OT: Rating the President

[Fian]

"No. Banks make more money by SPENDING it! They buy interest by loaning money out to people. They then loan out the money they make on interest, to make even more money. If people didn't spend more money than they make, and therefore have to borrow it from banks, and just saved all that they made in bank accounts, the banks could not make as much money, and so would loan out less at higher rates, and those that would have borrowed could not afford to borrow any money. As long as people are spending money, banks won't run out of it."

Wow, I didn't realize what I was talking about was viewed as so controversial. Question one: How do banks get money that they can loan in the first place? Someone chose to deposit it in the bank. What if no one ever deposited money into a bank, how much money would the bank have to loan to the spenders? 0. If a bank has 1 million dollars, and 100 people want to borrow that million dollars, who will the bank lend the money to? The person willing to pay the highest interest rate for it (or if the rates are regulated, maybe they will hide the extra money in "fees" that they charge). If 10 banks have 1 million dollars, and only one person is interested in borrowing it, what interest rate will the person pay? The lowest rate offered by a bank.

Based on the above comments, banks need people to save in order for them to exist. If there is too little money saved, interest rates will be pushed higher due to competition (supply versus demand). If there is too much money, interest rates will be pushed lower (supply versus demand). Greenspan setting interest rates confuses the matter, but I am sure that feedback from banks in regards to their supply does affect the decisions that he makes as well. If people should be encouraged to borrow more so that they will spend more, why does Greenspan ever raise interest rates? The reason is that the rate of spending needs to be balanced, not overdone.

"Banks make more money by SPENDING it!"
If you consider a person depositing money into a bank which is then loaned out to another person as "spending." Then I would agree that "spending" is good. I recommend more people "spend" their money by depositing it in a bank.

"If people didn't spend more money than they make, and therefore have to borrow it from banks, and just saved all that they made in bank accounts, the banks could not make as much money"
I agree that if everyone saved and no one borrowed, then there would be an economic problem. They key here is balance. Saving versus spending must be kept in balance.

"As long as people are spending money, banks won't run out of it."
I am not sure about this, but I don't believe that the interest that banks earn on their money is lent back out in the market. Most of the interest made is paid out to those who deposited their money in the banks, staff/equipment who run the bank, and shareholders who own the bank. The rest of the profit could in theory be deposited back into the bank, but I have doubts about that keeping pace with inflation/growth of the economy. If inflation or the economy grows faster than people save, you will eventually run into a point where the banks don't have enough reserves to satisfy all of the loan requests resulting in higher inflation.

[Phoenix-D]

"If 10 banks have 1 million dollars, and only one person is interested in borrowing it, what interest rate will the person pay? The lowest rate offered by a bank."

If 10 banks have 1 million dollars, and -no one- interested in borrowing (because everyone is saving as much as they can), what happens? The bank goes out of buisness. This is what Fyron is talking about.

Phoenix-D

[Fyron]

Fian:
It is not controversial, you are just confused as to how banks operate.

Of course if no one deposists any money in the bank they won't have any to loan out. But, there are always people depositing money in the bank. And even if no one deposited for a while, banks own stocks in the stock market, and make money off of that. They already have money in their vaults (~80% figuratively, depending on the current Federal Reserve Rate), and loan it out to make profit off of. It would take a bizarrely unusual amount of circumstances to deplete the banks of all money with how the banking system operates in this day and age.

People depositing money in the bank are not spending it. The bank goes and "spends" that money to make more money. There is a colossal difference.

I am not sure about this, but I don't believe that the interest that banks earn on their money is lent back out in the market.

Almost all of it is loaned out to new customers. Banks make a lot more money in interest than their operational costs and the interest they pay people with savings accounts.

The interest made on a savings account is designed to be significantly less than the rate of inflation, and so the banks minimize their losses on savings accounts.

[jimbob]

If people didn't (1) spend more money than they make, and (2) therefore have to borrow it from banks, and just (3)saved all that they made in bank accounts, the (4)banks could not make as much money, and so would loan out less at higher rates, and those that would have borrowed (5)could not afford to borrow any money.

I don't know. I think that banks have become pirates who take and take. I personally think it would be better for most nations/economies if people worked with people to make things happen instead of people borrowing from institutions (and my goodness, there is a huge difference between how people interact with eachother vs. how institutions treat people). I honestly feel that one of the worst things in the modern era is the degree of indebtedness people are in to their respective institutions, and usually only because they're addicted to buying beyond their means!!! (oooh.. gotta have that DVD player, that brand new car....)

1) people spending more money than they make results in/is deficit/debt spending. I don't know why our current society believes that this is a good idea, but it sure is addicted to it. Look, if someone needs a car, they should buy within their price range or save up until they can afford it. Constant interest payments aren't good for people!

2) that said, there are times when large investments should be made (ie starting a business). but this doesn't necessitate the existance of banks, it actually requires somebody with liquid assets, eg. a business partner. When loaning money, the bank is just a business partner who gets paid interest for not showing up to work!

3) with the paultry interest rates and the amount of service charges, the only thing the bank has over my trusty mattress is a few armed guards and a vault door! People should save some money, but they should also invest some money. They should not give any of it to the banks, because their money ends up with shareholders - instead they should invest so that they are the shareholder! But hopefully they can be the shareholder of an organization more productive/valuable than just a money-grubbing bank

4) this assumes that banks are a required institution... they're just a handy institution, not a requirement for a healthy thriving economy.

5) and so people would have to band together to start up capital projects, businesses, etc. etc.
Hmmm people working together, people dominated by a bank, people working together, people dominated by a bank....

I just think there are some weak/sick points in how our modern economies run, is all.

[ February 14, 2003, 01:00: Message edited by: jimbob ]

[Fyron]

1) people spending more money than they make results in/is deficit/debt spending. I don't know why our current society believes that this is a good idea, but it sure is addicted to it. Look, if someone needs a car, they should buy within their price range or save up until they can afford it. Constant interest payments aren't good for people!

Can you afford to go write a check for a brand new car today? The whole thing at once. What I meant was, I can't afford to buy a car today. So, I take out a loan to spend more money than I have. I pay the loan back over a period of months/years, as I can afford small payments over a time period, but not all at once. Take houses for a better example. Who (that is not rich) could afford to go write a check from their checking account and buy a house today? Almsot noone, that is who.

This is what banks are for. Banks are a necessity.

[ February 14, 2003, 01:05: Message edited by: Imperator Fyron ]

[jimbob]

Banks in our current society are a necessity, but what ever happened to the extended family, people working together, etc. Before banks existed in their current form, people survived (as did the economies) quite well! The idea of a banking institution loaning out money to joe nobody for just about anything (lines of credit, loans for vacations,etc) is a recent affair. And I'm pretty sure that you could write a cheque (note the spelling, Canadian ) to buy a car, it would just have to be a used car in the 400-500$ range is all.

N.A. was settled on the basis of hard working/entreprenurial people banding together to achieve greater things. There was an era in our contries when farmers did barn raisings, families bought and ran stores together, people lived in extended family housing arrangements, etc. Banks are not needed for any of these functions, because human relationship can fulfill any of these.

I will concede that very very few of us can buy a house outright, and that a mortgage is a likely requirement. However at least in this case the borrower will end up with a decent asset at the end... but wouldn't it be better if we could avoid paying double or more of the houses value by having a society of lender/borrowers instead of a society of banks/borrowers.

[dogscoff]

will concede that very very few of us can buy a house outright, and that a mortgage is a likely requirement. However at least in this case the borrower will end up with a decent asset at the end... but wouldn't it be better if we could avoid paying double or more of the houses value by having a society of lender/borrowers instead of a society of banks/borrowers.

The other thing to consider about mortgages is that before banks and mortgages, houses were generally much cheaper. They were made of simple, readily avvailable local materials and families would often build their own homes. The technology and materials involved in house building is far more complex and expensive than it was, but in most cases the price of a property is mainly to do with the cost of the land it's built on. If all we were paying for was the bricks and mortar (and glass and central heating and electrics and solar panels=-) then houses would probably be in the same kind of price range as that of a car.

Of course it's all complicated these days by the estate agents' markup, the legal fees involved in buying and registering a home, the labour of the various professionals required to design and build the house to the necesaary legal standards...

EDIT: Am I imagining this, or did I see a thing about a place in Australia somewhere wher, in the absence of building materials (they're in a desert) they dug themselves an entire town out of the rock beneath their feet, and still live there very comfortably now. Need a new bedroom? Get the pick axe Norma...

[ February 14, 2003, 16:48: Message edited by: dogscoff ]