And we fix up the old homes and get our people off the streets.Start acting like a community again and love and care for one another.
In Canada, we have credit unions that sound much more like the Building Societies in the UK. And they are here and well working well.
Thanks for sharing the info about move your money movement.
Very interesting about the computer experiment.
Eventually in time all things do realize that we're in this together.
The actual site is: http://moveyourmoney.info
Great article. I think we are so far gone, as far as the big banks are concerned that it's going to take something beyond what we can come up with as of yet, to turn this greed around.
It has to start at the college level where before the meltdown kids were coming out of MBA programs heading straight to Wall St. with determination to make millions in their lifetime and many have--they also, became today's Greed Squad. It's in their DNA now and as we can see by the obnoxious bonus amounts, they are not going to give up their creed of money rules the world so get as much as you can, while you can and because you can! I see no way to un-train their way of thinkin or ethos because they are brainwashed into believing that they earned it and therefore, they deserve it. The genie is out of the box!
Their major incentive is to design financial quagmires to earn huge profits for themselves while not giving a damn if the larger less wealthy population's bottom line goes belly up due to their foolishness or not. There is no regulation to stop them.
All of the big banks were aware of the sub prime problem years ago. They were warned back in 2005! Their greed kept them from doing anything to stop it from happening because they were raking the cash in. Goldman Sachs has made sure that they have so many really big movers and shakers--(even in Obama's adm.) and from every sector in their corner that they will always profit. No one is brave enough to put in place serious regulations to stop them. It would take a complete outsider but there are no outsiders in this bunch. They would be cutting off the hand that feeds them or feeds their investments or political campaigns.
Money trumps humanity and fairness at this point and time. How these banking giants can sit by and watch what has happened to people's lives is beyond me. But the Banking world went back to business as usual and took the tarp money, turn their backs on the taxpayers and now make more money than ever! AND are rewarding themselves handsomely without any humility or shame.
With one of Goldman's people inside the administration who is a dyed-in-the-wool Goldman man...there seems to be no way around getting any regulations or changes . No one with any clout wants to take on these big banks. That says a lot about how many people are secretly beholden to Goldman Sachs.
You have to love their name--it says it all. It couldn't get any better than..... Gold Man Sacks.
I moved my money into a small Federal Credit Union here in S. TX about a year ago. I decided Bank of America would not miss me since I could not find a phone number to our local branch. Can you imagine my huge surprise when I received TWO checks in the mail from my Credit Union at New Years, telling me that they had such a profitable year that they were sharing the profits with their members? I almost fell over at the mailbox. This is the same Credit Union that financed our new home with such ease and low closing costs that I continue to send them business at every turn.
So, goodby megabanks and your mega greedy executives. Who needs you? Not me!
Many loving and enlightened remarks above. Just one disagreement. Out of this thinking you are expressing comes ideas like Acorn in the USA. If you are not familiar with this scandalous outfit they have been using every dodge in the book to help people lie, cheat and steal their way into homes with mortgages they could not afford. They are reputed to have practiced harassment on lenders and banks accusing them of racism. At the first sign of hard times all these people began to default on the debt they had committed to.
People enlightened enough to be reading Lynn's blog want the best for everyone but you must be vigilant as to how that state is obtained. The end result of fraud and lies is chaos
Marylin is flat wrong talking about ACORN, please go to http://www.acornhousing.org/index.php and find out the truth.
Thanks.
What a great idea. all my friends will hear about this including my bank. Thanks
I was so disgusted by the actions of my lender, WAMU, that my husband and I refinanced with a local bank. They immediately sold our loan to Chase and now my stomach turns every time I see mail or emails from these banksters.
Thanks for the link, Benjamin. My partner & I are trying to save our home and have had a hard time. We'll check into Acorn. We're both hard working people, but our income is half of what it was. Both of us have excellent credit, but it doesn't mean much!Don't bank with B of A!
A follow-up on my story about the Federal Credit Union here in S. TX.
They DO NOT sell their mortagages. They make sure that they loan to responsible people in the community. They also do not escrow your tax and insurance money, letting you to that yourself so that you can earn interest on your own money instead of the FCU making the interest.
One last thought, please use your credit cards as little as you can., say only for gas. Those companys are to blame for much of the distress and hardships people are experiencing because they made it too easy to charge. Our daughter was GIVEN a CITIBANK credit card in college. She had no job, nothing, and they did not ask us either. Trust me when I say many kids are not ready for that. She is now forty years old and paying for her mistake over and over and over and over. Worse, we are too. It never, never ends either. We are subjected to harrasing phone calls, threats, and more and we had absolutly NOTHING to do with her obtaining a credit card from CITIBANK.
Everyone, please go to cash as soon as you can. Ditch and cut up those credit cards, all of them except one, and pay it off every month when the bill comes due. By the way-they call people who do this freeloaders. I am happy to be a freeloader. I hope all you can be freeloaders too.
Good by and good riddance B of A, Wells Fargo, CITIBANK, Chase, and the rest. Goodby to greedy executives too.
Peace and plenty to us all.
I concur with all of the above regarding switching to community banks.
The problems with the banking industry all started long before sub-prime mortgages. It originated with the inception of the Federal Reserve Board. If you wish to find out about the shinanigans of the banking industry, I recommend reading "The Creature from Jekyl Island."
The one example of a responsible person at Acorn in Pennsylvania is true. The corrupt examples seen on TV are also true. Look on youtube for videos on the fraudulent votor registrations obtained by Acorn. They stop at nothing to get what they want.
However all of this is beside the point. There is a fundamental misunderstanding of the nature of reality by these people. There is no shortage of wealth. It is available to everyone. If there was a limited amount to be divided up we would still have the same amount in the world as when money was invented. WHERE DID ALL THE REST COME FROM?
Lynne,
It’s amazing what you can learn at a Chinese restaurant on Elvis night in the UK!
With a degree in banking and finance, I can assure you banks exist today for one reason; to make money.
The fact is the shares of most of the large publicly institutions, mentioned in the thread so far, are probably owned by mutual funds, which are owned by the folks who’ve posted as part of their IRA’s and 401k’s.
It’s not about where you keep your savings or whose credit card you use, as you can see from Zora’s post about her mortgage. The financial system is so intertwined with government it is difficult to remove yourself from it.
You mention the self-dissolving Building Societies in the 1700’s. Remember in the early years of the United States government, the offices were filled by men who returned to their farms and businesses after serving their term. Now, we have lifelong politicians.
Unless you can stop government, you’ll never gain control of the banks.
My suggestion is not to run and hide your money in a small institution unless they are truly solvent. To know that fact, you should understand how to read financial statements.
Take your financial destiny in your own hands and learn as much as you can about the world of finance.
This is a fascinating article in the Wall St Journal about the history of banking in America. Are you a Jeffersonian or a supporter of Hamilton?
http://online.wsj.com/article/SB122360636585322023.html
hi to all - my favourite movie is Its a Wonderful Life with Jimmy Stewart. Its easy to blame the Banks for larger money problems but when we can begin to accept that they are an outer manifestation of our inner world then we can really make progress and examine our own imbalances. remember without the Watcher there simply is NOTHING THERE We are going to have a very hot week-end here in Perth OZ - well over 40 as have most of the other cities in Australia we certainly are the " fire" area on the planet!! Nature sends us all amazing messages!!!
I have always been a big believer in small local banks. If you're worried about lack of mortgage options. Consider that most, if not, all sell the loans to the same guys that the big banks do. Rates and specifics stay the same.
[...] Het klinkt als een goed plan voor nu. (http://moveyourmoney.info/) Je kan Lynne’s hele post hier lezen. Een van de commentaren is echt uniek. Van Marilyn. Zij schrijft; There is no shortage [...]
[...] Sounds like a good plan for now. (http://moveyourmoney.info/) You can read the whole post of Lynne here. One of the comments is really unique. From Marilyn. She writes; There is no shortage of [...]
You have all made some interesting pionts and the discussion is fantastic. However, I think the perspectives (even Lynn's) probably say more about political leanings than anything. The "liberals" blame "greedy wall street" and the conservatives blame "bad policy." The truth is that there is no single bad character in this plot, and we are dealing with multiple points of nefarious behavior from all involved. We are all human, we all make mistakes, and playing the blame game is easy on the day of the hangover.
From an insider's perspective, and as near as I can tell, this is roughly what actually happened.
The spark for the housing bubble fire was lit by two different, and very poor, government policy decisions:
1) mandate that banks make more home loans to poor people that can't afford to repay them and
2) reduce interest rates after the fairly minor "internet" recession of 2001 to "save" us.
While, on the surface, encouraging lending to lower income families seems like a good idea, the broader real economic ramifications were bad:
1) these loans have much higher default rates and the banks lose money.
2) these "artificial" loans that wouldn't otherwise be made in a real economy where banks want to be repaid, thus inflating housing prices because there were 10million new buyers that there otherwise would not have been.
3) disreputable individuals took advantage of the "low income" label to get no-income-verfication loans to make speculative bets on real estate.
On top of this, the FED dropped rates to ridiculously artificially low levels. When interest rates are 5% rather than 10%, the monthly payment after tax is just over half. You can pay 2x for the same house and have the same payment, thus housing prices go up too much.
In general, government makes very poor long-term decisions in favor of short-term voter happiness. The liberals can really screw things up in the name of "good" by not considering broader secondary impacts.
Then the "greedy conservatives" took over and broadened the ultimate damage done with various mortgage packaging schemes that pooled mortgages. The concept was "there are 1000 mortgages in this pool, they can't all be bad..." Famous last words.
So wall street took bad government policy and made a lot of money expanding it far further than it ever should've been expanded (helped in the interim by more bad government policy in the form of freddie and fannie).
Bad on top of bad made for really bad.
In the interim, small banks weren't even remotely innocent in this picture. They originated and sold many, many, many, many bad loans getting their little piece too. My favorite line from a small town banker in the middle of the mayhem in 2006: "if you lend on dirt, you can't get hurt." expressively beautiful idiocy.
Then the regulators came along and encouraged all this. They threatened to revoke charters of banks that refused to make bad loans at the top of a huge bubble. They approved millions of speculative real estate loans and kept right on approving them over the edge of the cliff. Bottom line is that mid-level bureaucrats don't make decisions, they check boxes.
We don't have a problem of too much regulation in this country, we have a problem of regulations that aren't adaquately followed or enforced.
Then everyone and their sisters and brothers started making money on their houses, buying more houses, "flipping" houses and borrowing more and more and more and more. How many of those people stood up and said "STOP!"
Bad policy, poor enforcement, greedy wall streeters, greedy "regular people" all combined to create a massive problem.
Everyone at the party got drunk on the easy money and didn't realize they were drinking shots of plastic-bottle tequila until too late. How many drunks make the decision to stop at 2am on saturday night when the parties still feels lively?
We are all to blame for this. The government shouldn't save us from ourselves. Wall street shouldn't regulate our economic good sense. We shouldn't borrow money just because the government or wall street will lend it to us.
A huge bubble requires that many people make lots of poor decisions, which is exactly what just happened.
Dear Banker,
While I'm willing to stipulate that many people in every Sector contributed to the Housing Bubble and it’s intendant collapse, I hold some more culpable than others. People like YOU and all the other Financial Experts I expect knew better, but did it anyway.
The Sub-Prime Borrowers and Individual Speculators were easily duped, in my opinion, by the 'Experts' and their advice and behavior. They are not supposed to know the ends and outs, the subtleties, of Financial Systems. They followed YOUR Lead! (You do still claim some expertise in these matters, yes?)
And the bad advice and behavior still continues from your Colleagues. The thing to do is NOT figure out how to continue the activities that caused the trouble! The Solution IMNHO is to reinstate the Glass-Segal Act (Depression Era Legislation that created the separation between Commercial banks and Investment Banks) with the understanding that any Contracts made prior to its new effective date will stay in force until their Renewal Date. At that point they will expire. No new deals will be made and no existing deals will be renewed that violate it. The system of Securitization will then 'unravel' itself and we will get back to a Financial System that there is some hope (however small) of understanding.
That does sound superior although i am still not too certain that I prefer it. Regardless will look further into it and decide personally! 🙂