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R.I.P. Scout26

Author Topic: Man Bites, Diddles, and Marries Dog: Obamanomics' Incentive Inversion  (Read 1323 times)


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Dude quotes a Bloomberg business article that described freakish (but currently rational) behavior on the part of banks:
U.S. regulators have asked some banks to take more deposits from large investors even if it’s unprofitable, and lenders in return are seeking relief on insurance premiums and leverage ratios, according to six people with knowledge of the talks. Deposits are flooding into the biggest U.S. banks as customers seek shelter from Europe’s debt crisis and falling stock prices. That forces lenders to raise capital for a growing balance sheet and saddles them with the higher deposit insurance payments. With short-term interest rates so low, it’s hard for financial firms to reinvest the new money profitably. …At least one firm, Bank of New York Mellon Corp., tried to recoup some of the costs by charging depositors 13 basis points, or 0.13 percent, for holding unusually high balances.

Whoa, Nelly!  What sort of spock-with-a-goatee business universe is this?

The author goes on:
Let’s think about what this article is really saying. Banks normally make money by attracting deposits and then lending that money to people and businesses that have productive uses for the funds.

Yet the economy is so weak that banks are leery of taking more money. The story is complicated by other factors, including flight capital from Europe, taxes (or premiums) imposed by the Federal Deposit Insurance Corporation, and various regulatory issues.

But even with these caveats, it’s still remarkable that banks want to turn down money – or charge people for making deposits.

Sort of like McDonald’s turning away customers because they lose money by selling Big Macs and french fries. Or, better yet, like McDonald’s turning away free goods from suppliers because not enough people want to buy the final product.

To sum up:
Banks don't want to take in large sums of money because:
1. They have to pay taxes/insurance on those deposits.
2. They can not find borrowers (or are unwilling to loan out money) and interest rates are so low, the usual "park it" options make less than inflation, causing them to lose money on those deposits while simultaneously paying tax to the regulators for having that money.



“Fallacies do not cease to be fallacies because they become fashions.”
----G.K. Chesterton


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Re: Man Bites, Diddles, and Marries Dog: Obamanomics' Incentive Inversion
« Reply #1 on: August 27, 2011, 10:54:14 AM »

What, you expected to save without being punished?  Your job is to spend and consume.  Anything else is unpatriotic.
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Re: Man Bites, Diddles, and Marries Dog: Obamanomics' Incentive Inversion
« Reply #2 on: August 27, 2011, 09:06:04 PM »

Banks already have so much bad paper on their books, that they are not lending any money to anyone.  There's safe place for money since the downgrade.  There are funds (mostly pension plans and the like require all investments be in only top rate instruments or FDIC insured deposits).  And no since there is no safe place, the money managers are in somewhat of a panic.

And it's playing royal havoc with markets and world economy.
Some days even my lucky rocketship underpants won't help.

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