So banks aren't lending money to each other. Huh? You mean to tell me that banks, where thousands of people put thousands of dollars don't have enough money on deposit to make loans?!?!
Like my previous post lamented, companies, including banks, are running their finances just as bad as the typical American family.
On the news this morning, they say that banks aren't making loans to other banks because they're hoarding money. Banks are trying to protect themselves from a possible run - meaning that they need enough money to cover their deposits.
Here's a quick example. I gave Bank of Me $1,000 to put in a savings account. I only get 1.25% interest. Not too much. The bank turns around and gives my money away to someone else in the form of a loan. And that person, with good credit, pays about 6% interest. So, the interest is used to pay my money back to the bank, and also to make the bank money.
So, that model works fine. UNTIL, the bank starts making a lot more loans to people who have spotty credit and worse work history. All of a sudden, the loans aren't being paid back and the bank starts to panic because they don't have enough money in the coffers to cover the deposits. So, they start hoarding money.
The banks will stay afloat. Leave your money there. It's a lot safer than in the stock market right now. But instead of government and taxpayers money being used as corporate giveaways, I think financial institutions need to be creative in raising their own capital.
One of the major reasons that people put $1,000s of dollars into the stockmarket is because of a higher yield in long term investments than what banks offer through traditional savings vehicles. To increase the amount on deposit for banks, I propose that banks offer higher interest rates based on the amount on deposit. Customers need a reason to put money in the bank. I like my money to work for me - as little as I have, I like to know that it's making me something. If banks started offering no-min savings accounts with higher interest rates in the 3-5% range rather than the paltry 1.25%, it would give banks more money on deposit, thus more latitude in making loans. Even higher rates could be offered to people with substantial amounts in accounts.
I expect the feds to raise the FDIC insurance to $250,000 anyway to entice people to leave their money in accounts rather than pull it out.
Anyway, this is just something thats been stewing about for the last few days. Discuss.
