Saturday, January 23, 2010

Banking on Obama

Barack Obama has announced that he will pass legislation preventing banks from becoming “too big to fail”. There will be limits on their size and risk taking activities. Banks will prevented from owning hedge funds and other special purpose investment vehicles to remove risk from their balance sheets. These are good things, but it will not happen.

Christians should not count on the politicians to fix the banking system. Whenever the bankers and politicians get together, compromise follows right behind. The new legislations will be twisted to protect the banks. They will find ways to make any new laws work for their benefit.

The solution rests with ordinary people. If people withdrew their funds form banks that undertake risky behaviour and deposit their money in safer banks, at least some of the banks would be forced to change.

Power to the People
Depositors should also start asking banks what they will do with their term deposits. They should ask if the money will be loaned for a longer term than the term of the deposit. If the bank says yes, they should ask how the bank will repay their money when the term of the deposit has ended. The bank will say that it will obtain deposits from other people or borrow the money from other institutions. This kind of questioning will expose the dangers in what the banks are doing.

If enough people ask for a different service, an innovative bank will be able to get an advantage by providing that service. If consumers start enquiring about a bank that matches the terms of it loans with the terms of its deposits, a bank should emerge to provide that service. If that is what most depositors really want, then that bank should grow quickly. As more and more depositors choose this service, other banks will have to start providing it, so that they do not lose market share.

The power to change the banking system lies with depositors. If enough people demand a better service, banks will have to change their practices. All that is need is for one bank to provide an alternative service. Depositors can then use the power of their money to reward that bank and punish those that refuse to change. Power rests with those who own the money and the money is owned by the depositors, not the banks (From Bank Deposits and Loans).

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