Tuesday, July 15, 2008

Bank deposits are investments, and can go wrong

Karl Denninger takes us back to basics about banks and "your money" (highlighting is mine):

I want to talk about IndyMac for a bit.

The news has covered a few really, truly sad stories. People with $200,000, $300,000, $400,000 or more in there who have seen 50% of their balance over $100k disappear overnight.

Older people who literally have their life savings in these institutions. People who are relatively unsophisticated, but have been told through the years that the government will make it all ok, and who believed it.

It tugs at your heart to see a 70+ year old man pleading for them to let him have his money - money that he worked and saved a lifetime for.

If only it were that easy.

People don't think of a bank as being an investment, but it is.

You are lending your money to the bank so they can make money with it, and they pay your a coupon - interest, or the "safekeeping" in the case of a checking account that does not pay interest - in return!

4 comments:

sobers said...

Perhaps Marx (or Engels, or Lenin, or some other bearded socialist - I'm haven't made a great study of such folk) was right when he said that capitalism would destroy itself from within.

Without limited liability and fractional credit banking we would all now be living in much reduced circumstances. The economic growth that they allow enriches us all. But at heart as we are finding out it is an illusion. No bank can pay interest on deposits without lending them to others at a higher rate. There is not enough cash in any bank to refund the depositors their capital if they all ask for their money at once, if at all.

I can foresee a situation when the government (of the USA or UK) will decree no-one can remove deposits from financial institutions to prevent them from failing.

SACKERSON said...

Hi, Sobers. "No bank can pay interest on deposits without lending them to others at a higher rate." That one also puzzled me for years, but of course, if the bank has loaned out 10 times as much money as we've deposited, it's earning much more interest than it's giving to depositors. What a scam!

Re your last, I do wonder whether we shouldn't hoard our small wealth in several different ways, including the shoebox at the back of the wardrobe.

SACKERSON said...

Hi, Sobers. "No bank can pay interest on deposits without lending them to others at a higher rate." That one also puzzled me for years, but of course, if the bank has loaned out 10 times as much money as we've deposited, it's earning much more interest than it's giving to depositors. What a scam!

Re your last, I do wonder whether we shouldn't hoard our small wealth in several different ways, including the shoebox at the back of the wardrobe.

sobers said...

I wouldn't think that you couldn't get ANY money out, probably a limit per week/month, and an upper limit in the case of deposit accounts. But a bit of spare cash hidden somewhere safe would go amiss. Better still a few gold sovereigns or such.

There was a good quote on a blog the other day from a share trader back in the early 70's crash "What you need in todays situation is canned goods, krugerrands and a gun!"

I would concur with the first 2! A months supply of dry/canned goods wouldn't go amiss if things got difficult and food stopped showing up in the shops for some reason or another. (I worry about frozen stuff - if the electric gets shut off that's gone in days). And gold is always tradeable for food/shelter etc. Greed never goes away. My ex girlfriend never left the house without £50 in cash in her pocket and her solid gold bracelet on. She reckoned she could get by in an emergency with those two. Perhaps she is ahead of her time!