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We Desperately Need to Return to a Free Market Banking System

By: Steve Johnson

8/14/2009 - 17 Comments

The current savings rate in the US is very low, while the average credit card debt is around $8,000. 

That is all going to change in the next decade as consumer credit becomes harder to get and savings become a vital part of financial survival. As families begin saving, many will consider ten to twenty thousand dollars a goal to put away in a savings account.

Bank deposits are protected by the FDIC, so your money should be safe from losing it but not safe from inflation or higher banking costs.  

Banks are still sitting on trillions of dollars in bad loans that they have been able to ignore with the mark-to-market account rule change that congress made a few months ago to let banks play tricks with their balance sheets.  But nothing has changed and thousands of banks will probably fail if the economy does not recover.

Bank Failures

In 2008, 25 banks failed and were taken over by the FDIC. This year 70 banks have failed so far, with another 117 on the trouble list. Perhaps 200 will fail before the year is over.  Next year, as many as 500 banks could fail and in 2011 perhaps another 1000, totaling 1725 bank failures from 2008-2011 or 20% of banks. 

It is quite possible for more than 1700 lenders to fail in the next three to five years as banks are forces to sell trillions of dollars in bad loans and over priced assets at market prices, compounded with credit card, auto and home equity loan defaults. 

The FDIC doesn’t have nearly enough money to pay for the 200 banks that could fail this year without asking congress for more money.  And they will be asking congress for a lot of money in the next few years.  That money will have to be created by the Federal Reserve, which will be forced to print the money as the national debt has already exhausted their ability to borrow the money by selling Treasury bonds.

Adding another several trillion dollars to the currency will have drastic effects on the value of the dollar. The banks will be desperate for deposits to replace the money they lost in bad investments.  If the Federal Reserve starts removing the money they gave the banks like they say they will to stop inflation from getting out of control, banks will be in even more need of deposits. If the dollar continues to weaken, foreign investments will also not find there way into the US banking market.

At the same time, congress is busy trying to create an entirely new banking regulators system, which will cost banks a lot of money just to stay in business.

Bank Suppliers

As banks fail, bank suppliers will also find there market shrinking just as GM suppliers have followed GM into bankruptcy.  Bank suppliers will be hard pressed for growth as the number of banks contract.  It will be very difficult for any bank supplier to invest in new product development with a shrinking market. 

The only growth will be in offering new compliance products to help banks manage the new banking regulations that congress is working on.  These products may help boost bank supplier sales, but they don’t help the overall economy or the banking industry.  More complex regulations will push more banks out of business and drive up consumer banking costs – with higher interest rates and fees.

Consumers Get The Bill

Because the government has bailed out the banking industry, consumers are going to pay for the failed banks and all the trillions of dollars in bad investments that bankers have made. Then consumers will pay for the higher costs of banking that congress will impose with a new regulatory system, with higher lending costs, interest rates and fees.

Consumers will also have fewer options as the most vulnerable small and mid-size banks begin to fail and the largest banks (protected by the Federal Government bailouts) will remain.

The largest banks that are already ‘too big to fail’ will get even bigger as they continue to offer unrealistic product offerings like ‘free checking’ and ‘no minimum deposits’, which they can only offer because there losses are funded by the Federal Government bailout money and protected with the ‘too big to fail’ mantra.  These competitive advantages of the largest banks, which are essentially government banks, will drive private banks out of business – all funded by the consumer though inflation and higher taxes.

Banking Crisis Caused By Government Intervention

Just like the housing market crisis and the stock market crash and the auto industry collapse, the banking crisis was caused by the government’s intervention in the economy by juicing the economy with a decade of low interest rates.

If the government would not have inflated the housing bubble, we would not have a bank on every corner and therefore would not have a banking crisis.

The worst thing the government could have done is what they did by providing banks with taxpayer bailout money.  This action put the taxpayer on the line to pay for the failure of the banking industry – through inflation, higher prices and higher taxes for years to come.

Congress should have let the wealthy investment banks fail, instead of handing them a blank check from the poor middle class taxpayer.  Then the Fed did the second worst thing they could do by dropped the interest rates to zero.  This is like putting the banks on life support, even though the banks are already dead and the cost to keep them on life support is being funded by the taxpayer. Pull the plug, its already over.

We need higher interest rates to build a sound economy and a sound banking system. Without higher interest rates, which increase the value of saving and borrowing, the banking industry will continue to be dependent of the actions of the Federal Reserve, funded by the taxpayer. 

We need to return to a free market banking system.  And for that to happen, we need free market financial leaders in congress and the white house.

Until then, consumers will continue to get the bills for these failed policies. 

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