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Categories - Copywriting - Shopping - Free Online Business Help - Telecommunications Services Articles: Finance - The Hidden Financial Demon There are many demons lurking about in the current financial crisis. The media has been all over things like asset-backed securities, mortgage backed securities, sub-prime mortgages, bad loans, interest rates, predatory lending practices, derivatives, and the legislation or lack of legislation that has allowed these things to cause problems. There is, however, one monster that no one seems to be addressing.
In a healthy economy, banks create loans from deposits made by the population and deposits that are made as a result of corporate profits. This is significant in that it demonstrates that the population has the money to buy goods and services and corporations are healthy, selling their goods and services, and employing people.
Banks take the deposits and create loans in the amount of ten times the deposits and loan the population and businesses money, which they use to buy the things that they want, expand, and finance business operations, and enhance their sales by offering credit terms to buyers. Because goods and services are being purchased by what always ends up being consumers, businesses are healthy and banks are willing to loan businesses money. Banks also invest in things like asset based securities and make more money that they can use to make loans or re-invest.
The hidden monster that people ignore is interest. When too much of the population's deposits are taken to pay interest, they have less money to buy goods and services and businesses begin to sell less. When sales drop, banks are less willing to loan them money. This of course, hampers business and they have to lay off people, which has a direct effect on deposits. Of, course, this downward spiral continues until the disaster becomes evident when the pain trickles up.
The thing about interest is that, when the Fed creates money, it does not create the money to pay the interest it charges to the government or its regional banks who, in turn, create loans to local banks and add more interest charges. If you had all of the money that the Fed has ever created, you would not have enough to pay the Fed the principal plus interest because the money to pay the interest does not exist.
Normally, in a free market, responsible banks and businesses will police themselves and not allow businesses or the population to become overextended. Banks don’t want to loan money that they don’t have a good chance of being paid back. The government will also pass laws that prevent lending and business practices from becoming predatory on and abusive to its Citizens. Governments are good at this, but they are not good at regulating things that they know nothing about. It doesn’t take much to know when the population is being tricked into or encouraged to do things that will be harmful to them.
In the current situation, exactly the opposite has happened. Because the government became business focused, special interests have been allowed to drive legislation that protects businesses from bankruptcy and encourages them to loan money to the people who can least afford to borrow it. Banks are not normally allowed to offer zero interest credit cards, apply an unreasonable amount of interest after people use them, and raise interest rates on the mere notion that someone has good credit and might overextend themselves. The Federal Reserve has made an abundant supply of cheap money available on behalf of its owners and members.
Because of this, greed has been allowed to replace good judgment and the population’s ability to purchase goods and services has been destroyed by interest. The banks are now getting too much of the money with no one to loan it to. They, too, find themselves overextended with investment liabilities that threaten their survival.
No amount of money thrown at the banks is going to fix this. No matter how much money they are given, they still will have no one to loan it to. Normally good investments like asset-backed securities become worthless when no one has the ability to buy the assets. When the population’s ability to buy food is hampered, even assets like corn and wheat drop in value. Money becomes worthless to banks if they can’t loan it or invest it.
The population has to recover first. This, unfortunately, will involve the banks taking their lumps along with the rest of us.
IF you would like to become involved in replacing legislators who have caused and allowed this to happen visit http://campaignforliberty.com.
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