There has been a lot of news coverage about the banks andbanking system and the people running the system, how they have brought us allto our knees and have lost amounts of money we cannot comprehend, we have seenpeople disgraced and forced out of their jobs for crimes or indiscretions whichwe have no hope of ever understanding. Let me ask you, what is a LIBOR? I havenever heard of this before recent news coverage and even after the explanationsI am still not able to tell you what it means or even what I think it means.Yet I have been told I should be angry and people should pay for this breach ofour trust. Grrrrrrr. That’s about as angry as I think I can get aboutsomething I have no comprehension.
Lets look back and see if we can figure out when the bankingsystem became so complicated, I believed that a banks primary functions was tokeep my savings safe, and to lend me money as and when I need it (status pending).Now that does not seem very complicated, so the bank pays me for leaving mymoney with them to keep safe and they charge me for lending me money, and thisis where the profit comes from. To quote a well known Meerkat “Simples”.
The following people are all fictitious and I have made themup to demonstrate my point. So Here is how I see the banking system starting,Liam the farmer needs some money to build an extension on the side of his barnbut he wont have the money to pay for this until the main harvest but if hedoes not build the extension he may loose half the harvest to the elements andnot make as much money as hoped and wont be able to afford the extension.
So Liam knows Emma who lives in the next village is well offand has surplus bundles of cash, Liam approaches Emma and asks to borrow £100and once the harvest has been sold he will pay Emma back £110 as compensationfor the use of the cash. So Emma agrees and lends Liam the cash, one night inthe village pub Liam mentions to Mason another local farmer about thearrangement he has with Emma, Mason needs £100 to buy some more seed as he didnot have enough money to plant in all his fields this year. Mason now goes tosee Emma and asks to borrow £100 and he too in return will give Emma £110 oncethe harvest has been sold. Again Emma agrees, this continues until Emma findsherself with very little cash.
To rectify Emma’s cash flow issue she approachesOlivia, whom she knows also has some spare cash and she offers to invest thecash in return for a yearly fee. Emma will give Olivia £5 pounds for every £100pound invested each year. Emma is now using the money she has from Olivia tolend to more farmers and is making £5 clear profit for every £100 pound that isbeing invested. Using this business model, as long as no more than 5% of Emma’sbusiness goes bad, she will always make a profit, and if all monies are paidback she makes 5% clear profit for managing the money, and we know banks etccharge a lot more than 10% per annum to lend us money.
Now the numbers have been kept simple to show that a simplebusiness model can work and profits can be made from simply holding peoplesmoney and giving them a fee for doing so. Also lending people in need money andcharging them for the privilege but always charging more than you pay out tohave the money in the first place. As long as you don’t lend more thanyou hold and don’t hold much more than you need to lend then you shouldalways make a good profit.
So how did we go from this simple model to the overcomplicated model we see in today’s banks, where money is virtual andthere is so much changing hands, it’s impossible to understand or as Ihave already said comprehend. By making it so complicated it stops us outsidersfrom seeing what is happening making fraud and corruption easy to cover up. Thislack of transparency also breeds mistrust and fear or apprehension when goingto the bank to ask for help.
The banking crisis, do we really know what caused this then,is it all fraud and corruption built or hidden in the overly complicated system.Or was it caused by a few greedy people exploiting the system, again difficultto see in such a complicated system. What checks should be in place to preventthis, can we build checks into such a complicated system, should we maybe goback to basics and let Emma lend her money to Liam again.
Personally I think all the banks should not be bailed outand allowed to crash, I know this seems harsh but I believe out of the ashes anew breed of bankers would emerge, with new simplified rules and procedures withan eye on making clear profits in a transparent environment easily scrutinisedby the simplest of folk (and I mean me), this would allow us to build on a newstable system giving back confidence to the wider economy to the envy of therest of the world, lets be world leaders once again by trying something newhonest and clear