on banks and profits...
Oct. 19th, 2011 11:12 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
acroyearIf Your Business Model Requires Ridiculous Gouging, Then… | Mike the Mad Biologist:
We all hear about the positives of the 3.X % house loan (nice, if you can get it), but truth is that low rate loan is death to the banks. It is a major reason the banks wouldn't have survived the mess even if they didn't also get involved in the tranching and securities scheme (thanks to Bush II era deregulation). Banks make profits, just like any other company, by making more money than they spend. Except there's more to it - by making more money than they spend or lose.
When the interest rates were (Reagan era) 12% for solid customers, and 18% for risky, the 12% was enough to cover the losses from the risky ones that defaulted. If an 18%'er actually succeeded, then it was a double-win - the customer got a better credit rating the next time, while the bank raked in even more profit. At reasonable interest rates, the system works.
The current interest rates, while seemingly good, are not reasonable. They are atrociously low. There simply is no profit to be made through them. The main rate for decent customers is barely enough to account for the expenses of getting the loan established in the first place (plus the subsequent handling when it is acquired by Freddie Mac). It doesn't even come close to covering loans that fail.
As such, the banks simply won't make ANY loan that has even the slightest risk of failure, including and especially loans to small businesses (in spite of the federal guarantees attached to recent stimulus plans).
So long as they know they aren't making profit doing what banks are supposed to do (make loans), and they can't make gobs of money the easy way (by getting into the Wall Street gambling racket that almost destroyed the whole system), then the only way left to make money is charging customers tons of fees for things that cost them nothing at all.
I'll stick with my credit union (for 21 years so far), thank you very much...
There was a time, admittedly so long ago that liberals freely roamed the political landscape, when banks made profits and didn’t have to have to gouge customers. In fact, they made profits, and debit cards hadn’t even been invented yet (terrifying, isn’t it, kids?). How did they do this?MtMB talks about how they didn't make loans that sucked, but there was and is more to it: the interest rates for the loans were higher than they are now.
We all hear about the positives of the 3.X % house loan (nice, if you can get it), but truth is that low rate loan is death to the banks. It is a major reason the banks wouldn't have survived the mess even if they didn't also get involved in the tranching and securities scheme (thanks to Bush II era deregulation). Banks make profits, just like any other company, by making more money than they spend. Except there's more to it - by making more money than they spend or lose.
When the interest rates were (Reagan era) 12% for solid customers, and 18% for risky, the 12% was enough to cover the losses from the risky ones that defaulted. If an 18%'er actually succeeded, then it was a double-win - the customer got a better credit rating the next time, while the bank raked in even more profit. At reasonable interest rates, the system works.
The current interest rates, while seemingly good, are not reasonable. They are atrociously low. There simply is no profit to be made through them. The main rate for decent customers is barely enough to account for the expenses of getting the loan established in the first place (plus the subsequent handling when it is acquired by Freddie Mac). It doesn't even come close to covering loans that fail.
As such, the banks simply won't make ANY loan that has even the slightest risk of failure, including and especially loans to small businesses (in spite of the federal guarantees attached to recent stimulus plans).
So long as they know they aren't making profit doing what banks are supposed to do (make loans), and they can't make gobs of money the easy way (by getting into the Wall Street gambling racket that almost destroyed the whole system), then the only way left to make money is charging customers tons of fees for things that cost them nothing at all.
I'll stick with my credit union (for 21 years so far), thank you very much...
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Date: 2011-10-20 04:35 pm (UTC)