Category Archives: Banking

EconPop – The Economics of It’s A Wonderful Life

It’s that time of year — time for Andrew Heaton to peel back the onion on the economics of one of my wife’s favorite films.

Perhaps That Guy Was Onto Something…

Yesterday in the Examiner, Joel Gehrke wrote about the horrifying prospect that Senator Sherrod Brown (D-OH) could chair the Senate Banking Committee if Democrats retain control of the Senate after the 2014 elections.

Brown’s views on economics (especially banking and international trade) are decidedly backwards and appeal to the misguided economic populists in Ohio that elect him and keep Ohio in an economic homeostasis that’s not as bad as Detroit, not as good as Pittsburgh, and far behind Texas.

One paragraph that Joel wrote jumped out at me:

Brown is working with Sen. David Vitter, R-La., to craft legislation that would shrink the biggest banks in the country, and they have 10 other Republican allies, according to Business Insider. The Dodd-Frank bill was supposed to solve the problem of some banks being “too big to fail,” but it didn’t.

OccupyWallStreetNYC (which apparently still exists) tweeted this about Gehrke’s story:

Perhaps the folks operating their twitter account aren’t very familiar with the Dodd-Frank law (RAFSA), but Brown already sold them out by voting for it.

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Maths are important

One constant cry among education lobbyists in Washington is that we need to “do something” about STEM education. If you’re not familiar with the term STEM, it stands for Science, Technology, Engineering and Mathematics.

I doubt many of us can claim proficiency in all STEM areas; I certainly can’t. However, when some folks share stories, I do doubt their math and economic competency.

Take for example this headline I saw on reddit:

This isn’t bad headline writing, as far as attracting readers is concerned. But, economically and mathematically, it is bad headline writing.

Here’s why:

  • The poster has no idea what is in the contracts of the “ousted” executives. It’s not like this bank said, “You’ve done a terrible job, and we’re firing you, but here’s a few million on the way out. Enjoy retirement.” Odds are their contracts stipulated the terms of their compensation in the event they were ousted.
  • Comparing 11,000 jobs to $14 million in bonuses may seem like a great idea at first to get traffic; that is, until you think about it. (Unless you’re trying to attract readers who won’t.)
  • How many employees could you employ with $14 million? Well, 11,000! If you paid them $1,272.72 a year.
  • Put another way, this could pay 11,000 people to work for minimum wage for about 4 weeks. 11,000 tellers for about 2.7 weeks, it could pay for 343 personal bankers for a year, or 206 branch managers. (This does not include fringe benefits, healthcare, etc.)

In short, comparing 11,000 employees to a $14 million total shows a disturbing lack of economic and mathematical knowledge.

 

UPDATED: I Thought the Durbin Amdt. was supposed to help consumers?

Via email:

Dear Valued Member,

Beginning October 29th, transaction fees in DC will increase from $0.32 to $0.45 due to increased costs triggered by recent federal legislative reform enacted by the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Durbin Amendment.

To help offset this increase Parkmobile has developed the Parkmobile Wallet which will provide a more cost-effective parking experience in DC – Wallet transactions will carry a $.30 transaction fee. You can update your payment method to the Parkmobile Wallet via your Personal Pages at www.parkmobile.com or from your mobile app (if using iPhone or Android). If you have forgotten your username/password you can retrieve it using your registered mobile phone number and the last four digits of the credit card on file. The Parkmobile Wallet is FDIC insured.

For more information please visit our website at www.parkmobile.com and click on the Parkmobile Wallet link. If you have further questions click on the orange ‘Help’ tab or email helpdesk@parkmobileglobal.com.

Sincerely,

Tina Dyer
Marketing & Sales Support Manager
Parkmobile USA, Inc.

And from a Press Release:

They can continue to use existing payment methods, but due to increased cost related to the Durbin Amendment the transaction fee will be changed from $0.32 to $0.45.

I guess the Durbin Amendment isn’t as beneficial for consumers as we were told…

UPDATE: HOH reports:

Senate Majority Whip Dick Durbin (D-Ill.) fired back by penning Mayor Vincent Gray a sternly worded letter.

“Mayor Gray, in order to avoid any potential confusion,” Durbin began. “I request that you and DDOT make clear that the District of Columbia Government does not agree with Parkmobile’s analysis of the cause of these fee increases or endorse Parkmobile’s disingenuous assignment of blame.”

This Wednesday, “plus 13 cent Durbin tax” stickers have started popping up on parking meters.

UPDATE 2: ParkMobile has backpedalled. I wonder what Mayor Gray threatened them with.

Dear Valued Member,

Last week in a press release and email announcement introducing the Parkmobile Wallet, a simpler, lower cost way to pay for parking in the District of Columbia, the company made an overly simplistic statement about the underlying cause of increasing card transaction fees. In an attempt to explain why costs have increased the company left the potentially confusing impression that Federal legislation is to blame. The company apologizes for any confusion caused by this statement.

Credit Union Elections

While I certainly enjoy banking with ING, my favorite financial institution in DC is the US Senate Federal Credit Union. I’ve been a member since 2007. Conveniently located near work (especially when I worked in the Senate) and their headquarters is on Eisenhower Avenue in Alexandria, also very convenient.

Tonight, I got my ballot to vote for my credit union’s board of directors. As you can see, there is a talented group of people running.

It also looks like the USSFCU is going mobile, which is nice.

Intellectual Overdraft

On Tumblr, I saw this interesting fact.

In 1995 Michael Howard was charged £20 for a £10 overdraft on his bank account at Yorkshire Bank’s Horsforth branch. The 30-year-old marketing consultant changed his name by deed poll to “Yorkshire Bank plc are Fascist Bastards”

I looked up the story, and it checks out.

A couple thoughts:

  1. This guy probably spent more on a name change than he did in overdraft charges, which brings me to
  2. This guy’s decision to change his name is just indicative of his poor judgement, which shouldn’t be surprising in that he somehow cannot manage his own money.

I think Michael needs a copy of this book:

Don’t get me wrong, there are legitimate criticisms of banks, but I don’t think that not being good with your money is one of them. 

Student Loan Protesters Don’t Get It

I recently commented on a MyFoxDC article about 36 students who disrupted free entry to the Sallie Mae loan company in DC. I heard they also blocked traffic, too, which is a really great way to win Washingtonians over to your cause on a weekday.

To read this extremely long post, make the jump!

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ABA Lawyers Credit Unions

In the Capitol Hill newspapers today, the American Bankers Association printed a simple and devastating advertisement.

For full disclosure, I am a member of the U.S. Senate Federal Credit Union. I love it. However, if credit unions want to act more like actual banks, they should be treated like them.

To which I award the American Bankers Association advertisement a well-deserved Kaboom!

Lawyered

Banking in D.C.

I love my banking institutions. So, let me tell you a bit about each of them. If you’re looking for a good bank in the D.C. area, let me know.

The first is ING. Co-workers and friends really liked their service, I invest through their Sharebuilder arm, and have checking, savings, and an IRA with them. To deposit money, you pretty much have to have a local account you can use to make deposits. You get free withdrawals at 7/11s, which are all around D.C. They are an online bank, so no branches. Their online site is excellent.

The second is the United States Senate Federal Credit Union. This is the credit union I joined through work. Each credit union has different membership standards,  but this one is great because their ATMs are all around work, they have a branch there, and their home office is on Eisenhower Avenue, literally 3 minutes away from my condo. If you don’t know of a credit union near you, check out the credit union finder. Most other credit unions’ ATMs are free for withdrawal. USSFCU’s online site is well above average.

Third is Burke & Herbert Bank and Trust. Based in Alexandria, this is Virginia’s oldest bank. They have locations all throughout Old-Town and Northern Virginia. Their online site is average, but their customer service is unparalleled and their mailed statements are immaculate.

I highly recommend all of these institutions, but also suggest that you take the time to learn about financial institutions in your area and determine which one is best for you.

Fractional Reserve Banking

I wanted to take a moment to talk about fractional reserve banking with you.

Seems to me that this is one area where you might see the term, and go “what the heck is that?” Well, it’s actually quite important in our economy. So, I wanted to take a bit of time and explain it in layman’s terms.

Banks do a lot more than transfer accumulated wealth through loans to young people like you and I seeking to buy a car or house. In fact, banks serve a vital purpose doing this.

Recently, the President and some in Congress thought it was dandy to nationalize student loans (as a ‘pay for’ for health-care reform.) Frankly, as a government, we don’t have the money to do that. This is a bad idea because it is open to political gamesmanship, and as it stands, we don’t have the necessary cash reserves on hand to finance it. It will likely be financed through borrowing, or worse yet, “quantitative easing” (i.e. printing money.) In my view, nor is it a proper role of government to get involved in lending, because politicians will start exempting certain classes of individuals from repaying their loans, thus transferring the burden to others. The recent health-care bill also takes interest earned from repayment to fund the new health-care scheme. A reassuring thought for students, I am sure, using the interest they repay from borrowed or created money to funds others’ health-care. But, I digress.

Anyways, banks earn a return on the loan they give you for a car or house and keep a portion of that interest for researching the feasibility of repayment and facilitating such a loan. They also pay interest to people who put their money in instruments like savings accounts and consumer deposits (CDs).

At some point, you may have met somebody whose name is “Goldsmith.” Similarly, like people whose names are “Brewer, Smith, and Carver” — the origin of this last name is tied to the career of the person who initially bore the name. Goldsmiths were artisans who made jewelry and items out of gold. Like any prudent person, they would protect the components of their trade (gold) in safes. In the olden days, not everyone had a safe, so people would frequently ask to store their gold with a goldsmith, who would issue a certificate redeemable for that specific item, or, if it were straight gold, that value in gold. He or she might also charge a premium for its safekeeping, but as we’ll see later, those fees likely disappeared if individuals agreed to the goldsmith’s terms of keeping it. Plus, it is worth pointing out that it was rather cost-prohibitive to either build or purchase a safe in olden days, as it is today.

People could then treat these certificates like currency, and trade them for goods or services. Goldsmiths soon realized that people tended to put their gold in their safe for long periods of time, and rarely would people all at once ask for their gold back.

Goldsmiths came to the point where they figured out that they could use the gold for other purposes, like making items for sale or lending the gold to others. They would make profit on the product they sold, or made interest on the lending of some of the gold.

Since the gold was protected in their safe, and they could lend the gold with some reasonable assurance that not all of it would be claimed at the same time, there was in effect, two types of the gold in existence. The value of that gold on paper, and the gold that goldsmiths could lend to others for interest. Naturally, this increased the value of the “money” supply.

This, of course, enabled people to generate more economic activity with the loans they received, and also led to the betterment of society as a whole through increased investment.

Of course, problems arise from this concept. What about unscrupulous goldsmiths who kept practically no reserves? What about inflation in the money supply?

In today’s banking system in the United States, two entities exist to address both of these concerns. First, the Federal Deposit Insurance Commission (FDIC) exists to guarantee deposits at banks. Banks pay a premium into a fund that exists to pay for their potential failure. The FDIC, in turn, insures your deposits up to a certain limit (which changed recently because of the economic crisis from $125k to $250k.)

The other entity exists to ensure (in theory, at least) that inflation is not rampant and, thus, a silent thief of your wealth, is the Federal Reserve. The Federal Reserve also determines the percentage at which banks have to keep certain reserves relative to their total holdings. They also lend money to banks at a fixed percentage (federal funds rate, set by the Open Market Committee) to lend to banks, and thus, individuals/businesses.

A bank may be perfectly sound, but a run could ruin it because loans (like mortgages) are not liquid to the degree where the bank could force you to repay your loan instantaneously. Banks cannot legally breach contracts like this. This is why both the FDIC, the law set by Congress, the Judicial system, and the Federal Reserve, our central bank, exist.

Through the laws of the country and the policies of both entities, a balance is meant to be struck to ensure the safety of bank deposits, their holdings, and the greater money supply, which the Federal Reserve oversees.

Just something to think about when you get your next loan, or you open up an investment instrument through a financial institution.

SOURCE: Much of the content for this blog post was adapted from Thomas Sowell’s book, Basic Economics: A Citizen’s Guide to the Economy, pages 268 and 269. This is an excellent book to purchase if you’re looking to gain a good understanding of the fundamentals of economics, or to brush up on them.