On a Wednesday morning, we stepped outside onto our front stoop, taking a moment to absorb the surroundings.
The sky was cloaked in deep darkness just before dawn, while the crisp air mingled with a gentle coastal fog. Above the warm glow of the streetlights, faint stars shimmered—witnesses to ages long past.
After a fleeting pause, we locked the door behind us and entered our car. While spring mornings in Southern California are undeniably delightful, the drive to downtown Los Angeles can be an arduous journey.
However, we approach it with the same mindset as a dentist visit or a meeting with our accountant. It gives us a rare chance to reflect and ponder our thoughts.
Before long, we arrived at our destination, but not before encountering several unresolved contradictions—those troublesome inconsistencies that are often impossible to reconcile.
One particular issue that gnaws at us is the unfair treatment of everyday depositors and borrowers by credit unions and commercial banks. In essence, the credit landscape is decidedly skewed in favor of the bankers.
Extreme Maltreatment
It seems the rules have always played into the hands of bankers. Lending out deposits at a higher interest rate than what is paid to depositors is fundamental to fractional reserve banking. Yet, the severe mistreatment of individual depositors and borrowers that has persisted since the 2008 credit crisis is frankly disgraceful. Where do we even start?
The prime rate serves as the standard for banks in setting rates on consumer loans, which include credit cards, auto loans, and home equity loans, among others.
This prime rate is typically reserved for clients with the highest qualifications—primarily corporations rather than individual consumers, and certainly not your average credit card holder.
Individual customers usually pay the prime rate, plus a percentage based on their risk of default. Changes in the Federal Reserve’s federal funds rate lead to corresponding adjustments in the prime rate, which affects the variable rates on credit cards and other lines of credit.
Currently, the prime rate stands at 4 percent. To put this into context, present-day credit card rates often reach around 16 percent APR or even higher.
While no one is compelling consumers to take on debt, it’s worth mentioning that many are willingly drawn to the convenience of credit card debt offered by banks.
Nevertheless, this reality does not alter the fact that main street depositors and borrowers are receiving a remarkably poor deal. Such a situation is straightforward and doesn’t require speculation—it’s simply arithmetic.
The Simple Math of Bank Horsepucky
As mentioned, the average credit card APR for individual consumers hovers around 16 percent. However, when an individual entrusts their money to a bank in the form of a savings deposit, do you know what they earn in return?
The typical annual percentage yield (APY) on savings deposits is not 1 percent. It is not even 0.1 percent. Rather, it stands at approximately 0.01 percent, which effectively amounts to less than zero when adjusted for inflation.
Moreover, if someone deposits $10,000 into a certificate of deposit (CD) for a full year, they can expect an APY of merely 0.35 percent. To see such low rates on deposits compared to a 16 percent APR on credit card debt is profoundly insulting.
Conversely, banks have never enjoyed more favorable conditions. They borrow from the Federal Reserve at rates below 1 percent, invest in U.S. Treasury notes with current yields of 2.24 percent, and then extend credit to consumers at 16 percent APR while providing a paltry 0.01 percent yield on savings deposits.
Is there a more questionable business model that enjoys such extensive advantages?
In fact, just this week, Bank of America reported first-quarter earnings of $0.41 per share, exceeding analyst expectations by a margin of $0.06 per share. How did they achieve this?
“Our approach to responsible growth delivered strong results again this quarter,” CEO Brian Moynihan stated.
But what exactly qualifies as responsible growth? Is it akin to responsible drinking or an honest thief?
According to the Bank of America website:
“Bank of America has transformed into a simpler, more efficient company focused on growing the real economy in a way that creates tangible value for our business, our customers and clients, and the communities we serve.
“Through our strategy of responsible growth, we are driving the economy in sustainable ways—helping to create jobs, develop communities, foster economic mobility, and address society’s biggest challenges worldwide—while managing risk and providing a return to our customers, clients, and our business.”
What a load of nonsense. Tangible value appears to be created solely for a select group—namely, shareholders—not for depositors.
The crux of the matter is that in today’s fiat money system, where debt equates to money and money equates to debt, the house invariably wins. Bet wisely.
Sincerely,
MN Gordon
for Economic Prism
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