Sunday, September 09, 2007

Term Deposits (7) - Trust and Honesty

If bank depositors understood the risks involved, they would not have so much confidence in banks. If the farmer who borrowed the tractor for six months lent it to another farmer for 10 years, the owner would get a bit upset. He has lent his tractor to a farmer who does not know how he will be able to return the tractor at the time when he has promised to return it (after six months). The farmer might be able to borrow or buy an equivalent tractor to return, but that might quite costly. The owner of the tractor would become quite nervous and would regret leasing the tractor to this farmer. He would probably consider the farmer to be dishonest.

Depositors should view banks in the same way. Why should they trust a bank that has taken money on deposit for six months, and lent it to someone else for 10 years? Why should depositors trust the bank, when the bank does not know how it will repay the money when the term of their deposits are complete? Why are banks that behave in this way not labelled as dishonest? We should demand better behaviour from the banks that care for our money. We should not trust organisations that behave so perversely.

2 comments:

norrbu said...

You're using the bank for other services - debit cards, checks - payment of bills - banks avoid holes, literally. You're not going to carry bills with you, and hide the rest in a hole somewhere, or are you? I thought that was a relatively simple intuition. Please correct me if I am failing to see the larger picture.

RonMcK said...

Using these services does not make our money any safer.

I am not interested in choosing between a bank and a hole in a tree. I want to be able to choose between a dishonest bank and an honest one.