Early inflation indicators?

[Larry Gude]

That's not the point I'm getting at. I'm wondering if, when picking a mechanic, you give any consideration to how good a job they will do as a mechanic - how well they will take care of your car?

The answer seems obvious and I am not smart enough to see where you are going with this so, if you please...

 

[Tilted]

The answer seems obvious and I am not smart enough to see where you are going with this so, if you please...

Sure...

I find your answer to my first inquiry amazing, but mostly because it's typical and, frankly, makes sense given the circumstances. Most people give no thought whatsoever to how well the bank(s) they use will take care of the money that they deposit in them. That seems counter-intuitive based on what banks do. We take our money to banks. We ask them to hold on to it. We ask them to give it back to us when we need it (or, in the alternative, give it to other people for us as with a written check). We also ask them to do other stuff, but first and foremost deposit banks are the holders of our money. The main thing we want them to do is take care of it and make sure it's still there when we need it back.

That's a big part of the basis from whence the modern bank evolved. For example, miners would take the gold they found into town and 'deposit' it with the local blacksmith or some other business. They asked the business to hold onto it for them for a while and sometimes paid them a fee to do so - to protect, i.e. not lose, their gold. From there, banks developed into what they are today. The blacksmith realized that he had deposits from a bunch of different people. Surely they wouldn't all return at the same time to get their money back. So he could loan some of it out to people in need of money and make money for himself off of the transaction. He kept enough around at any given time to pay back to a number of depositors that might return and want their money. But the point for the depositors remained the same, the 'bank' was expected to take care of their money and return it to them when they wanted it - if the depositors didn't trust a given 'bank', they wouldn't deposit their money there.

Fast forward to today: Retail banking customers don't even consider banks based on how trustworthy those banks are with the customers' deposits. We think about things like location, what kind of interest they'll pay us, how friendly the tellers are, what the statements look like (maybe that's just me ). Not losing our money isn't even an afterthought. That's like choosing a mechanic and not even considering whether they'll destroy our car in the process. It's like picking a babysitter with no concern whatsoever for whether they'll lose our kids while we're gone. It's like picking a barber without caring whether they'll mangle our hairdo.

Why is it this the case? Because the government perverts the retail bank market: the FDIC Depository Insurance program, that's why. The government tells us not to worry about whether banks perform their primary function worth a ####, the government has our back and will protect us from potential losses. So, we don't think twice about such things (i.e. whether banks are responsible with deposited funds) and choose banks based on less important considerations. Retail banks don't have to compete based on how well they protect and safeguard our money, the government tells us it will make us whole if the banks turn out to irresponsible money-holders. So banks are free to be irresponsible. They can have associated enterprises which put their basic depository functions in jeopardy. And now we have systemic risk. Now we have too big to fail, because the government can't let these banks fiscally irresponsible behavior - their gambling - lead to a collapse of the retail banking system. The government has to backstop the risks created by its ill-advised efforts to make the world a perfectly safe place - to envelope retail banking customers in bubble wrap and promise them that which can't be promised, complete safety and the lack of all risk.

What would happen if the government promised to make all car owners whole if mechanics messed up repairs in any way? The government would trade them an equivalent vehicle in proper working order if a mechanic ever messed something up. Well, the quality of mechanic-ing would go down considerably. The things you'd think about when picking a mechanic would be convenience, how inexpensive they'd be, maybe how nice the candies in the lobby were or how cute the gal beyond the counter was. To hell with whether or not they could actually fix a car, I'm covered no matter what - why pay $1,500 for a repair this other guy offers to do for $200. Mechanics would compete on price (and other things), not on being trustworthy mechanics. There'd be a race to the bottom.

Much the same happens with banks when it comes to what they are, first and foremost, supposed to be doing. They don't need to convince you they're responsible, they need to go make as much return as they can - to build nicer bank branches, to offer higher interest on deposit accounts and CDs, to expand to as many new areas as possible. The quality of the primary product (securing money) suffers, that suffering being realized as systemic risk.

If there were no such thing as FDIC Depository Insurance, banks would compete based on the promise to not put your deposited money in any risk. They would have to be completely transparent about what they are doing, or people would choose to take their deposit funds to other banks that would. Entities would follow what respective banks were doing in great detail and in near real time, so that people could get insight into what banks were doing the best job of protecting the wealth they were entrusted with. Retail banks and trading enterprises would go their own way, the market - the decisions of millions of customers waving billions of dollars worth of deposits around - would force them to. Retail banks would have to be good retail banks, or they wouldn't get much in the way of deposits to play with. They wouldn't take risks, not big ones any way. Systemic risk would be minimized. And it would be the result of free market forces, not the result of layer after layer of government regulation seeking to mitigate the deleterious market perversions created by other layers of government involvement.

The problem is FDIC insurance. The problem is that customers don't hold they retail banks accountable for who well they perform as... well... banks. Make retail banks compete on the main thing they should be competing on... taking care of our money and making damn certain that it will be there for us when we want it. They can offer us all those other services we want and need, but only after they've gotten their first job right.


I don't feel like editing this post. If there are typos or confusing passages, I ask your forgiveness but will accept your ridicule.

 

[Railroad]

Early Inflation Indicator in Southern Maryland: The sound of air flowing in through the valve and signs of the tire expanding to seal up with the rim.

Early Recession Indicator in Southern Maryland: The boat trailer leans to one side, or the truck just don't feel right.

Early Depression Indicator in Southern Maryland: Cecil comes home drunk and gets his gun out. Or, If you don't know Cecil, early depression indicator might mean the "number ones" ain't as big as they were last year...

Index of Economic Indicators in Southern Maryland: They don't carry 10-ounce Buds anymore down at the beer store.