Liquidity Crisis - Right.

[Brian4Liberty]

My take on the "liquidity crisis":

As most of us know, there was a "liquidity crisis" recently in the financial markets. What I have not seen commented on is the root cause of this problem.

Once again, the greatest enemy of competitive markets is oligopolies, trusts and collusion...

Think about this: The lenders have lended money on credit cards at rates of almost 30%. Home loans, car loans, etc. range from 6% to 12%. So why do many of the largest banks only pay 1% to depositors? Even the most competitive deposit returns are around 5%. This reeks of collusion.

If these banks/money markets/etc had raised the rates that they paid depositors, would there have been a liquidity crisis? Isn't this how markets are supposed to behave? Supply and demand. Consumers demand a higher rate in times of uncertainty. Pay a rate of 6% or more to depositors, and these entities that whined for a government bailout would have had more deposits than they could deal with. People would have poured money into money markets, cds, and savings accounts. So why not? It's collusion. They don't want to pay a higher rate to depositors. They collude to keep that rate low.

In a bailout attempt (and a possible future anti-competitive merger), Bank of America deposited $2 Billion with Countrywide with a guaranteed return of 7.25%. Why wasn't that rate offered to average consumers? Collusion.

The liquidity crisis is a farce, perpetrated on the American people to allow a government bail-out; an increase of profits, at the American taxpayer’s expense. It's criminal. This isn't a question of regulation; it's a question of crime. No matter how elaborate the scam, it's still a crime.

But you will never see this in the media...even if Bush pays lip-service to prosecuting the criminals in the lending industry. Don't hold your breath waiting for that to happen.

The keys are real competition in the markets, and prosecution of the criminal scammers. For true free-markets to thrive, these are mandatory. As long as these are ignored, the taxpayer rip-offs will continue...

And just to be clear, windfall profits taxes and other penalty fees are NOT a solution. They are just another rip-off of the common consumer and share-holder.

[foofighter20x]

Granted that you are hitting the target by implying that the banks are the problem, you aren't hitting the mark as you aren't looking at this from both sides of the supply and demand picture. You are only looking at this form one side.

Were I a banker, I'd have to loan money at rate X while at the same time offering my depositors rate Y. X must always be greater than Y or else I won't be banking long. X-Y=Z, which is my bank's revenue which covers not only my bank's cost of operating, but also my bank's sharholder profits.

I can only cut profits so much before I arrouse the ire of the shareholders. At the same time, I can only cut costs of operating so much before service gets so bad that people leave. Then I have a problem with both the customers and the shareholders. Not to mention that I probably have operating costs cut to as low as possible as it is anyway.

Next, if I want to ratchet up the interest rates on deposits, that means I need to subsequently raise lending rates in order to maintain a net-zero income for the bank. People don't want to borrow at high rates. My interest rates need to stay competitive in order for my bank to stay afloat.

Also, you can't honestly compare credit cards, which are meant to be short term and convenient and paid-off before 25 days, and long term bank loans like mortgages, which is where the real crisis is. Credit cards are for limited amounts with no collateral and open to higher credit risks, which means, guess what, high interest rates. ;) Add to the fact that the 30% you cite probably is due to either late fees or cash withdrawal fees and not the standard interest rate for the account as a whole. Mortgages, on the other hand, are long term loans with collateral (the houe/real property).

Banks still have to operate like a business, you know.

As for the rest... Spot on. :)

[Brian4Liberty]

Granted that you are hitting the target by implying that the banks are the problem, you aren't hitting the mark as you aren't looking at this from both sides of the supply and demand picture. You are only looking at this form one side.

Were I a banker, I'd have to loan money at rate X while at the same time offering my depositors rate Y. X must always be greater than Y or else I won't be banking long. X-Y=Z, which is my bank's revenue which covers not only my bank's cost of operating, but also my bank's sharholder profits.

I can only cut profits so much before I arrouse the ire of the shareholders. At the same time, I can only cut costs of operating so much before service gets so bad that people leave. Then I have a problem with both the customers and the shareholders. Not to mention that I probably have operating costs cut to as low as possible as it is anyway.

Next, if I want to ratchet up the interest rates on deposits, that means I need to subsequently raise lending rates in order to maintain a net-zero income for the bank. People don't want to borrow at high rates. My interest rates need to stay competitive in order for my bank to stay afloat.
...
Banks still have to operate like a business, you know.

As for the rest... Spot on. :)


Yeah, I thought of that when the "crisis" started. :) They need to have a profit margin, but how big? When Countrywide gave 7.25% interest to BofA, it sparked a question: why are the rates so low for normal depositors? Why not 7.25% for the average depositor? Especially looking at the major banks that only pay around 1-2% interest? Why so low? They didn't even try to compete, even on a short-term basis. They just screamed for a bail-out. :mad:

And let's not forget the government welfare that is already in place for this industry: mortgage and home equity loans are tax deductable! Another rip-off of taxpayers.

And most unfortunately, credit cards are long term debt for far too many people.

It's hard to have pity on an industry notorious for taking the money and running, and leaving the public to pay the price. Their pity index is right down there with Haliburton and Chevron/Exxon/Mobile/BP...

On the lending topic, an interesting article:

http://www.dallasnews.com/sharedcontent/dws/bus/scottburns/columns/2007/stories/DN-burns_12bus.ART.State.Edition1.35a53f5.html

[Hook]

The reason that banks don't offer high yields on deposits is that it is much cheaper to borrow from the Fed. That is ultimately why no one saves anymore.

[Brian4Liberty]

The reason that banks don't offer high yields on deposits is that it is much cheaper to borrow from the Fed. That is ultimately why no one saves anymore.

Yep, just another form of government bail-out...

[Cowlesy]

The reason that banks don't offer high yields on deposits is that it is much cheaper to borrow from the Fed. That is ultimately why no one saves anymore.

Right and why pay a yield on small demand deposits that can be drawn almost at any time with little if no penalty. That's why you get a marginally better rate with CD's because you're locked in for a period of time, but don't really see any sort of yield until you get into the $10.0mm plus deposit rate (Merrill Lynch Premier). That's the capital that banks need so that they can really borrow from the Fed.

Retail/Consumer banking is a very low growth, crappy business. Bank of New York actually divested their Retail Banking unit to JPMChase so they could focus more on commercial banking and their bread & butter custody business.

[constituent]

The reason that banks don't offer high yields on deposits is that it is much cheaper to borrow from the Fed. That is ultimately why no one saves anymore.

bam!

But much credit to the OP 'cuz it is an unfortunate situation particularly for those struggling to get by; and by that I mean the ones who feel like they're on top of their game b/c they opened up a savings account with more than the minimum.