Tuesday, April 10, 2012

Banks stopped Banking

Today the public opinion bashes banks because they use their money to buy public debt of their own country instead of borrowing it to those in need. In practice, even if it sounds weird, banks stopped banking.

The bank’s job is simple: they buy money from you (when you deposit your cash on your account). Then, they sell you the money when you are insolvent (mortgage rates, credit cards, lease). The difference between that little amount that the bank puts in your account and the enormous amount you pay as interest rate it’s indeed the bank’s profit. This was the routine banking procedure. While doing so they used to provide a service to the customers who requested it.
In the past twenty years the bank that did not make enough profits from ordinary operations they ventured in high-risk operations (derivative finance), which provided immediate and greater returns.
The evidence these were risky investments has been confirmed by the present-time crisis.

Now the problem is very serious: real economy stopped growing.
Those who needed liquidity were not able to get it because banks already spent it. And those who pay the price of it are the young couples who cannot afford a mortgage, the business owner who cannot enlarge its store and the companies whose scarce liquidity prevented them to invest and stay competitive in the market.  
And the Real Economy engine unfortunately but obviously stopped working.

Luigi Foscale

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