Re: econ #1

On Sat, Dec 18, 2010 at 3:29 PM, Lance McLain <lance-X3DuywwxauBWk0Htik3J/[email protected]> wrote:
> On Dec 15, 2010, at 1:39 PM, nicholas a. evans wrote:
>> Well, banks and funds *do* provide valuable services to their
>> depositors and investors (as well as their borrowers and shareholders
>> and the companies in their portfolio), at least in theory.
>
> Valuable services such as?

The benefits banks and hedge funds can provide to borrowers and the
companies in which the fund invests should be fairly obvious.

For depositors, the alternatives to banks are investing or keeping the
money as legal tender.

Investing takes time, introduces risk, reduces liquidity.  Some bonds
might be perceived as "risk free" (e.g. T-bills) but they reduce
liquidity, which is a bigger concern to most of us who live month to
month or quarter to quarter.  Some investment options keep your money
relatively liquid (e.g. day trading) but they cost far more in time,
fees, and risk.

Keeping the money in your mattress, vault, and wallet is relatively
liquid, except it means that you need to use cash for every transaction.
Money you've left in your vault isn't very liquid when you are out
shopping.  Also, there is the opportunity cost due to lost investments
and probably a real cost due to inflation.  Banks should give you at
least a small return on your deposits.  Also, with merchant accounts and
payment processors, you can entirely avoid the hassle mentioned by the
original post of this thread, at least in Nevada where prostitution is
legal.  Complex circular debts between merchants disappear when they are
passed off to banks, who could theoretically settle them on paper.

Also, you will need to go to a bank to cash your paycheck, since
employers will not want their entire payroll to pass through the doors
to their building every month (for security and logistics).  I wouldn't
feel safe leaving my office (predictable location) once a month
(predictable time) with my entire month's wages (predictably large sum).
It is safer for most transactions to use checks and cards (etc) than
hard money.  Black markets, which are forced to use cash, have a booming
side market of piracy and higher security related costs.

The alternative to a hedge fund for its investors is spending your time
managing the fund yourself, and if you aren't studied up on the markets
you'll most likely be taking on more risk with less profit than those
who are.  If you need a full time day job in order to pay your monthly
bills, then you probably don't have the time to manage your investments
as well as a fund manager would.

A traditionally well run bank will handle most of these concerns with
the 3-6-3 formula: 3% interest for depositors, 6% interest from lenders,
on the golf course by 3pm. ;-) At least, in theory.  In practice, they
abandoned that formula decades ago.  Now the employees embezzle the
shareholders who turn a blind eye since they're busy cheating the
depositors and debtors.  But it's subtle cheating and it's mostly done
legally.  And with their lobbyists capturing the legislators and
regulators and their ability to buy out or out advertise or otherwise
squash competitors, they have a nice little racket going.

> Right now I'm having trouble seeing what service they provide.

That's rational to question.  I wish more people asked it of more
things.  It's worth adding up the costs and then making a decision to
close your bank accounts if they outweigh the benefits.

See also http://goo.gl/pLwTs =>
http://voices.washingtonpost.com/ezra-klein/2010/04/what_are_you_worth_to_your_ban.html

> Banks used to be called "Trusts" for a reason.

Absolutely.  And I don't trust any of the big banks one iota.

For what it's worth, almost all of my savings and loans are handled by a
local credit union.  Unfortunately, our credit union used more
conservative assessors than did Countrywide (the lender our realtor was
in bed with) and their assessments differed by $10K.  Shocking, I know.
So rather than play hardball with the seller and possibly lose the bid,
we used Countrywide, whose assessment came in at exactly the bid price
(what a coincidence!).  Of course, our CU's assessor was more accurately
predicting the market, and our mortgage only recently turned right-side
up (although that obviously still depends on who's assessment we use).
Sometime next year, after we've built a little more equity, we'll be
refinancing with our (more trustworthy) credit union.

-- 
Nick

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