Posts tagged: banking

How Mint.com Can Fix The Banking Industry

By Rathan Haran, February 12, 2010 2:18 am

So you are unemployed, with no job prospects in sight and a healthy mortgage and family to worry about.  You are not alone as a staggering 17% of Americans are currently out of work (sorry, U.S. Bureau of Labor Statistics, this is a more realistic vision of the jobless rate, not the 10% that you are ‘reporting’ and will subsequently adjust a year from now when no one is paying attention).  Here’s Mint.com’s spin on the real unemployment rate in America:

Now while many Americans are finding it hard to earn a wage, there is a strange thing going on with the employed folks at our country’s largest banks.  They are getting bonuses, and not in a figurative sense of ‘hey, you have the bonus of keeping your job although your performance was a bit spotty abysmal over the past few years.’  No, they are paying themselves cold hard cash partly financed by the federal (read as American tax payer dollars) bank bail-out program.  Now I understand that a few of these banks have begun to repay their financial debt to the country, but the ‘lifestyle debt’ of long-term unemployment, mortgage foreclosures, small business bankruptcies, and retirement saving losses that these banks helped create are nowhere close to being recovered.  To turn a blind eye to anything beyond the reach of their balance sheets is just another example of the lack of fiscal and moral responsibility so prevalent in modern day banking.

In nearly any other industry, these poorly operated business would be purged in typical capitalist fashion during down business cycles; survival of the fittest, Darwinism in industry.  The main reason these industry Dodos survived was because the government had to intervene and lend mega amounts of money to them.  They were so big, and supported so many consumers and industries, that letting them fail would cause massive devastation to our economy (and the world’s economies).  In fact, 15 of the top 21 recipients of bailout funds were banks or bank subsidiaries whose survival has been contingent purely on their size rather than their abilities to operate, a fact ignored when decisions were made to pay out bonuses this year.

Being “Too Big To Fail” creates an imbalanced risk/reward structure because it allows banks to engage in short-term highly profitable businesses (CMOs, proprietary trading, hedge funds) with limited consideration for the additional risk (thanks to 3rd party capital rescue), which tends to be a long-term compounding problem that grows unfettered over many years.  It essentially allows them to share the risks over a larger capital base (theirs plus the American tax payer) during crisis, yet distribute profits accumulated from their activity that leads to the crisis to themselves (through short-term incentive structures like year-end bonuses on annual financial performance).

So what can you do (and how can Mint.com help) so that this does not happen again?  Well, it’s pretty simple, fire your (big) bank.  Firing your bank is basically saying “I will not allow you to get so big that you can act irresponsibly because you are not worried about going bankrupt.”  To do this, all you need to do is move your savings accounts to a smaller, more responsible bank.  This exponentially reduces the size of a big bank, because your deposits are significantly leveraged in the modern day banking system (see the section called “Effects on Money Supply“).  Moving $1,000 dollars out of your large bank could potentially reduce the bank’s asset size by $9,000, so a lot if these jabs to shift the deposit base can amount to a staggering change.

Mint.com allows customers the opportunity to do this in their “Ways to Save” section.  Mint could take this a step forward by giving higher visibility to responsible banks or discouraging consumers (think “Didn’t Screw the Economy” rating) from moving accounts to bailout banks.  They could even flat out not allow irresponsible banks on their site, a move that would certainly be damaging to new customer acquisition for these banks.  With information that is publicly available, along with the data they are collecting consumers relationships with banks, they could create a banking watchdog system that brings the same transparency to the banking industry as they have brought to personal finance.  These types of ideas, although not necessarily beneficial in the short-term, could provide a larger pool of financially healthy individuals transacting in more stable and responsible banking industry.

So are you going to move your accounts to smaller, more responsible banks?  Would you like to see companies like Mint impact the banking industry for the better?  Chime in on the comments section if it suits you … or don’t.  I’ll be checking in to see if you did or didn’t while QAing Jeff’s latest build of Wixity.  Fun.

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