Touch the Soil News #616 (feature photo CC SA 3.0)
The cornerstone of the financial system – upon which the economy hinges – is the banking system. In the aftermath of the 2008 financial crisis, the Frank-Dodd Act tried to manage the risks banks take. In the process, banks needed to build more equity. The theory is that if banks have more equity, they will have a greater cushion for adversity before the FDIC has to step in and protect deposits.
To make it simple, let’s assume the banking industry is a house worth $100,000. As of 12/31/2008, the banking system would have had debts of $90,700 against the $100,000 house. As of 9/30/2016 the banking system had debts of $88,700 against the $100,000 house. In short, the stake that the bankers (and their stockholders) have in the banking system improved by 2.2 percent.
So why are banks so deeply in debt? Simply because all bank deposits (your checking and savings accounts) do not represent money in the bank, but what a bank owes you. When you write a check (debit card transaction), what your bank owes you, gets transferred to become what another bank owes the person you wrote the check to.
The most important thing to understand about the banking system is that the bankers and their stockholders – as of 9/30/2016 have an equity stake of 11.3 percent. The depositors and a few other creditors, have a stake of 88.7 percent. No matter how much the public, businesses and individuals may want to bash the banking system; any dramatic attack will always result on the public, businesses and individuals taking the biggest hit.
The problem in political circles is that the basic realities – of our financial world works – are not understood. Politicians, regardless of party, do not understand what can happen if they take an ax to the system or perform invasive surgery. This by no means infers that there are not structural flaws that need correcting. Nor does it mean constructive legislation is not needed. It means we must first understand what we are dealing with.
Case in point. Rumors have surfaced that the Frank-Dodd Act must be axed because it has caused banks not to make enough loans. The error in this rumor is that the actual facts were not visited. The following Info-graphic illustrates changes in bank loan growth over recent years:
From 2007 to 2009 loan growth collapsed by $1.3 trillion. Since the Frank Dodd Act of 2010, loan growth has been restored. In 2016, the banking system made so many loans that after paydowns, the total volume of loans increased by $604.2 billion.
This info-graphic suggests the exact opposite of the rumor that banks are not making enough loans. The info-graphic illustrates that bank loan growth is headed on a steep upward trajectory whose sustainability must be vigilantly followed for a potential bubble.
While this may seem complicated, perhaps the best hedge individuals and families can take is to learn food growing skills and put your lawn to better use.