Banks are in reality, a rather old type of business. Originally, before paper money and checks, gold and silver were the monies in daily use. People who were wealthy, needed a place to store their gold and silver which was surplus, so they used a storage facility, which is what banks were. The banker charged for his services, and gave a receipt for the gold and silver placed in storage and in his care. To retrieve one’s gold or silver, it was only necessary to present your deposit receipt, and your gold and silver were returned to you. Gradually, the deposit receipts were exchanged as proof of one’s gold and silver in storage, and the receipts were used as payment for whatever amount of gold or silver was needed to buy something. If a man had 1,000 ounces of gold in storage at his bank, he could write a receipt for maybe two ounces of gold to his merchant from whom he was purchasing something, and the seller could get gold at the banker’s storage facility. This was the origin of the checking system.
The bankers, or storage units of their customers’ gold and silver, eventually discovered that only a very small number of depositors ever wanted the full amount of their gold and silver immediately, but left most of it in storage for safe keeping. The bankers thought that they could earn extra money if they loaned someone else’s gold and silver and charging interest for its use. This decreased the storage fees charged, and turned them into places where you were paid to store your gold and silver. The banker loaned your gold and silver, and paid you part of the fee he charged for its use. The banker made a profit, and you not only got free storage, but were paid to leave it there. Bankers then became loaning agents, as well as storage agents. Bankers had to be very careful of who they loaned their depositor’s money to, or they may lose their customer’s gold and silver if the loan went into default.
Bankers who were careless and who loaned to irresponsible borrowers, or who loaned too much of their depositor’s gold and silver, went bankrupt, and were jailed, sued, or had other actions taken against them. Good bankers were careful about who they loaned to, were careful about the security of their facility, and became pillars of their community. So far, so good. There have always been crooks and dishonest people in the world, so the bankers had to be careful about fake deposit receipts, which would steal their customer’s gold and silver, plus careless or dishonest employees, who would do the same.
Like any successful businessman, bankers who were successful, wanted to branch out and start new banks to make more profits. They then built new banks, and hired managers who they thought to be honest and reliable. This is why I deal with a locally owned bank, and whose owner I know personally, and know of his honesty and ability. As bankers obtained more and more branches, and spread out all across the nation, their operations became extremely complex, compared to the old fashioned local banker who everyone knew and trusted. Huge banks developed, such as Wells Fargo, Bank of America, and the like. Customers became a mere account number, or an anonymous account holder, who may be known by a familiar teller, but there was no contact or familiarity with management. The difference between buying groceries from a Mom and Pop grocery or meat market, and from a huge super market chain, might be a somewhat good example.
The managers of these banks, which number in the hundreds or more branches, then hired loan officers, and trusted making loans of depositor’s money to that officer, who perhaps had poor judgment. Banks then began to sell stocks to raise money to do their expansion, build more buildings, and hire more people and managers. Gone was the local banker, the pillar of his community, who everyone trusted and admired. Banks became big business, and were run by tens of thousands of employees, loan officers, cashiers, tellers, vice presidents, and other employees. With millions of shares outstanding, the share holders wanted a return on their investment, so the banks worked hard to make as much profit as they could, so as to declare dividends to those who loaned them the money to become as big as they had become. Anyone see why this might not turn out too good? It didn’t.
Banks, with their maybe hundreds of branches, had to show a huge profit to pay dividends to shareholders, as well as support a huge central headquarters, communications systems, and investment operations. In order to make all the money they could, some banks began charging for the use of a physical teller, or a charge for cashing a check or using an ATM machine. This didn’t sit too well with customers, but foolish as most Americans are, they swallowed hard, and stayed as a customer. Big banks, in order to show even more profits, became careless about their loan policies. They were so anxious to loan, that they often got insufficient information about the borrowers or the security the borrower presented to borrow. A man might come to a bank for a loan to buy a house, present an appraisal of the house, and give the banker his income. If the appraisal had been exaggerated by the appraiser, because he had been bribed by the real estate salesman, and the would be borrower didn’t have proof of his income, and then on top of that, the banker had loaned too much of his depositors’ money out, can you now see what has happened?
Understand the following: A bank’s loans are an ’asset’ on its books, because the borrowers owe to the bank, and a deposit is a ’liability’ on the bank’s books because the bank owes the depositor the money he deposited. Therefore, when a bank made huge loans, irresponsible loans, careless loans, or downright stupid loans, these loans showed up as ’assets’ on the bank’s books, and everything looks just fine. Note: I am not getting into the fractional reserve system, commercial vs. investment banks, the Federal Reserve or the fact that under rules of the banking system, a bank may be in bad shape, and technically look OK. Like the US economy to the media? This morning, all the stops are being pulled out to give ’confidence’ and keep this thing from snowballing.
The largest investment banks, are the ones in the most trouble now, because they did all of the above. They loaned too much, for bad security, and to poor risk borrowers. Banking success depends a great deal on faith. Faith that the bank has cared for your deposits, and didn’t loan them out haphazardly or irresponsibly. If word gets out that the bank may have made a lot of mistakes with depositor’s funds, they will come to the bank and attempt to draw out all their money, and this is a ’bank run,’ which is exactly what has happened to Bear-Stearns, and will probably happen to other investment banks. Will the scare carry over to commercial banks? Probably not, but I don’t want any dollars in those huge chain banks. The bigger anything gets, the more inefficient it gets, as witness the federal government, army, navy, air force, and the D.C. Gang in general.
Depositors lined up at Bear Stearns, demanding their money, and the tills were empty. The Fed, and other big banks inserted $200 billion to pay Bear Stearns depositors, but it was bought out for $2 a share over the weekend. As an indication of the trouble the world’s financial system is in, the Fed cut interest rates by a quarter percent on Sunday, a move which is unheard of, but it is an indication to me of deep trouble ahead. Bear Stearns made every mistake any bank could make. They invested poorly, loaned on real estate which wasn’t worth what they loaned on it, and loaned to poor risks. A good bit of mortgage debt is sold to Fanny Mae and Freddy Mac, who in turn have sold 40% of their mortgages to foreign banks. Now, hundreds of billions of debt has turned sour, no one wants to loan to anyone. Huge bank portfolios, in may cases may not be worth the paper on which they are printed, because the properties are in default, and many times are being vandalized. As if that weren’t bad enough, a recent court case denied a foreclosed property to a lending institution which was way down the line, because they could not produce the original mortgage papers. They had bought paper from someone, who had bought it from someone, who had bought it from someone, and who knew where the original papers were? My small local bank has had one foreclosure, and they sold it instantly. Compare that to a huge mega bank chain with hundreds of branches, and hundreds of managers and loan officers, many of which are inexperienced, or who are trying to make a name for them selves by making loans which should never have been made, but were an ’asset’ on the bank books.
Consider the fake appraisers who exaggerated appraisals, and were bribed by hungry realtors anxious to make sales. It has all come home to rest, just as I have been writing about for years. Real estate has become foul, just as did the ’dot com’ stocks and NASDAQ. Millions will loose. Correction: Everyone will loose. Why? because the D.C. Gang probably will try to print its way of of the mess, as it already has done with Bear Stearns, and did a few years ago with another private investment fund, LTCM. They said, “It’s too big to fail.” “It might collapse the whole economy.” “Bear Stearns is a $400 billion bank, and we can’t let it fail.” Bear Stearns is the fifth largest investment bank in the world, and the stock value went from over $20 billion to $240 million almost overnight. The depositors will be made good, but the stockholders have lost many many billions. Making depositors good is done with the printing press. Will they also pay Lehman depositors when they line up, or another investment bank? We all will pay, because the bailouts will just be another Iraq or Afghanistan, and the presses will roll, making all our dollars decrease in value. Our gold and silver be the same gold and silver, but cost more in dollars.
Locally, Russell Stover has a candy factory. They just laid off a third of their labor force. People are so broke, that they simply aren’t buying much candy. They need to fill their gas tanks so they can get to work. In Iowa, Blue Bunny, one of the world’s largest ice cream makers is in trouble, and is either cutting wages or threatening to hire Mexicans at lower wages. People are buying gasoline to get to work, and aren’t buying as much ice cream. Auto sales are way down, as are restaurant sales, resulting in layoffs. People have to make mortgage payments and buy staples to feed their families. The more that get laid off, the less they will buy, because they can’t afford to buy. Without people buying, even more will be laid off, and the process feeds on itself. The fed will probably lower its interest rate by another three quarters of a percent later this week, or maybe more, but this will not solve the problem; only make debt harder to sell overseas. Watching Secretary Paulson on Fox News Sunday, I was appalled at his failure to answer questions about other banks being in trouble. He sounded like a stuck needle on a worn out record. “The economy is sound, The economy is sound, The economy is sound.” And “We’ll do what it takes.” Oh yeah? Not in my books fella! All they can do is print, and that’s simply hurting everyone. And when the Dow going down, crosses the price of gold going up, and it will happen, the rush for gold and silver will be astronomical, far outstripping supply. Know what will happen to dollar prices of gold and silver then? You figure. Protect yourself.