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Banking is way too much of the economy

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October 14, 2009 – Comments (17)

I have argued in the past that the financial sector does too little for the economy relative to what it sucks out of the economy.  Yves has a post questioning the value of the banking industry.

Seriously, it is as if the banking industry functions under the adage "possession is 9/10ths of the law."  They most certainly have taken money that isn't theirs and paid it in bonuses to themselves and completely put at risk people whom the money belongs to at risk for getting it back.

And in the big picture, if there is always a spread they suck out of the economy, ultimately it is better for the economy to avoid that spread, however, the rules are such that people have saving and debt and ensure they owe the banks a bit of that spread instead of paying off debt.  And it makes no sense in the big picture as to why people think this is a good idea.  Ultimately, the bank takes its spread so ultimately the masses can not be better off.

17 Comments – Post Your Own

#1) On October 14, 2009 at 10:41 AM, brickcityman (< 20) wrote:

So what do you recommend we do? 

 

Personally I've been thinking of cancelling out some of my debt with a 401K loan, but I am still weighing the "costs" of this approach.

 

Beyond what else is there?  Write your congressman and demand action be taken?  ...  So that they can take the choicest letters to have a laugh at over drinks with banking industry lobbyists?

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#2) On October 14, 2009 at 10:55 AM, russiangambit (29.12) wrote:

FInance is sort of like military - non-productive spending layer that is providing us services ( see post by Chris Graley today). Only we got too much of the services , more than we need. We can't pay for them. 

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#3) On October 14, 2009 at 11:04 AM, carcassgrinder (35.71) wrote:

Take a look at the percentage of GDP that the financial sector is responsible for over the last 50 years.  30 yrs ago the financial sector was accounted for 7%-10% of our GDP.  It now is closer to 40%....and arguably higher than that in real #'s.  It is the american dream come true....wealth creation without productive output.

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#4) On October 14, 2009 at 11:09 AM, carcassgrinder (35.71) wrote:

Productive output requires all those things that easy-money makers hate.  It relies on overhead, labor, supervision, property, liability...and worst of all....HUMANS.  I believe that we will soon see more and more banks realizing this and therefore stop investing money in small and midsize business loans and just "invest/trade" the money.  The markets are becoming so manipulable, that banks will feel markets are a safer bet than people.  We are already seeing this.

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#5) On October 14, 2009 at 11:22 AM, bigcat1969 (92.41) wrote:

Well JP Morgan just made a bundle and almost all of it on trading.  Net Income YOY at the Investment Bank was up 118%, while at Retail Financial Services it was down 89% and Card Services posted a $700 million dollar loss.  Other bits of the company were up somewhat, but its clearly playing the markets that is the driver for GS, JPM and the others.  Ironically this positive news will force the markets up and allow the banks to make more money investing, while companies that have to deal with those silly broke people struggle along with falling revenue.

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#6) On October 14, 2009 at 11:23 AM, brickcityman (< 20) wrote:

Again... how as a individual citizens do we combat this?

 

Seems to me that one way to do it is to remove the fuel on which they run...  Stop using actively managed funds for retirement, possibly use 401K loans to cancel out debt, and just generally try to eliminate paying any interest and fees to anyone but yourself.

 

Anyone else got any other ideas? ... possibly favoring small banks and/or credit unions for banking purposes?   

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#7) On October 14, 2009 at 11:25 AM, russiangambit (29.12) wrote:

> Seems to me that one way to do it is to remove the fuel on which they run...  Stop using actively managed funds for retirement, possibly use 401K loans to cancel out debt, and just generally try to eliminate paying any interest and fees to anyone but yourself.

You can't. Their fuel is coming from the FED, retail investors are barely participating in this market. FED is the gate keeper for the whole system.

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#8) On October 14, 2009 at 11:34 AM, bigcat1969 (92.41) wrote:

No wonder they won't open the books for Ron Paul, Russiangambit.  Can you imagine what would happen if it came out in the open?

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#9) On October 14, 2009 at 11:34 AM, brickcityman (< 20) wrote:

@ russiangambit

 

I fully understand that... but politicians are generally a pretty fickle bunch.  Given midterm elections next year I think most of the major banks realize they need to get retail investors into the game in a big way over then next 3-6 months.

 

I'll be the first to admit that I have been completely wrong so far about how things will go down...  I started pulling back and exitting the market way too soon in my retirement accounts.  Likewise I was overly aggressive about setting up for a fall in my "play money" account.  I may continue to have my expectations counfounded by the actions of the market.

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#10) On October 14, 2009 at 11:37 AM, ocsurf (< 20) wrote:

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#11) On October 14, 2009 at 11:37 AM, ocsurf (< 20) wrote:

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#12) On October 14, 2009 at 11:39 AM, carcassgrinder (35.71) wrote:

I agree with your approach Brickcityman...I think all the menas you listed would be somewhat effective on a large enough scale.  And I do believe that using regional and CU's is a good approach also....but you need to do a lot of homework on these entities also to make sure your money still isn't ending up in the big players hands.

I ultimately agree with russiangambit as to the average persons ability to effect the situation.  One of the goals of wealth creation has always been to get the 'reliance on people' out of the equation.  We are upon an era where this is possible. 

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#13) On October 14, 2009 at 11:55 AM, alstry (34.92) wrote:

At this point there is really little that can be done absent revoking charters of Money Center Banks....they no longer need to loan to citzens any more to make money.

As a matter of fact, loaning to citizens is a money losing venture due to defaults.

When you can borrow money for free and loan it right back to the government for a HUGE spread guananteed.....why would you loan money to citizens.

The only problem is after you loan enough the the government and not to the citizens, tax receipts evaporate and the government can no longer pay the banks and the banks own the country......

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#14) On October 14, 2009 at 5:05 PM, dwot (42.57) wrote:

Interesting debate.  Personally, I lost the battle between my husband and my mother-in-law about putting the money on the mortgage and getting rid of debt rather then saving for retirement.  That battle costs us 30-40% of our savings in the bubble around 2000 and literally, in 2006 we were where we started going back to 1991, basically no gain what-so-ever on monies saved going back over 15 years.

It just so happens that I was pretty good at reading and analysing  the market when I was actively vested and I more then made up for the incompetent advisors.  So, in my case, having money invested has worked to my favor, but there was an enormous set back along the path. However, had I remained a passive investor I suspect my savings would be down from 2006 right now, which is what has to be true for most people.

If you think about it, who is giving the advice to start saving for retirement?  Bankers.  No question compounding works in your favor with compounding when interest rates were higher, but I serously doubt it does at today's rates.  

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#15) On October 16, 2009 at 12:03 AM, ByrneShill (73.92) wrote:

Compounding? Let's say you make 60000$ per year in 2009. You're 30 and plan to retire at 65. If you invest 20 000$ per year at today's rate of 4% on GICs, you'll end up with 3.3 milions in 35 years. On a 3.1% inflation rate, it's gonna be worth roughly 1.2 milions. If you plan on using 4% of that (so that you perpetually use that money), then you'll roughly end up with 45k$ per year in today's dollars.

Put simply: you need to save 33% of your salary to retire at 65 and keep the same expenses. In other words, you're bummed. Nobody can spare 33% of his salary, and retiring at 65 isn't exactly anyone's dream. So let's make things clear: people my age either bet on the market, live into a cardboard box, or we start eating a lot of bacon right now and hope to have our first heart attack at 45.

I was running the numbers last week, and there just isn't any way I can retire before I'm 69. If anything bad happens to me (job loss, sickness, car accident, whatever), then I'll work till I die. Kinda makes welfare looks tempting.

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#16) On October 16, 2009 at 9:05 AM, russiangambit (29.12) wrote:

"We have to regain our ability to produce goods. Moving money around does not necessarily provide dinner on the table," Volcker said. "You can't run an economy where the financial sector is making 40 percent of the profits."

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#17) On October 16, 2009 at 9:10 AM, russiangambit (29.12) wrote:

>  Put simply: you need to save 33% of your salary to retire at 65 and keep the same expenses. In other words, you're bummed. Nobody can spare 33% of his salary, and retiring at 65 isn't exactly anyone's dream. So let's make things clear: people my age either bet on the market, live into a cardboard box, or we start eating a lot of bacon right now and hope to have our first heart attack at 45.

People seems to be always looking to get something for nothing, and that drives them in all kinds of gambles, including the stock market. Yes, a few good gamblers make it, and may be you are one of them. But majoirty only looses more than they otherwise would.

People need to acknowledge that the early retirement is a pipe dream for an average person, unless someone else is paying for it.

What happens if we assume that we can cut expenses in half in retirement? Will it bebpossible to achieve with 15% savings? After all, we don't need to pay for children in retirement. My kids are my biggest expense right now.

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