THIS IS MY 54TH BLOG ON UNDERSTANDING MONEY TOOLS
Let’s talk banking and a bit on the economy. Banking involves a lot of things
including money and the effect on the economy.
First let’s go over employment again. Numbers came out that
our unemployment has dropped considerably over the past few years, to below 6%.
What good is this number? The importance is the number of people who have given
up looking for employment, then under-employed, part time and full time jobs.
Part time employment and under-underemployed make up a big percentage. Overall
true unemployment most likely continues at about 20% of our workforce. A recent
report showed that of the people working 34% are outsourced/contract
workers. This reflects that
companies are trying to get around paying for benefits like health insurance
and contributions to retirement plans. Employment and jobs are key to a good
economy. The largest and most vital group to keep employed and pay a
respectable wage is the middle class. A measure of unemployment “is important”,
however wages are an equally important measure, and we are significantly
lacking.
Secondly, important to the economy is money. Let us recap on
this topic. Money has an all encompassing affect on the economy; the quantity
of money in the market, the availability of this money, the supply and demand
in relationship to interest rates of this money, and lastly the circulation
of money or as it expressed these
days “V” or velocity of the money turning per year in the economy. As a
baseline to a good economy we are far below the line of health.
Banking consists of three basic types, commercial, trust and
investment banking. Credit unions, unique to certain groups, fall under this
category. We’ve described each in
previous blogs so we will talk about commercial banking, especially how it has
changed and employment for you inside the industry.
Commercial banking is what most people associate with a
“bank”, savings accounts, loans, mortgages, money management and more. Years ago bankers had a certain look
and respect in communities. Many bankers dressed the part, men having
three-piece suits, ties or bow ties, women with dresses. It was a people
business as well as a relatively respected money business. The industry has
changed as most businesses. The big banks have bought up or forced many small
banks to close, consolidation.
Federal regulations after the industry collapse of 2007-8 forced major
changes mostly with loans and mortgages. This has contracted the industry to
about 6 major banks and holding companies.
If you are thinking of working in the banking industry it is
not a bad place to learn the industry, and how it relates to business. My mother worked for a small bank, and
when the economy for oil/gas and real estate collapsed in the mid-1980s I spent
4 years with a trust company; trust companies being under state banking
charters and regulations.
Employment has gone the same way as most industries paying
low wages and hiring contract people on an hourly basis thus avoiding employee
benefits. Upward mobility in the
industry is very difficult. Most banks hire younger people and train within to
their standards. The large banks have investment departments, and normally will
pay for your education and licensing. Licenses are issued to you, the bank as
principal. If you leave their employment the license can be transferred to
another brokerage firm. Normally,
you build a personal investment relationship with the bank’s customers. If you
leave the bank to go with another firm many of the clients will want to move
their money and stay with you rather than the bank, however note that the bank
most likely will sue you for taking any clients. Such lawsuits typically can be
settled or with considerable time go away.
There are many lower level jobs in the industry from tellers
to backrooms for people with computer skills. Use the time employed to learn
and advance your knowledge and skills.
Always keep your eyes open for another job. Companies many times like to
hire people away from banks as they perceive honesty.
Some banks are offering only on-line services cutting costs.
Year’s past you had a personal banker, and if needing a loan you sat down with
a banker analyzing your needs. Those days are history. If you need a loan you
are asked certain questions, your answers placed into their computers and an
answer comes back quickly from their home base computer, not a human being with
any of your concerns or special situations taken into account.
How else has banking significantly changed? Up until 2007
bankers were lending on asset based balance sheets. Now, banks do not care
about assets but lend on earned income.
As there is earned and unearned income, this typically means you need a
consistent paycheck every two weeks proving earned income. Banks will want a three year history of
income for a loan. Going from asset based to mainly income based lending to me
makes little sense as a person can lose their job at any point these days. It
does tell me that banks don’t trust asset values and liquidity in these
tumultuous times.
Banks are making a lot of money off fees like credit cards.
We have discussed that banks are not giving loans to middle class people
starting small companies or retail stores. Not long ago a person could get an
“operating line of credit” to help buy inventory and start a store, not today.
This is a real problem for the US economy.
Instead of a low interest rate, logical line of credit for a
store starting up, a bank may issue a credit card, non-secured line. Here is
what all to often happens. Let’s assume that the bank gives “you” a credit
limit of $40,000 at 10% interest, and you probably need much more than that to
purchase inventory. This would be based on your personal very high credit
score. Your store normally structured as a corporation cannot get a loan. After a period of time the bank may
drop the credit limit on your card, not what you are expecting assuming you are
doing well and have paid the monthly statements. When the bank cuts your card
limit, you have less available credit and rating companies lower your credit
score. When your credit score is lowered, the bank will raise the amount of
interest on your credit let’s say to 14% from 10%. Then, with the higher
interest rate you can’t pay off as much of the principal carried month to
month. Once this cycle starts people are seeing their credit card interest go
up to 29% or more. It is very difficult to get out of debt, and banks know this
and love it as a big profit center.
Try to stay away from carrying credit card balances over,
even though it is difficult and sometimes impossible not to.
Commercial banks’ spread or gross profit lending margin.
Years ago banks operated on approximately a 2% spread between what they took in
from people’s savings accountants and what they lent money out for loans; not
any more. (For instance, people would get a savings account at a bank and the
rate was, let’s say, 2%. Then, people went to the bank for a real estate
mortgage, car loan or business loan and the collateralized loan was at a rate
of 4%.) Now, banks are borrowing at a discount rate and inter-bank loan rate of
25 to 50 basis points (this being 1/4 to 1/2 percent) and lending it out at 7
to 30%. I believe the old expression of “rape and pillage” is appropriate for
this!
In past blogs we discussed two very important Act of Laws
that would have prevented some of this, if they continued to exist, those being
the Sherman Anti-trust Act/Law of 1890 and the Glass Steagall Act of 1933 which
ended in 1999.
I recently heard, and believe it true, that the investment
banks of Goldman Sachs owned coal mining interests in Columbia, and Morgan
Stanley which today through mergers is J.P. Morgan/Chase Bank owned 100 oil
tankers and millions of barrels of oil, both these situations of investment
outside their normal regulated banking purview. With these large interests they
could perhaps have an affect on commodity markets.
The current banking and financial/economic situation is a
two edged sword. On the positive side there is such a massive spread between
what banks pay on savings accounts (1% or less is normal), and the rate of
interest banks are lending. This forces the American public to de-leverage by
using discretionary income to pay off debt. On the negative side, it takes discretionary income from the
economy and Americans making purchases, thus inflation remains low as well as
GDP.
Bottom line, no risk lending, no money for the middle class
to start companies equates to no growth economy. If you are employed with a
bank use the knowledge and experience to move ahead. Try not to get stuck in a
slot with no future potential. Think outside the box!
I hope this is a good quick overview with some insight.
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