Foreclosures Exposes the Clay Feet of Bank

Foreclosed homes have exposed the clay feet of bank and the imposing granite fortress like structure no longer inspires awe and wonder. Even the sense of safety it used to exude is long longer there.

Banks today are electronic networks of flowing money – moving in and out in torrential transactions. Lately another feature has been added – unprecedented pampering in the form of government bailouts patted them on the head with billions in dollars. The ordinary American anxiously waits to see if the spoilt child will respond and be rectified or continue to sulk. The rise and fall of foreclosure numbers are the indicator of the mood of the spoilt child and darling of the administration – the banks.

Banks have been with man since the start of civil society. During the time of the Roman Empire they were the money lenders. The first recognized and licensed bank deposit happened in Genoa in 1400.

Today in USA there are about 8,300 banks that are federally insured dealing with savings and loans. With the souring of the economy their numbers have been steadily going down. In 2008 as many as 25 banks failed in USA – the number being more than the combined figures of the last five years. In 2009 already 21 banks have failed.

The banks operate many kinds of services – savings account, cheque accounts, investments, loans (business and personal) mortgages, Internet banking and financing of stock issues. Investment banks merge. There are private banks for the rich and tax havens out of the country are also conducted by banks. There is an unbroken chain from the firms in Wall Street to the local banks serving the community. The jumbo banks combine all the services under one canopy.

In 1999 a law was passed that broke down the barriers that had been set up just after the Great Depression – the walls between banking, securities, investment and insurance. Thus banks became super market selling to their clients’ three types of services.  The logistics are simple – the bank takes in money known as deposits and lends money out. The loans are assets because these earn interest and the deposits are liabilities because the bank has to pay out interest.

The banks make money because of the spread. It is the difference between the interest the banks pay out to other banks and government for money loaned and the interest the banks have to pay to the customers for the money.

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