Just another of my many dumb ideas. Economic bubbles like the housing bubble which burst in 2006 and the derivatives bubble which burst in 2008 can cause massive amounts of damage to an economy and affect many millions of people greatly. At the center of these storms are banking institutions lending out money, making what amounts to financial bets, and insuring those bets against losses. It turns out this is a ridiculously multi-trillion dollar industry in a world there is only about three trillion dollars in existence. It's kind of interesting when you think about it...it also sounds fraudulent and that's probably because it is at some level.
One thing I've learned over the years is that banks are not required to fully back their loans. In fact any given bank is only required to have a 4% cash reserve which means that if you've deposited $20,000 in the bank, they are only required to keep $800 of that onhand and the bank will make loans with the rest. (oh wow, it's actually worse than that)
That might sound all well and good but here's where it gets crazier. Thanks to something called Fractional Reserve Lending (which is totally legal by the way), it turns out the bank can lend out far more than the $19,200 it has available to loan. It's kind of scary. The example in the link shows how a $100 deposit can legally turn into over $350 in loans for the bank and legally exist as over $450 in deposits when only $100 ever existed. This is a source of inflation by the way. I personally don't think for a moment big ticket items like cars, houses, and education would cost what they do if they weren't propped up by these kinds of lending schemes.
Now, despite the massive recession following the Lehman Bros. collapse in September 2008 - I think it's called the Great Recession now - banks are rather insistent that they are not in need of additional oversight in their lending practices. Personally I think that's bullshit to the highest level yet they're clearly getting away with it so don't expect much folks. But I did have this one idea and believe it or not it comes from a Warner Bros. cartoon.
I remember when a bank robber would rob a bank in certain cartoons, they'd pass by the front entrance where the bank proudly boasted its total assets. The criminal would then erase everything but the cents and run off. Well...what if banks had to do a version of that?
What I'm thinking is this. A bank has so much cash - physical actual cash - on hand. It also has various obligations on hand such as depositors' accounts, certificates of deposit, mortgages, other types of loans, etc. Larger institutions might have various CDOs and other derivatives on their balance sheets as well.
Now, I'm one of those people who believes that it was overlending by the banks which led to this problem. I see it like a hot potato or a pyramid scheme. When things are going well, no one notices but eventually it has to end because otherwise the value of an asset or commodity would become infinite. Take houses for example. At the start of the bubble, people sold their homes for a tidy profit and those homes in turn could be sold again for an even higher price. I saw homes in my area go from about $250,000 to over $500,000 over the span of five years or so. The mentality becomes that of "Houses can only go up, Up, UP!!!" and they do...for a while. Eventually, however, some schmuck is left holding the bag when he can no longer sell his home for a higher price. He's forced to take a loss. Now the word gets out that if you're patient you can get a better deal. Now home prices start to sink leaving more people holding the bag because now their homes are worth less than what they paid for them.
On top of all this mess, as home values were increasing (on paper, mind you), banks were all too happy to have owners tap into this "equity" and loan the homeowners money off the fictitious increasing value of their property. And why not? The home's value is rising so fast, the loan will pay for itself. I'll remind you here that people are stupid and easily swept up in such fads.
Anyways, the point I wanted to make was, how about a trade? No new banking regulations (hell, we can even undo some other regulations too to sweeten the pot) in exchange for a number. A number which must be posted on the bank's entrance, on every bank statement, front and center on its webpage, etc. That number would be just how much your account would be worth if the bank had to pay out all its obligations at once with the actual cash it has on hand. Realizable assets like loans and mortgages don't count. It's simply CASH ON HAND ÷ OBLIGATIONS. This figure could be expressed as a percentage. In other words, for every dollar I have on deposit, the bank in the event of failure can guarantee me x.xx% on the dollar of my deposit. Bank statements would express the actual guaranteed amount.
Now imagine you received your bank statement and saw the guaranteed amount of your $20,000 deposit listed as $800. That might give you pause. But it's worse than that. The derivatives market is estimated at over $600 trillion, and the real estate market is estimated at $34½ trillion, the stock market capitalization is estimated at $15.35 trillion, among other things I'm sure. Think about that. About $650 trillion dollars being traded around compared to about $3 trillion in cash.
Viewed totally, that means there's only about ½¢ for every dollar in obligations so if the entire system (somehow) collapsed, you (on a system-wide basis) would only receive less than $100 for your $20,000 deposit. The reason I say less is because not all of that $3 trillion dollars is in banks. If I remember correctly, 2/3s of it is held abroad too so you're talking less than $33 of your $20,000 could be guaranteed.
If a bank had to admit that to you; that it could guarantee so little of your deposit...would you feel safe putting your money in such a bank? Yes, a lot of unwarranted assumptions are being made here. Obviously FDIC guarantees are not being considered but I wouldn't anyway. The banks abuse the FDIC notion now. They figure since your deposits are guaranteed up to $250,000 by the federal government, they see no reason to be careful with your money because fuck it, it's guaranteed. You won't lose so why should they give a shit about what happens to it? Banks lend money in your checking accounts too. Checking accounts are supposed to be demand accounts and thus fully on deposit at the bank but they sweep the money up when the bank is closed and lend it for short periods during the overnight without your permission nor do they share the profits with you.
But anyways, long-winded entry aside. That's what I want. A single number. A number that shows just how much my deposit is actually guaranteed for. Banks would have much greater incentive to be careful and considerate with other people's money if people saw at a glance how reckless the bank is behaving. People would seek the highest guaranteed number.
How to properly enforce it would be another question.
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