Tim Worstall, whom I read daily, has a good post dealing with the idea that it is somehow wicked for banks to charge a higher interest rate for a mortgage than the official base rate as set by the Bank of England (or any other central bank, come to that). It is, as he says, a matter of pricing for risk. Lending money to a person with a relatively small deposit – or collateral – relative to the total value of a loan is risky. I am going to have to renegotiate my mortgage in the next few weeks, and because the pricing of risk has risen dramatically, I can expect to pay more even though my loan-to-value ratio is quite low and I have a decent amount of equity, while both my wife and I earn a reasonable amount of money. It is not a great situation to be in, but it could be worse. For many years I chose to rent and stash up enough money to put down a good deposit, as did my wife. That, by the way, is one reason why there is a basic injustice when relatively prudent folk get taxed to bail out the imprudent, such as a person on a 100 per cent mortgage.
To be honest, had the price of risk not been artificially reduced by recklessly loose monetary policy over the past few years, we would not be in this pickle in the first place, but that’s another story.
The banks are making it more difficult and expensive to borrow. This is a consequence of their having made it too easy cheap and having therefore lost vast quantities of money, and having essentially bankrupted themselves as a consequence. In the circumstances it is a perfectly natural and necessary response, as they need to strengthen their balance sheets and to start running their businesses in a profitable way again.
However, as the banks have been essentially nationalised they are now being placed under pressure to advance a social agenda – that is to bail out people who have more debt than they can afford to pay back, and who should have realised that house prices can go down as well as up, that it is not a good idea to saddle yourself with debt that can overstretches your ability to pay without rather heroic assumptions, and indeed that variable rates can vary. The worst case situation here is that the nationalised banks now become conduits through which the government over a long period of time funnels money to bail out the spendthrift middle class. This of course totally retards their ability to reconstruct themselves as sound businesses.
Meanwhile, people who actually benefit from higher interest rates (who include old people who have paid off their houses and who are now living off investments and the risk averse generally) are getting short shrift.
Japan got itself a ten year plus depression as a consequence of doing this kind of thing. Nobody here seems to have learned the slightest lesson. Bubbles need to be deflated, so that the economy can then start growing again. It will be painful, but we are talking a choice between short, sharp pain (involving a lot of people acknowledging that they aren’t as rich as they thought they were, which is politically very difficult) and long, drawn out pain in which they eventually discover the same thing after a decade in which their children can’t get jobs.
It is almost beyond description how depressed I am about all this.
Financialy buying a house is a bad decision.
http://www.smartmoney.com/personal-finance/real-estate/renting-makes-more-financial-sense-than-homeownership-21111/
Your far better off putting your money into the stockmarket and renting.
its the non financial benfits of security and status that you buy a house for.
The parallels between what is happening in the worlds economy at the moment and the events of Atlas Shrugged have probably already been noted by your good selves but I find them quite shocking nontheless.
Michael, in part, I fear, we are dealing with the consequences of appalling state education. The ability to even understand that risk and reward are inextricably linked should be transmitted to pupils in schools, along with learning about percentages, interest, etc. This is survival stuff.
Another thing that stuns me about our country is that to this day, even wealthy people refuse to pay for good financial advice but they think nothing of paying oodles of money to a lawyer, accountant or to have their teeth fixed.
Criminal, do you own any shares at the moment? Mine aren’t doing so well! That said it may sometimes be prudent to rent and invest in the stock market, but at other times not so much. Surely it depends on rental yields, the state of the stock market and several other factors?
As to banks passing on interest rates, I wonder how big an effect this has either way. Are there many people who need to remortgage soon? Or is this about getting the housing market going again, by persuading the banks to lend to the kind of people who are going to come unstuck when interest rates finally do go up again?
Shares?
Yes I do.. hundreds of them .. mostly in Barclays.
They’re not doing too well either.
“At the moment” which is the important fact.
The stockmarket as warren buffet points is just a weighing machine – long term, (voting machine – short term)
If a company knows how to make money, the value of its shares will go up.
and barclays has been around since 1690 KNOWS how to make money.
So i’m not at all worried, however If Owned a home right now, id be close to suicidal
Michael notes (correctly) that banks are being placed under pressure to “bail out” people who are overextended on their home loans. I decry that pressure as much as anyone, especially when it takes the form of foreclosure moratoria and similar interference with contractual relationships. However, it is important to remember the lenders have always worked with troubled borrowers to minimize their losses (it’s generally called “loss mitigation”). The banks have been handed lemons (well, technically I suppose they grew their own) and now the have to make lemonade out of them.
If you’re a bank and have a bad loan on your hands, what are your options? You can:
1) Take the loan through foreclosure. This takes time and costs money (legal fees for foreclosure and eviction, costs to pay the inevitable tax arrearages and to maintain the property and fix it up for sale once you’ve taken possession, brokerage fees on the sale, etc.). Even in good markets banks lose money on most foreclosures; in the current environment the loss will be very large, without even considering the time value of money.
2) Sell the loan to a distressed debt buyer. As you can imagine, in the current economic environment those investors require a very high yield, so the purchase price is quite low. (I’m in this business: I know the pricing very well.) Nonperforming loans sell for a healthy discount (40%-50%) to the current appraised value of the property (that discount reflects their costs to foreclose [see above] plus their profit margin and a risk factor). Even performing loans which for some reason are not salable to the Agencies (Fannie/Freddie) are pricing at around 70% of the face amount of the loan. Taking a 30% “haircut” on a performing loan is an unappealing proposition to most banks, although it does provide liquidity and eliminates risk.
3) Work with the borrower to “rehabilitate” the loan. This can mean reducing the interest rate (temporarily or permanently), forgiving some of the principal balance, permitting the borrower to defer missed payments to the end of the loan term, etc. This sort of thing is what banks are now being encouraged to do, but in reality they have always done it (just not in a systemic way).
The bank has to decide which of these alternatives makes the most economic sense in each case. If they select #3, you might call it a “bail out”, but it is actually a rational response to a lose/lose situation.
Aargh! Smited! Sorry, but you’ll all have to wait for the Smite Gods to release my deathless prose.
I do enjoy the little picture on the smite page, though. Always makes me smile.
Laird: It is a fine thing being a smite God, I tell you. My own comments get smited (smote?) from time to time too, but the one good thing for me is that I can go and immediately unsmite them myself. RHIP.
Anyway, what you describe is indeed normal banking practice, and although I think the world would be a better place if foreclosure costs were smaller, what banks should be doing is precisely this: restructuring loans and/or selling them off, so that they have a precise idea what their assets are and what they are worth and that they are as liquid as possible. In cases where the banks renegotiate with the borrowers and write of part of the loan (and the new payment schedule is realistic so that a bad asset becomes a better although smaller one) the principle price the bank exacts in return may be reputational (via black marks in credit files or perhaps bankruptcy proceedings), but the price is still a real one. This is normal and what should be done. The value of the assets should then be written down to a fair level on the bank’s balance sheet and the bank recapitalised. Banks are then also inevitably going to raise prices (in terms of higher fees and larger spreads between savings and loans). If it ends up with banks once again becoming sensibly run busiesses, this is all fine and good.
What we have seen recently is banks realising that they lacked sufficient capital and then seeking to be recapitalised by the government. This has led to an immediate scream in the media and government that banks should be less harsh on borrowers than the state of the market demands that they be. “You have received this bailout from the government and therefore you should lower interest rates / foreclose fewer of the cases you would have foreclosed etc etc”. In short, the demand is that the banks cease restructuring their balance sheets and businesses in the way that is necessary to rebuild their businesses, and the belief that the nationalisation justifies the banks continuing to do the very things that god them in the mess in the first place. This means failing to write down assets properly and continuing to pretend that they are worth more than they are, and continuing to lend to existing borrowers at interest rates that are cheaper than reality demands.
In essence, the demand is that the banks become a conduit for government finanical aid to distressed borrowers. This outcome is just ghastly in so many ways, amongst which are that it leads to more money having to be given (probably endlessly) from government to borrowers via banks down the line, and an insolvent banking sector ad infinitum.
Banks that have managed to raise their capital in a way other than by being nationalised face many huge advantages for certain types of business, in that they will be able to continue running as actual businesses rather than welfare agencies for the undeserving. The demands from sections of the media that they not be permitted to do this are one of the more frightening things I have heard recently. Compulsory nationalisation of banks? How in the name of the smite Gods have we got here so fast?
I don’t disagree with anything you said, Michael. It is entirely possible the political realities dictate that banks will indeed “become a conduit for government finanical aid to distressed borrowers”, as you put it. If the government is going to shovel money into banks no one should be surprised to learn that there are strings attached. (C.f. our discussion thread on Council housing.) Still, at the moment anyway, the “fast-track” mortgage modification program rolled out yesterday applies only to Fannie and Freddie, which are essentialy government entities now; its applicability to other banks remains “voluntary”. (We’ll see how long that lasts!)
Indeed, I was expecting something like this for the Agencies. They are so huge, with so many loans to manage, that some sort of systemic means of dealing with the nonperforming ones was inevitable and probably necessary. My fear is that the moral hazard implicit in such a “one-size-fits-all” mechanistic approach will outweigh its benefits.
As to how we got here so fast, I don’t really know; everything really did seem to come crashing down all at once, didn’t it? The problems began to surface about 18 months ago, but while things weren’t going well the carnage wasn’t so widespread until this past summer. I think we’re rapidly sliding down the proverbial “slippery slope” which began with the bailout (or nationalization) of the Agencies, then accellerated into money for AIG, opening up the Discount Window to Wall Street firms, the ridiculous $700 billion bank bailout bill, and now its extension to American Express, possibly the automobile companies, and then who knows? The rate of decline continues to accellerate. At some point we’ll have to hit bottom. That won’t be pretty, and the road back up will be very long and steep. I’m as depressed as everyone else around these parts.
To slightly paraphrase Michael Jennings’ first comment:
Check all that apply:
1) Have you been fiscally prudent and responsible?
2) Do you have savings, a 401(k), a house that you own outright or with a mortgage that is not under-water?
3) Are you engaged in a productive activity AND do you have education beyond basic literacy? I.e. are you a tax-payer?
4) Are you an investor?
Congratulations! If you answered yes to any of the above (more so if you did so to more than one of the above), you have the rare opportunity to feel great (or a moron, if you have positive IQ) AND pay to help those who chose to be idiots (or did they?) and/or scam-artists AND help re-elect the politician who made it all possible!!! Ain’t it great to be alive?
The crash was preloaded into the system like a trap set and waiting for a mouse. Government tinkering with private contracts (or at least what depositors perceive to be private contracts) was necessary to load energy into this trap. This took the form of a discontinuity between duration of loans and duration of deposits. Whatever the small print says in their contracts, all American consumers assume that if a bank can’t give them all of their money back at a moment’s notice, the bank is insolvent. FDIC reinforces this perception. But no bank, no matter how cautiously managed, can meet this standard of solvency in a fractional reserve of demand deposits system.
When I repeatedly rant against fractional reserve, I am not against the money multiplier (it is an intrinsic feature of all lending) I am ranting against the unavoidable instability that exists when long term loans are made against the statistically and historically estimated availability of short term demand deposits. Those estimates (aka banking regulations) are inevitably politicized and the system as a whole is vulnerable in direct proportion to the ratio between reserves and demand deposits. People have and still do make the defense based on the situation of any one bank not mattering because it can draw on the Fed (either directly or through middle layer banks) but nobody can correctly claim that the entire nation can pull their demand deposits in unison without the Fed system having to monitizie (print) on behalf of its banks to make up the difference between reserves and deposits.
Again I am not, like some, against the money multiplier. (duh) In a system were lending is done from time deposits, the reserve requirement can be zero and the money multiplier is theoretically infinite. I actually, quell shock and amazement, think that the free market will introduce a bunch of ways that we can have massive amounts of lending as we do now, but without the instability caused by the discrepancy between duration of deposits and duration of loans. The system can get as big as it wants and still be stable. The reason this will never happen under our present political climate? Manipulating interest rates from the central banking system (not to mention MSM yelling ‘fire’ at key moments) allows political control of the economy. A market system does not.
So we’re back into the fractional reserve debate again, are we? [Sigh] Well, at least you’re off the “money multiplier” issue, which is a start.
Your whole premise is that if everyone withdrew all their money at once the bank would be insolvent. That’s not going to happen because of deposit insurance (which is preciesly why the government just increased it to $250k). And if it should happen, there are backstops (Fed Funds, the discount window, etc.) to handle a temporary liquidity shortfall at an individual bank. The idea that the entire nation would simultaneously withdraw all its money is a straw man. Runs are specific to individual banks, and in any event where would we all put the cash? Under the mattress? Of course not; we’d just go down the street and re-deposit it at some other institution. Status quo ante.
Banks don’t fail today because there’s no cash in the vault and George Bailey isn’t emptying out his wallet. They fail because their capital is depleted beyond what the FDIC deems acceptable, and in many cases that depletion is caused by accounting conventions, not realized losses. When banks do fail, their deposits are usually sold to another bank and the next morning the branch opens with a new name over the door. Most depositors are wholly unaffected. (The only ones affected are: (a) those with deposits above the insurance limit, and as a rule even they get out whole because the acquiring bank honors all deposits; and (b) brokered deposits, but those are from large, sophisticated depositors who can watch out for themselves.) In extreme situations a bank might be closed without its deposits being assumed by another institution (that hasn’t happened in a long time, but it could), at which point there would be a slight delay in depositors’ getting their (insured) money. But in any event, lack of cash in the vault was not the proximate cause in any bank failure I’ve seen.
You are arguing against the use of estimated cash requirements to calculate credit availability. But every business relies on estimates, averages and forecasts; you couldn’t operate without them. Banking is no different, and just because in extreme circumstances the estimates may prove to be inaccurate is no reason to abandon the system.
Well, I give up. Since you missed the point entirely, I spent the free minutes contained in a couple of busy hours to write a detailed second attempt. I didn’t really have the time and got distracted and accidentally erased the comment. When I went back to my cache file, which is what I usually do when this happens, it is entirely totally missing. The folder is there, but no cache files at all. I don’t understand this, the only thing unusual that happened is that I received an update announcement from Mozilla. I can’t imagine why that should matter but it is the only unusual thing that happened. In the course of looking for the cache files I found a bunch of newly accessed files associated with the update announcement so I guess it’s possible. Any ideas are welcome. It were a lurvly comment what gone missin’.
I’m not about to write it again so I’ll just leave it at this. I am not talking about the solvency of banks. I am talking about the solvency of the dollar and Ben ‘Helicopter’ Bernanke, et al’s metacontext. I predict the contraction will continue but at some point flip into inexorable inflation. That procession will be uncontrollable and will eventually run away. I’ve been wrong before, I sure hope this is one of those times. In other nations when that happened it brought about the collapse of the government and more important, civil order. I would prefer something less catastrophic but history suggests peaceful recoveries from failures of currency are not the norm.
I wish I could find my missing comment. At the end of it I offered to bet you a beer on the outcome. That offer still stands. Maybe Sunfish will brew a commemorative batch and barter it to the loser for settling the bet. 🙂
I’m sorry that you lost your draft post, and also that I missed your point. I took your argument to be a technical one, against the mechanics of banks maintaining only a historically-based estimate of their cash requirements. Apparently you meant something else, and if I read your last post correctly it has to do with a fear of monetary instability resulting from political manipulation of the reserve rate. That is a possibility, of course, but I point out that the reserve level in the US hasn’t changed in many years, through a variety of economic climates and political regimes. If the government wants to inflate our currency it has better and easier ways of doing it.
So I’d like to take your bet, but I’m not sure how we would determine the winner. To restate it, your bet is that the current economic contraction continues until it “flips” into runaway inflation, followed by the collapse of the government and a breakdown of civil order. If that doesn’t happen, at what point (and upon what date) will I be the winner? (And if you win, how will you collect?)
On a side note, this seems to be a good place to post my favorite song about Ben Bernanke.
I just watched your link. First I’ve seen it. It’s great. I enjoy that kind of humor. But silly me, I listened to try and figure out his policy. I suppose if I knew anything about Columbia Business School I would already know. Pretty cool stuff for the dean of a business school.
Re my last comment, yup. I really missed. I’ll try again. The thing that gets manipulated is the interest rates in order to achieve political goals. The fractional rate (10% in the US) is a floor. The reserve rate is how far you can open the door, the interest rate is how fast you let money through it. Think of reserve rate as maximum amps and the interest rate as volts. The manipulation of how much is lent is through the Fed rate and of course tax laws and regs. The f/r is the enabler. W/o it, depositors not the Fed would be setting interest rates.
My argument is not against banks determining how to do their business. But we haven’t had that since the Fed was formed and all other bank systems and currencies effectively outlawed. Apparently the national government did it much the same way the outlawed marijuana. By using an impossible-to-comply-with tax. That right there should set the sirens wailing.
It’s not going to happen because it would make tax collection a problem (to say the least) but if we went back to a free market in banking services, then I would be fine with various banks offering various terms and as long as they didn’t promise the same money to two different parties at the same time (as f/r does) then I would be happy to let various business models compete. I am absolutely certain that many different market solutions for optimizing the use of money would appear. Some would fail some would succeed but there would be no ‘just dropped the egg basket’ like with have with a compulsory single bank system. An insurance company just spun off a reinsurance company that they owned majority stock in. They sent us a choice for which company’s stock we wanted to own. I studied the two companies very different business goals and plans and chose based on that. But I can’t choose which currency to use or which banking regulations to use because it is a government guns enforced monopoly. Between the IRS and the Fed, nobody but nobody can dare rock the reserve note boat.
As for the beer bet, here is a clue. If I offer to bet somebody beer, it probably means that it is a bet I don’t mind losing. A win/win if you will. The winner will probably buy the second round anyway.
I’m interested in the details of the bail-out plan. This is clearly Ben dropping money from helicopters. I’ve already read some stories of banks being forced to accept money. Sorry, I don’t have the links but if it mattered I could probably find them. But in any case, the reason Ben asked for money without details is because in his play book, it’s all helicopter money. He doesn’t care too much where it goes, only how much and how fast. I’m sure we haven’t heard the last, there will be more asked for.
He does appear to be putting it into recoverable (as much as possible) stocks which reduces the chance of runaway inflation by some because he can just dump the stocks if inflation looks likely. This makes it a parallel to lowering the discount rate as far as how it fits the picture structurally. Any part that is defaulted however is unrecoverable and is very bad news. If very much of the bail-out money is not recovered then that is where the runaway inflation will come from.
I see that Nouriel Roubini is predicting pretty much the same thing I am. A contraction followed by inflation. At least I think that is what I saw. If his predictions for credit losses are close, then I stand by my prediction. Probably flipping somewhere in the 2-4 quarter of ’09 but possibly sooner or later. Sooner wouldn’t surprise me. But this is not going to play out quickly. As I said earlier, it may not recover at all. You have probably heard me use the term ‘brittle’ or ‘brittleness’ to describe parts of the economy that have no room to move. Credit in the US is one of them. There is no room to move and too many opportunities have been missed already.
Back away from your computer now so you don’t damage anything when you read what I am about to say. It is actually good for what needs to be done that Obama was elected. He will get a lot more slack to ‘do nasty things to poor people’ (which is how this will be characterized) than a Republican would. He will have a much larger range to work in than an evil capitalist would. Since I cynically think he is an opportunist who avoids making decisions, I think he may rubber stamp some of his economic advisers while blaming everything on Bush (which is only a slight exaggeration). But if his handlers have different ideas – I think he gets his guidance from the same cabal that told Teddy what to say and do – then who knows what will happen. He definitely has some nasty friends. And frankly Big Government will have to fail pretty viciously before the average person will agree to put it out of our misery.
Anyway, I still don’t know if I said what I meant but I’ll check in tomorrow and see if you have anything to add.
Must . . . process . . . information . . . overload . . . .
Not fair. It’s like you dropped a bag of marbles; there’s a thousand of them and they’re rolling in every direction. It would be unfair to our hosts for me to use up enough of their bandwidth to chase down every one of them.
So I’ll just say I agree with most of what you say (with the usual caveat of nuances, tweaks, etc.). (Oh, and I never really understood volts and amps, so that analogy doesn’t help me much.) And I like your little gif.
You could be right about Obama; he certainly will have much more latitude than a Republican president would be given. The question is, will he use it to actually fix our problems? My fear is no. Look who his economic advisors are: people like Franklin Raines and Jamie Gorelick (both of whom should be in jail, not advising presidents). Not exactly an auspicious start.
Anyway, regardless of our bet (if we actually have one; I’m still a bit fuzzy on that), if you’re ever in South Carolina I’d be happy to buy you a beer. Until then I’ll have to drink one for you (a dirty job and all that). Cheers!
By saying that I’ve sent thoughts and ideas rolling all over the place, are you insinuating that I am a scatter brain? And don’t worry about comment length at this point in a thread’s life. Our hosts are used to commenters who have lost their marbles. mmm . . . I’m not sure that’s exactly how I meant to say it.
Now you know what my comments look like when I don’t have or take the time to refine them down to clarity. Before I even shut down the computer I was already thinking I should have said things differently. My examples break down because they are poorly selected and your nuances, tweaks etc are probably useful corrections. Maybe it would be useful to say that the fractional reserve rate is the size of the pipe and the interest rate is the amount of pressure in it? But even that doesn’t work because lower rate equal more pressure and 0% is generally accepted to be the minimum interest rate, hence the helicopters.
Try this, the fractional reserve rate (US-10%) is the percentage of the lending market that is under the control of the money owners (depositors, ‘the market’). The remainder is the part that is under the control of the government. I consider the Fed to be government even though it claims to not be. UK IIRC, has a zero reserve rate.
Jamie Gorelick! She of the libertarian friendly clipper chip. I am afraid I share your concerns about this administration. I fear in darker moments that there is a competent malevolence driving it as some level. I would welcome some good old fashioned ineptitude right about now. Certainly Dodd, Biden, Frank pin the needle on the trait. As far as Obama having more leeway, the MSM is so heavily and unmistakably invested in him that they have to positively spin everything he does. It won’t do them any good though. They are toast.
The Bank of England should not exist.
It is true that up till World War II (not till 1997 as my fellow members of the Conservative party like to suggest) it did a reasonable job with bank credit money expansion being only a tiny fraction of what it is today.
But it still existed and it was still fraud – also the culture was different. And culture is important.
In the 1930’s a banker who had lost his bank (i.e. the shareholders and the depositers) vast sums of money would have had an “accident clearning his shotgun” (somehow it would have got into his mouth and blown off the back of his head).
These days the banker would have just trotted along to one of the P.C. clubs and societies that are boasted of the Leaman Brothers website (if it is still up) and told his chums about the billion in bonus payments he got for bankrupting the bank.
I have not dealt with the interest rate question:
The Bank of England should not charge interest – because it should not exist.
As no one deposites their real savings with the Bank of England it has no honest money to lend out anyway.
Banks themselves should not pay depositors any interest at all – in fact they should charge depositors for the safe keeping of their money.
If someone wants a bank to pay him interest he must agree to the money he hands over not being “a deposit” – but rather for it to be lent out (how can the bank pay interest other than this).
Money that is lent out is NOT still with the “depositor” (it is not a deposit because it is not there – and he is not depositor because he has agreed with the money leaving the bank to go to a borrower).
Two parties can not have the same money at the same time.
As for how much interest the bank should charge.
NOT “however much the borrower agrees to” – but also “how much they judge the borrower can really afford to pay back”.
Bankers never used to be rewarded for “selling loans” -whatever the banking books said, real old bankers knew in their gut that they were dodgy (which is why the whole process used to be covered in ritual and custom).
Old bankers understood (even if they never said) that a loan is NOT an asset – it is an I.O.U. (nothing more).
A good bank is not one that “sells lots of loans”.
It is one that GETS PAID BACK.
But all the above (perhaps because it was so rarely said) has been forgotten.
The men in conservative three piece suits and special hats knew they were engaged in dogy stuff – that they were on thin ice all the time.
The modern bankers are oddly innocent (for all their drugs and prostitutes), if one says to them “free trade in banking is free trade in swiddleing” (a maxim every old banker knew) they look blank – or become offended.
Their frauds are so vast because they honestly did not know they were engaged in fraud.
After all the government statutes said it was all legal – and what other measure of “law” is there apart from the will of the state.
The modern bankers will have been taught no other measure so they are actually much more honest than 1930’s British bankers (who knew what they were doing was dubious and therefore strictly limited themselves) in spite of modern fraud being vastly greater in size.
Modern British bankers are not really British at all – they are (as I said) so innocent. They really did not know there was anything wrong with what they were doing.
Of course there are exceptions – and perhaps they will survive.
I have not dealt with the interest rate question:
The Bank of England should not charge interest – because it should not exist.
As no one deposites their real savings with the Bank of England it has no honest money to lend out anyway.
Banks themselves should not pay depositors any interest at all – in fact they should charge depositors for the safe keeping of their money.
If someone wants a bank to pay him interest he must agree to the money he hands over not being “a deposit” – but rather for it to be lent out (how can the bank pay interest other than this).
Money that is lent out is NOT still with the “depositor” (it is not a deposit because it is not there – and he is not depositor because he has agreed with the money leaving the bank to go to a borrower).
Two parties can not have the same money at the same time.
As for how much interest the bank should charge.
NOT “however much the borrower agrees to” – but also “how much they judge the borrower can really afford to pay back”.
Bankers never used to be rewarded for “selling loans” -whatever the banking books said, real old bankers knew in their gut that they were dodgy (which is why the whole process used to be covered in ritual and custom).
Old bankers understood (even if they never said) that a loan is NOT an asset – it is an I.O.U. (nothing more).
A good bank is not one that “sells lots of loans”.
It is one that GETS PAID BACK.
But all the above (perhaps because it was so rarely said) has been forgotten.
The men in conservative three piece suits and special hats knew they were engaged in dogy stuff – that they were on thin ice all the time.
The modern bankers are oddly innocent (for all their drugs and prostitutes), if one says to them “free trade in banking is free trade in swiddleing” (a maxim every old banker knew) they look blank – or become offended.
Their frauds are so vast because they honestly did not know they were engaged in fraud.
After all the government statutes said it was all legal – and what other measure of “law” is there apart from the will of the state.
The modern bankers will have been taught no other measure so they are actually much more honest than 1930’s British bankers (who knew what they were doing was dubious and therefore strictly limited themselves) in spite of modern fraud being vastly greater in size.
Modern British bankers are not really British at all – they are (as I said) so innocent. They really did not know there was anything wrong with what they were doing.
Of course there are exceptions – and perhaps they will survive.
“But what about the people who can not afford a certain interest rate, but are still willing to agree to pay it”.
You do not lend them the money – and you BEG them not to borrow the money from anyone else (the people who will lend them the money).
“But that it is crazy business practice” – no it is not.
You save the bank a bad debt – and with the people who listen to your advice and do not go elsewhere, you build up a relationship with them.
They know that you are not just interested in earning payments by selling them stuff – that you actually care whether they will be able to pay back the loans and so on.
All of the above used to be known – and now it is not.