Hidden in the history our leaders have forgotten, the solution to the financial crisis!

When I was a boy in a small New York town I knew our banker and he knew my entire family, unquestionably he made a good living, but he was always there to help. When I was building my first business in Colorado my banker was Jim Asher. He was a very busy man and when I needed a start-up loan he suggested we could talk in the car during his drive over the pass to another of his banks. One condition was that I write a business plan before meeting him or the trip. We drove over the pass to Fairplay and back, but never discussed the loan. When I was getting out of the car in Breckenridge I was a bit confused, but offered him the paperwork anyway, and he said "it was for you, not me"; I got the loan. He was making a loan to a person, not a balance sheet. Some years later I was in Europe and my partner told me we had an emergency and needed some cash fast. I phoned Homer Ellis, the President of our bank in Vermont, told him our problem and asked how we could solve it. He said the money would be in the account that day and to come in and see him when I returned. They were all in business to serve the community and they knew their customers. (They all were paid back on time.)

During that time interest rates and fees were generally reasonable and banks were profitable. If you were not financially ready to make a loan, your banker helped you develop that readiness. A well known and telling expression was "If you can't trust your banker, who can you trust?"

At that time even big banks were very small by today's standards. They could not operate across State lines. Financial centers like New York City had literally dozens of banks competing for our business. Their operations were regulated and their business was limited to simple savings and checking accounts, auto and home loans, financing business transactions and the like. They ran relatively simple businesses that provided valuable services to the community and made a fair profit. Of course there were a few sharpies who were looking for a fast buck, but they were the exception and generally didn't last long.

Then came the deregulation madness of the '80's. Interstate banking became legal, big banks cannibalized little ones while merging with one another to become huge ones; all in the name of better service at lower costs. Of course the costs did not go down, instead they skyrocketed. Let's not forget the savings and loan scandal in the late 1980s that deregulation enabled. Credit card interest rates soared to such an extent that Congress tried to limit them in the early '90's, but the banks had made bad loans offshore and they claimed they needed the income from credit cards in order to offset them - Congress folded. Are the current bills designed to reign in the banks? Does "Deja Vu all over again" mean anything to you?

It amazes me that after the havoc the banking and financial sector has wrought on America and the World, that they are portraying themselves as the injured parties, and they have the unquestioning support of the majority of our Congressmen. To me it looks like the Power Brokers have regrouped and are back on the offensive bolder than ever. Am I the only one who can see what is going on behind the scenes, or is it that I am totally deluded and misguided?

The answer lies in recognizing that banks should not be profit based:
- They are a core service that is there to facilitate commerce, not to siphon off the cream. They should be chartered and run under strict executive compensation and profitability guidelines.
- They should be firmly regulated regarding the geographical area they can operate in (no bigger than the State they reside in), the maximum compensation allowable for their management, the maximum interest rates they are allowed to charge (as a capped percentage of their average cost of borrowing), and the types of services they are allowed to offer.
- Their market share should be limited to 10% in larger markets and 50% in the smallest.
- Fees should be structured based upon the actual cost of the service offered.

What do we mean by Zero Cost Recovery?

Since this is the core of the blog, a summary has been created as the lead article.

It's simple, much if not all of what ails us economically can be solved without costing one thin dime, that is what we mean by a ZERO COST RECOVERY.

Many of today's ills have come from easily reversible causes. Just watch the Boston Legal reruns and Alan will explain most of them eloquently. Here are a few to start you thinking:
- The Bible condemns usury (there are some loop holes); whether or not you are religious, the core concept make great sense. In years gone by, U.S. banks had to peg their lending rates to a percentage of what they paid their depositors. In other words their "markup" was regulated. Almost all States had usury laws which prohibited charging exorbitant interest rates, the cap was something like 12 -15%. Then back in the '80's Citibank realized South Dakota did not have these laws, moved Mastercard there, and Credit Cards began their rapid climb to 25 or 30%. All we need to do to correct this is:
* Reenact national usury legislation (we had it until just after the depression) and
* Link the interest rates banks can charge to what they pay for their money.
* While we are at it, let's address the 1996 Supreme Court decision which took the cap off of credit card fees. Late fees were $5 - $10 then and have climbed steadily since, if left alone they will be $45 - $50 within a year or so. All it will take to correct this is for Congress to address the issue and legislate reason into bank fees.
An easy way for you to let them know your opinion is to log onto Congress.org and use their user friendly site to find and write your Federal and State politicians, always send a copy to your local newspaper.
If a maximum spread of 4% was mandated and a maximum lending rate of 12% was legislated, they would go a long way toward restoring consumer confidence and would be a major step toward solving the financial crisis.
- The "Free market" is not the cause of this problem, the fact that it has been castrated and prostituted is. Without meaningful competition, a true "Free Market" cannot exist - period.
- Bigger is not better, that is why anti-trust legislation was enacted. Today's crisis was created by the unvarnished greed of the giant banks and financial institutions & the complicity of our governments, it is just that simple. Update and enforce meaningful anti-trust regulations and the root cause will be eliminated. Good competition makes for good businesses!
- Big Banks don't work for America or Americans (or anyone else for that matter). Consolidation was touted as a way to lower costs, provide better service and offer more affordable fees to customers. Can anyone show me an example where these promised economies of scale came to life? In almost every case, it is just the opposite, fees have skyrocketed and service has all but disappeared. The consolidation frenzy only served the top management of the surviving institution, and to a lesser extent those who sold out the smaller ones. It was something like using a "Judas goat" to lead lambs to slaughter.
All you have to do is look at how small Credit Unions and local banks are weathering this financial storm to see living proof of how "Small is Better".
Updates;
* Bailed-Out Banks Raising Credit Card Interest Rates
* Bill would limit loan, credit card rates
- The Stock Market is not synonymous with the economy, it is gambling pure and simple, and in its current form it is one of the economy's greatest ills. A simple truth is wherever there is gambling there are people who will find sophisticated ways to cheat and fleece the unsuspecting. In its noblest form, the concept of selling stock started as a way to fund the research, innovation, and company growth that was vital to the economic development of our nation. With time it morphed into a haven for speculation and manipulation. Rather than funding growth, for the most part shareholders have become solely interested in maximizing short term profits at the expense of the company's long term health and growth. It is speculation rather than investment.
In my opinion, shares should be classed into two broad categories, those held short term (for argument sake, less than two years) and those which following Warren Buffets advise are long term. Voting power should not be bestowed upon the short term, speculative investor. Executive stock options should encourage long term corporate health and growth by not becoming vested for five years after they are exercised.
- Food costs have more than doubled, yet the family farmer is struggling while large corporate farmers are getting huge subsidies. One solution would be enacting Anti-trust legislation that forbids the huge conglomerates which are so dominant in critical industries from operating at more than one level in the manufacturing and distribution chain; pick one, manufacturing (including farming), distribution or retail. It should also limit the market share one company can have in any sector to 10% of the market. Except in small towns, retailers should not be allowed to control more than a specified market share based upon the population of the area they serve. Just watch what this would do to your weekly food bill.
- The price of oil at the well head is dramatically different from the price we see quoted on the TV each night. The difference is created by speculators in the commodities markets (the same holds true for food and other vital commodities). Products which are vital to the national good such as food, oil and the like should be heavily regulated so as to forbid the unconscionable profits which are siphoned off by manipulation of these markets. A short term 90% windfall profits tax should be levied on all profits above a reasonable spread, for argument sake 15%. At the same time a long term per share traded tax of 1.0% should be applied to all stock and commodities transactions (by other than users) which are held short term. The term should be 1 year, with the fee applied at the time of sale.
- Big Pharma spends more on marketing than on R&D, some say the figure is twice as much. How much do you think this adds to what your prescriptions cost?
- Health care costs are skyrocketing yet Physicians pay has decreased dramatically. How much do you think the near monopolies in Health Insurance and HMO's contribute to this? Do you think limiting their size and forcing competition would bring reality back into the cost of health care?
- "A Free and Independent Press is the Cornerstone of Democracy". I don't know who first said it, but they were spot on. Today's media does not hold the powerful accountable. Return to regulations which forbade multiple ownership of media outlets and protected the world's newspapers, radio & TV stations from being swallowed up by massive multinational conglomerates which only provide us with the information they want us to have. Just this week two major metropolitan newspapers have announced closing their operations. Break up these non productive giants. Our news media and objective investigative journalism is all but a thing of the past, and IT IS THE CORNERSTONE OF DEMOCRACY. Media reform is one of the most important strategies for reclaiming our democracy!