21 May 2024 13:33:37 GMT

The Third Rock Forum - Economics

Article Title
Banks, deceit and lies
Al Terego
Topic Section(s)
Submitted : 09-11-2010 13:13
Amended : 10-11-2014 12:52
Status : Approved:  
Likes : 2
Dislikes : 0

If you are an ordinary citizen who works hard, earns a living and saves some money, the entire financial system (of financial advisers, banks, other financial institutions) is a device for skimming (or sometimes gouging) money out of your account, so that at the end of each year your wealth is reduced, not increased.

All these financial institutions do everything they can to give you the impression that
they are:

a)  acting in your interests

b)  increasing your wealth.

I am therefore accusing them of deceit and, in some cases, outright lying.

Let me explain.   If you have any money, you have two main choices.  You can spend it or you can save it.  If you save it, you will probably either seek an interest-bearing account or you will invest it in equities.  ( I will deal with equities in another article on Financial Advisers.)  If you place the money in an interest bearing account, you will earn some “interest”.  At the time of writing these interest rates for those with savings are very low.  

You will, however, be aware that the difference between the interest banks pay depositors and the interest they charge borrowers is considerable.   On mortgages they probably charge borrowers 5% or 6% more than they pay in interest to those who gave them the money to lend.  On credit cards, they will charge 10%, 15% or 20% more.   We will leave aside for the moment the question whether these differentials can in any way be justified.  We will just focus on the percentage of interest you earn as a depositor.  

Today, if you earn 1% interest, you are losing money.  With inflation running at around 4%, you would end the year with 3% less purchasing power.   If you have £100,000 in savings, at the end of the year, you will have £101,000 in cash but, in real terms, you will have only £97,000 of purchasing power compared with your position at the start of the year.  (If you are lucky enough to have a million pounds, you will, in effect, have lost

Before you reconcile yourself to these losses, remember that you must pay tax on that interest.  If you deposited £100,000 at 1%, you earned £1,000 in interest.  You will now lose between £200 and £400 depending on your tax situation.  

What this means is that, if inflation is running at 4%, you need to earn between 6% and 8% (before tax) just to end the year with the purchasing power you had at the start.  If you look into it, even when interest rates for depositors are high, you will discover that banks rarely pay you enough in interest even to maintain your savings at the value they had when you gave them to the bank.  Once tax is taken into account, you are almost sure to be a loser all the time.

You might say, that’s just the way it is.  People who save must expect to pay tax;  and, after all, 1% or £600 after tax on £100,000 is better than nothing at all.  The system is simply a way of redistributing wealth.

Well it’s certainly a way of redistributing wealth but the direction of travel is not from you to socially desirable causes, it is from you into the coffers of the banks.   While you may think your money has been lying idle, gradually dwindling in value, it has in fact been working extremely hard.   Just not for you. 

If the bank took your £100,000 and lent it to a mortgage holder, the bank probably made  £6,000 or more.  If it lent to a credit card holder who carried debt on his/her  card,  the bank probably took a minimum of £15,000 in interest.   In other words, at the worst they kept ahead of inflation and made money.  At an interest rate of 15%, they did rather well, ending up with around £10,000 in real terms.

Of course banks have costs.   They occupy prime sites in our high streets; their head offices are great temples to mammon. But even after they have paid such costs, they have enough to lavish outstandingly high salaries on their senior people.

Perhaps they are worth it.  After all, they do make enormous amounts of money.  But isn’t that rather like a Sicilian peasant admiring the wealth of the mafia boss who has built his lavish villa out of the money the peasant and his friends paid him and his enforcers for protection. It’s our money that creates this wealth.  The banks don’t create; they don’t invent; they don’t manufacture.  In a sane society, they would be seen as an essential but mundane component in a system where those who innovate, those who develop new technologies, those who build businesses or infrastructure, those who manufacture, those who provide our healthcare, those who educate our children are the ones who are accorded the greatest respect and earn the greatest rewards.

Of course none of these socially desirable activities can take place without money, so we should respect money.  But that is no reason to accord respect and privileges to those who simply handle it.  After all, in the main, it’s our money; it’s not their money until they filch it from us.

And if the banks argue that we are paying for their expertise in lending, for their sage judgement in deciding who should have the privilege of paying high interest rates on loans, we should remind them that sensible lending on mortgages is perfectly straightforward requiring only average intelligence on condition that the lenders do not allow greed, as the bankers have done, to cloud their judgement

So what am I saying?   I’m saying that if you deposit your savings with a bank, you  should expect to lose money.  Ignore the misleading drivel with which you are bombarded by the banks through emails, leaflets and posters.  Just accept that the bank is taking your money so it can make a profit while your wealth stagnates or declines.

And there’s worse to come.  Not only do the banks skim money off depositors every day at every turn, they also employ speculators whose job it is to gamble with your money.  These “traders” who are on more than generous salaries earn enormous bonuses when their gambles pay off.   But it’s not their money they gamble with. It’s ours.  Why would anyone in their right mind hand their money over to a stranger on the basis that the stranger could gamble with the money, take all of the winnings if the bet was won, and leave the investor with nothing if the bet turned sour?  

How has all this come about?  How do the banks get away with it?  Well, through the effective use of public relations, they attempt to project an image of integrity and probity.   (Currently, some of them even have the effrontery to claim credit for socially desirable activities, performed by their staff, paid for by depositors and loans from the tax-payer, while racking up further losses.)  The banks have all the trappings of wealth and those with great wealth can always command deference.   But the real reason is far simpler and cruder.  They get away with it because they have access to the till; they take the money because the money is continually passing through their hands and the urge to cream off is irresistible.

What can we do?  Well, we can suggest ways in which the system can be changed or regulated to prevent banks siphoning off so much money at every opportunity.  Perhaps we could come up with a mechanism that ensures the banks are rewarded at a level in
keeping with the modest contribution they make to the quality of life in our society.

Could we, for example, legislate to make sure that banks were allowed to charge on mortgage loans no more than 2% above the rate they pay in interest on their poorest deposit account? 

Why should banks not be compelled to pay depositors interest on the hundreds of millions of pounds left by current account holders in their accounts.  After all, they are earning interest on it overnight all the time.

At present, banks are for ever changing the interest on deposits held on variable rates.  Short-term bonuses disappear and the deposit is shunted into an account earning almost nothing.  If you’re lucky you will receive a notification of the change; as often as not, you will simply discover what has happened months or even years later.  The banks rely on customer ignorance, inattention or inertia to skim even more
money off the accounts of their customers.  So why don’t we compel banks to return our deposits to us whenever the interest rate changes.  Then, if we still wish them to keep the money at the new rate of 0.01%, we can always transfer it back to them.  Would they still be so keen to reduce interest rates if they thought:

a)        the depositor actually knew what they were doing) 

b)        there was a good chance the deposit would go somewhere else?

Please come up with other ideas on how to put the banks in their place.   This is not intended as an attack on individual bankers or those who work for them.  It is an attack on the system which is economically and socially pernicious.