Archive for October, 2011

How we think it works:

We deposit our money at the bank and the bank then lends out that money to others, right?

How it really works:

People do make deposits, yes.  Banks also make loans, yes.

What I’m having trouble with is conceptualizing how they are connected.  Banks don’t need the deposits to make the loans. Loans are NEW money that didn’t exist before.

Banks are not taking your money (from your deposit) and then giving it to the loanee.  The bank simply says “Ok, we are giving you a loan,” and then they make a digital keystroke in the loanee’s account, and, presto, there is new money! Magic!

All those millions of bank customers (i.e. all of us) are a hassle. We aren’t very profitable.  We require banks to put branches everywhere and have tellers.  Mostly just so they can “warehouse” our money, as most of us don’t use fancy services.  We just write a few checks and add and subtract money from our account.  Those are pretty modest needs.  Why not simply stop providing depositor services and still give out loans (which is far more profitable)?

An aside here is for people to remind me that our fractional reserve banking system requires banks to keep about 10% of assets on deposit for every dollar they lend out.

This is simply a legislative requirement though (we invented it); so we could easily change it.  Also, it reminds us that banks are created legislatively by government; they wouldn’t exist otherwise…so for banks to ask government to stay out of their affairs is disingenuous.  The two are inseparable by definition.

However, even with the 10% requirement, why would the 10% need to come from us in the form of our deposits?  Why not borrow the 10% from the government or from other banks.   In essence, when we deposit, the bank is borrowing from us and paying a small interest to our account.

Why not just borrow from elsewhere and pay a small interest to them?  Then the banks wouldn’t have to deal with all the small consumer accounts, which is admittedly a lot of work for little reward from a bank profitability perspective.  In the end all money (even the money which we eventually deposit) originates from the government.  Why not just borrow directly from the government (since that is what is happening indirectly anyway)?

Indeed, why not?

I guess I’ll restate here in summary:

I’m saying consumer banking (where normal people deposit paychecks and maybe write some checks and use an ATM) is not causally related to lending. The two are associated, but you don’t need one to do the other.

Deposits wouldn’t go away entirely if lending and consumer banking were separated.  If banks provide loans, they will likely provide the ability to deposit for loanees, since banks generally deposit the amount of the loan you just asked for in an account they just created to be the repository of the loan (alternatively they could give you a suitcase of cash).  But the model of normal people depositing a paycheck and such….that just isn’t related to lending that I see.

Am I missing something?

I can think of a few reasons to keep the consumer depositor services: a) for marketing reasons (maintain the relationships for people who might need loans), and b) for public relations reasons (maintain the illusion that banks do something useful for us and so tie up the risk of our money with the risk of their investment arms which cause us to need to bail them out).

In short though, banks must have some other reason for maintaining consumer depository services; isn’t for reasons of profitability.

Tags: , ,

Comments 1 Comment »

Tahrir Square ended in revolution in Egypt.  “Occupy Wall Street” probably won’t.  Why not?

What is similar?

They are both demonstrations protesting general disaffection with the current state, with the economy, etc.

They are both using social media.

They are/were both disorganized somewhat at first, but growing in clarity and numbers.

In short, they are about the same things thematically; why did it end in revolution in Egypt, but not here?  What is different?


Tahrir started with about 50,000 people and ended with about 300,000.

“Occupy Wall Street” has about 5,000 now; 700 were arrested over the weekend.  The numbers are growing.

So…Tahrir had more people (especially when you consider Egypt’s population of 82M people). “Occupy Wall Street” would need about 1.1M people to converge on Manhattan to achieve similar numbers per capita.

Income inequality:

The US’s income inequality is actually worse than Egypt’s by a fair bit. We are near the Ivory Coast and Uganda.  Egypt is more in par with the U.K.


Unemployment in the US is about 9%.

Unemployment in Egypt was about 20% at the time of the revolution, concentrated among the young and educated.

So…I don’t consider this a ton different.  Our unemployment numbers are usually understated, and this is relatively small difference, not an order of magnitude different.

Hmm….I don’t see the general conditions as all that different; certainly somewhat different, but not an order of magnitude different.

Let’s make a few hypothesis as to why so many people showed up at Tahrir square, and so few show up at “Occupy Wall Street”.

1) The US is geographically distributed.

Even if we would like to show up (and it is largely young unemployed males that do something like this); we are pretty far from NYC.  All of Egypt is just a train ride away.  Most people live just a few hours from Cairo.

2) In the US, we can get married, even if we are poor.

As long as people can have a family and put food on the table, they will let the rich play their games and the government do what they want.  The Middle East in general could take a lesson here.

Stable societies are ones where men and women can have families.  If you have polygamy, some men will get zero women.  If you have restrictive socializing between men and women, men feel like they can’t get women.  If you have dowries, some men can’t get women.

And if you have a bunch of unemployed men who can’t get any women, they have nothing to lose…and so are apt to fight for revolution….so they can have a family in peace.

3)  In the US, we can still mostly put food on the table.

Income inequality is worse in the US, so relatively we are worse off than Egypt.  However, in an absolute sense, the poor still have more money in the US.  In Egypt food inflation had made it so that some people couldn’t eat.  That is a recipe (no pun intended) for revolution.

4) In the US, we have a democracy?

I actually don’t think this makes a ton of difference; it is a perceptual difference perhaps and gives us an outlet to say “I’ll just vote someone else in next time instead of staging a revolution”; however, in the end it is not democracy that keeps us from revolting; it is the ability to live our lives in relative peace.  Democracy or not, if that condition isn’t met, the government is in trouble.

So, there you have it.

If you want to keep people from a revolution, follow this recipe:

Make sure there are not a bunch of single, unemployed men around who cannot afford food.

If boys have too much time on their hands, they usually chase women.  If they can’t chase women, they eat.  If you take both those options away, they get really mad.

Tags: ,

Comments No Comments »