November 4th, 2010 at 09:07am
I didn’t have time to address this yesterday, but I certainly wanted to.
I’m sick of people complaining about banks making profits and increasing interest rates, without giving any thought to changing bank and instead wanting the banks to be more heavily regulated.
Regulation is not the answer to this problem; competition is. At the moment there is virtually no competition for two reasons:
1) People don’t consider changing bank. If they did, the banks would be more afraid of losing customers and be less willing to annoy their customers.
2) The federal government put that silly deposit guarantee in place which gives banks an unfair advantage over the smaller outfits such as credit unions. This bit of government regulation is killing competition by making smaller outfits seem less safe in the eyes of customers.
The banks are doing what any sensible profit-making business does when in a virtual monopoly position; they’re making as much money as they can. Of course they wouldn’t be in a virtual monopoly position if the federal government’s deposit guarantee hadn’t caused a heap of people to shift their business from credit unions to the big banks.
The federal government’s regulations are largely responsible for this situation, and yet people want more regulation. Haven’t people learnt from the financial crisis yet? Government regulation was the main catalyst for the financial crisis, as the US government forced lenders to lend money to people who could never pay it back. Government regulation does not help people when it comes to banking. In fact the current situation is not sustainable as this ever increasing concentration of the banking business will lead to many people defaulting on their loans, followed by banks struggling to sell houses, followed by the federal government (aka the taxpayers) compensating banks for lost investments due to a lack of loan repayment income.
The solution to this problem is for the deposit guarantee to be removed. This will encourage competition.
Competition is good for consumers, and leads to businesses being more creative in the way they run their business in an effort to gain more market share. This, in turn, leads to economic growth.
The solution is simple…the question is though, will the government make it happen?