Tuesday, November 15, 2011

Shaft The Banksters! (And Yourselves!)

Banks are pretty simple institutions. Once they finish foreclosing on the orphanage*, they lend your deposits out to your neighbors using something called fractional reserve banking. Fractional reserve banking means that for every dollar of actual deposits they have, they can lend out some multiple of it. This is called the Deposit Creation Mulitplier. Let's run through a simple example.

Greedsville Bank has some deposits. By regulation, they have to have 20% of the value of their loans in assets (20% arbitrarily chosen). That means for every $1 they have on deposit, they can lend $5. Jason, Britney, Michelle, Tasheka, Eduardo and Jabrielle all want to go to college, but they can't afford it. They decide to take out loans. Jason goes first.

Jason takes out a loan and gets a degree in Bisexual Performance Art. When he graduates, he discovers two things. He can't get a job and Greedsville Bank is all over his sorry rear end trying to get money from him. The banksters are at it again! Well-schooled in economics by his university professors (particularly the ones who taught the Transgendered Studies classes), he decides to strike a blow for the masses and refuses to pay the banksters their blood money.

Greedsville Bank has to write off his loan as a loss. When they write off his loan, it comes out of their deposits. The loss of his loan means there are 5 loans they can't make in the future because those reserves are gone. Britney, Michelle, Tasheka, Eduardo and Jabrielle go to the bank and ask for loans and are turned down. They realize that it's the bankster greed at work, man! This is totally uncool! They gather up their sleeping bags and go to the local city park and protest. After 2 months of sleeping in self-created filth, Britney gets raped, Michelle contracts Tuberculosis, Tasheka overdoses on Heroin, Eduardo is robbed at gunpoint and Jabrielle is arrested. It's a big win for The People!

Meanwhile, Greedsville Bank still isn't able to loan anyone the money because Jason didn't pay them back.

* - This is a very dated reference. Thanks to more than 1 million abortions per year, we no longer have orphanages. Instead, we have full employment at Topf and Sons dumpsters full of body parts. Margaret Sanger FTW!


tim eisele said...

A question: are there really that many people taking out student loans to get degrees that will be useless for getting a job?

My understanding is that only a few percent of students are, say, English or Fine Arts majors[1], with the vast majority of students studying business, or medicine, or science/engineering, or some other constructive occupation where they can reasonably expect to find work.

For that matter, are people really complaining that much about "greedy bankers trying to collect student loans"? I thought the issue was "greedy bankers making loans that they *knew* were unlikely to be repaid, then bundling them up in a package that obscured the nature of the loans enough that they could get the whole mess stamped AAA, and then unloading them onto some unsuspecting sucker before it all blew up in their faces"?

Doo Doo Econ said...

Yes there are many worthless degrees available to study ( http://www.sdsu.edu/academicprogs.html ).Further, it was not the "bankers" who knew the loans were unlikely to be repaid, they had been in the business for a while and understood how it worked.

It was greedy government that passed laws (CRA) and began lending to people who could not pay (Fannie and Freddie). This is called regulatory innovation, when crony capitalism is used to create a new market based upon the threat of force by the government.

Large investors went astray by trading in insurance against these markets. Credit Default Swaps are premium insurance offerings that paid the investor in the impossible event Goldmann Sachs, Leeman Brothers, Bear Stearns, or other large firms default on their bond payments. Selling these things was essentially free money, as that would never happen. Except in 2005 and 2006, 40% of homes were not purchased as primary residences thanks to The CRA.

K T Cat said...

The point I was trying to make in this is that there is a very real effect to not paying back your loan. You're hurting the villainous greedy banks, yes, but you're really screwing the people who are coming after you trying to get loans to pursue their dreams. There's not an infinite amount of money out there to loan.

tim eisele said...

Doo Doo Econ:

Yes, I know that idiotic degree programs *exist*. My question is how many students are actually fool enough to get *degrees* in them?

This is an honest question. I'm not seeing any obvious place to look up statistics on how many students go into which majors. I can look around me at Michigan Tech, but I'm pretty sure that it is atypical, seeing as how over 50% of the students here are studying engineering (and a lot of the rest are studying mathematics or one of the sciences).

So, again: How many actual students really end up with worthless degrees? Is this a real problem, or just one of those things that people like to rant about but is actually very low on the scale of things to worry about?

K T Cat said...

Here is SDSU:

Business, Management, Marketing, and Related Support Services 21%
Social Sciences 12%
Psychology 9%
Health Professions and Related Programs 8%
English Language and Literature/Letters 7%

SarahB said...

We all need a refresher on how simple the cycle is to screw up.

Kelly the little black dog said...

There's one big problem with your straw man argument, you can't just NOT pay back your student loans. You can't get out of them by filing bankruptcy. The government can attach any salary you have and decline any future benefits. So short of going off the grid, they will extract their pound of flesh.

Dean said...

Kelly, I would imagine delaying/forestalling in paying down your loan would have a similar slow-motion effect.

Yes, they will eventually get you, but in the meantime...

K T Cat said...

Kelly, you are absolutely right when it comes to Sallie Mae (government) loans. Those will follow you to the grave. Private loans from commercial banks, not so much.

The larger issue is still there. The banking system, like the water cycle, is a renewable resource only so long as you let the cycle work. As soon as you step in and screw with it, very bad things happen.

K T Cat said...

One more note about student loans. Even if they chase you to your grave to get you to pay it back, you're still screwing the people coming after you by delaying payments. Money loaned to you is not available to anyone else until you've repaid your debt. All of this "screw the banksters" stuff is really an act of petulant, childish selfishness.

Lesley said...

"Margaret Sanger FTW"
Thanks for continuing to be vigilant about social issues----abortion, fatherless men in prisons. I found you on Ricochet and am happy to have found your blog.