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Post by turbonium on Sept 8, 2005 20:59:45 GMT -4
Obligated by what means? What would be the penalty for defaulting on the loan? It would depend on various factors - amount already repaid, amount of orginal loan, etc. There could also be a restructuring of the payment terms to keep the loan active.
Yes, interest. No, it is not interest - for example, when your bank charges you a monthly service fee, it is not interest - it is a one time charge.
Terms the borrower willingly agreed to when they signed the loan No, terms the borrower had to agree because he has no alternative.
But during that time, the homeowner has posession and use of the home, which they wouldn't have unless the bank plunked down the cash up front. And while they're coming up with money to pay off the loan, the'yre (presumably) not coming up with money to pay rent, from which they never aquire equity. The bank doesn't plunk down any cash - they simply make a data entry in a computer. Renting is worse, of course - but it is only a jump from zero equity to maybe 20% equity over many months or years - not nearly as much as it should be.
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Post by turbonium on Sept 8, 2005 21:26:31 GMT -4
So, let's see some numbers. What would be the "fee" to borrow, say, $100,000? Sure, let's compare a fee based loan versus an interest based loan....
Fee Based Loan Let's assume a 10% fee on our $100, 000 loan. The borrower is indebted to the bank for $110,000. Monthly payments are worked out to be, let's say, $458.33 over 20 years. That's assuming no down payment. So his total payment amount would be $110, 000.
Interest Based Loan Down payments on our $100, 000 loan would be at least 5% at a bank, and a very good interest rate today for a five year term would be, let's say, 5% based on a 25 year amortization.. But, for our example, let's put on rose-tinted glasses and assume our borrower has no down payment to make, and is able to get a 5% interest rate for the entire length of time to repay the loan - in other words, 5% interest over the entire amortization period.
His monthly payment would be $584.59 over 25 years. He has paid $175,377.01 back to the bank. His total interest paid would therefore be $75,377.01.
Fee Based Loan: $458.33 a month over 20 years. Interest Based Loan: $584.59 a month over 25 years.
The reason for the disparity in amounts is because interest based loans are structured so that they are constantly putting the vast majority of your payments toward the interest charges, not the principle. Every month, the interest on that $100,000 only goes down by a very small fraction, because the principle is reduced minimally.
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Post by Joe Durnavich on Sept 9, 2005 15:47:23 GMT -4
His monthly payment would be $584.59 over 25 years. He has paid $175,377.01 back to the bank. His total interest paid would therefore be $75,377.01.
Fee Based Loan: $458.33 a month over 20 years. Interest Based Loan: $584.59 a month over 25 years.
What you are not telling us here is that much of the $65,000 the borrower would save would come at the expense of a saver or an investor. In the existing system, people save, invest, or lend to the bank to earn a cut of the bank's loan income. Banks pay out about $200 billion a year in interest expenses. You would be taking that income away from savers and investors to benefit borrowers.
What is ironic is that you structure your system to try to punish bankers, but the bankers are still profitable in your system. They would still earn the lending fees. Who would be punished are the members of the public who save or invest--which is just about everybody.
You might counter that the savers could invest their money elsewhere, but economy is not that elastic. All that extra money chasing stocks and whatnot would only drive down stock prices and returns on investment. Furthermore, you would be injecting money into the system that rolled off your printing presses that would be in addition to the money that was in bank accounts. Your money would be inflationary.
Rather than a being a net benefit to society, your system tries to benefit some at the expense of others.
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Post by Joe Durnavich on Sept 9, 2005 17:46:16 GMT -4
I don't see the system I advocate as Communistic. That system leaves all the control and power in the hands of the "privileged" few in Gov't.
The difference between communism and capitalism resides mostly in ownership. Communism holds that the resources of the economy belong to all the people, hence, common ownership of the means of production. Capitalism makes the resources the property of individuals. My car is in the control and power of the privileged very few, namely, myself.
Your system is communistic/socialist/collectivist because it confers ownership of the banking system to everybody.
In my system, lower Congress, transparent to the public in its economic operations, and fully accountable to the public, would indeed implement the technological advancements the public agrees would be a benefit and convenience to them. I'm not pushing for The Bank of Stalin here.
The collective--that's us--acting as a collective has little aptitude for technological innovation in banking. Oh sure, there might be financial JayUtah's here and there arguing for this or that innovation, but their voices would be drowned by the multitude screaming for more cheap loans. To put the banking system in control of the public is to put it in our control, and face it, Turbonium, most of us are banking idiots. We have little idea how to go about building a banking system that is efficient and responsive to the needs of its customers.
A bank under private control, on the other hand, will likely be managed by banking experts who are trying to get an edge over other privately controlled banks managed by equally capable experts. The customers of the banks do not need to be experts in bank management. Rather, they just need to be experts of their own financial affairs.
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Post by Data Cable on Sept 10, 2005 0:57:41 GMT -4
No, terms the borrower had to agree because he has no alternative. Of course they have an alternative: to not borrow. Don't like the price? Don't buy it. "Cash" as a figure of speech, of course. By that data entry, a given quantity is subtracted from the bank's account, and added to the borrower's, or otherwise transferred to his control by whatever means.
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Post by turbonium on Sept 10, 2005 2:17:00 GMT -4
What you are not telling us here is that much of the $65,000 the borrower would save would come at the expense of a saver or an investor. In the existing system, people save, invest, or lend to the bank to earn a cut of the bank's loan income. Banks pay out about $200 billion a year in interest expenses. You would be taking that income away from savers and investors to benefit borrowers. Not a chance. What you have failed to mention is the bank's net interest income. You are saying that the banks are only able to offer their (paltry) savings account or term deposit interest to their customers because of the money they receive from the interest on loan payments. Not true in the least.
Look at the annual reports of the banks and their earnings. A bank's overall earnings are typically measured as net interest income (the difference between total interest income and total interest expenses). This doesn't even take into account their non-interest income, such as revenue from mortgage servicing activities, and expenses.
The banks annual net earnings are in the trillions. To say that eliminating interest based loans would require the banks to hurt their customers by lowering or eliminating interest on their savings accounts and the like is absurd.
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Post by Joe Durnavich on Sept 10, 2005 9:27:02 GMT -4
The banks annual net earnings are in the trillions.That's not true. Take a look at the FDIC statistics. Here is the page for commercial banks. There is a tab at the top to switch to Savings Institutions: FDIC Historical StatisticsTo say that eliminating interest based loans would require the banks to hurt their customers by lowering or eliminating interest on their savings accounts and the like is absurd.Banks do take in a lot revenue from sources other than loans. But if you eliminate interest on loans, why would banks accept deposits and give some of their service income to depositors? [Edited to fix link]
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Post by echnaton on Sept 10, 2005 11:38:53 GMT -4
Look at the annual reports of the banks and their earnings. A bank's overall earnings are typically measured as net interest income (the difference between total interest income and total interest expenses). This doesn't even take into account their non-interest income, such as revenue from mortgage servicing activities, and expenses. The banks annual net earnings are in the trillions. To say that eliminating interest based loans would require the banks to hurt their customers by lowering or eliminating interest on their savings accounts and the like is absurd. Banks make varying percentages of their revenue from net interest income and non-interest income. Typically younger or smaller banks make most of their revenue from net interest income. This provides funds to cover loan losses, rent, salaries and potentially dividends. They simply do not have the scale to offer many services. This is the second quarter income statement for a young small bank, taken from Edgar at SEC.gov. Sorry for the poor alignment. Interest income in thousands: Total interest income 8357 Total interest expense 2,263 Net interest income 6,094 Provision for loan losses 440 Net interest income after provision for loan losses 5,654 Total noninterest income 727 Total noninterest expense 4,119 Income before income tax provision 2,262 Provision for income taxes 740 Net income $1,522 As you can see, non interest income covers less than 25% of non-interest expense. There is no way this bank could stay in business without interest income. Many small banks don’t pay dividends but retain net income to provide tier one capital for growth. Many large banks pay a dividend but the percentage of net income paid out varies considerably. Banks that maintain a lower payout typically have a higher price to earnings ratio because they are funding more rapid growth. Also banks that get a larger percentage of net income from non-interest income get higher P/E multiples.
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Post by turbonium on Sept 11, 2005 3:42:09 GMT -4
That's not true. Take a look at the FDIC statistics I erred - I meant to say in the billions, sorry for that. The banks have assets in the trillions (about 14 trillion). Their net interest income was nearly $250 billion for 2004 - a very tidy sum, not even including other income sources.
Banks do take in a lot revenue from sources other than loans. But if you eliminate interest on loans, why would banks accept deposits and give some of their service income to depositors? Because as I was pointing out earlier, with fee based loans, the banks still would take in substancial revenue. Their margins are huge and they would still be very profitable operations if they switched to a fee based system.
The site you linked provides financial statements that are invaluable in giving one an impression of just how profitable the banks really are. The P/L statements give you just a rough idea of how well they are doing. If you're familiar with year-end accounting procedures, you know that the numbers are usually 'arranged' (through methods which are legal, btw) to downplay profits and 'puff up' expenses. For example, by deferring income and shifting around some expenses, a business can report a loss when in fact they actually were profitable for any given reporting period. The deferred income can be expensed towards asset purchases or investments to reduce profits the following period.
That's why the true profitability (or success) of any company is based on more than net earnings. Assets (whether fixed or liquid) are extremely important in determining the worth of any business, because most successful firms plunge a lot of their revenue into investments of various types to lower their taxes, etc.
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Post by turbonium on Sept 11, 2005 4:21:30 GMT -4
As you can see, non interest income covers less than 25% of non-interest expense. There is no way this bank could stay in business without interest income. As I pointed out in my last post, there is a lot of important information to include in any assessment of a company's financial status. Also, and most important, is to have a solid understanding of how to interpret these financial reports before making an accurate determination of how the business is really doing.
The bank you have as posted as an example could well be quite profitable if it were to switch to a fee based system for loans. Without a thorough analysis of their financial reports, a claim that they could not stay in business is unfounded.
High profile accounting firms, whose services are of greatest benefit to mid- to large sized companies, employ the best and brightest in the field to provide solutions that help their client in ways a less thorough or diligent accountant would overlook. Just as in most professional occupations, from lawyers to doctors to engineers, the highest paid among them are nicely compensated for a reason - they are the best at what they do.
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Post by echnaton on Sept 11, 2005 18:38:15 GMT -4
As you can see, non interest income covers less than 25% of non-interest expense. There is no way this bank could stay in business without interest income.As I pointed out in my last post, there is a lot of important information to include in any assessment of a company's financial status. Also, and most important, is to have a solid understanding of how to interpret these financial reports before making an accurate determination of how the business is really doing. The bank you have as posted as an example could well be quite profitable if it were to switch to a fee based system for loans. Without a thorough analysis of their financial reports, a claim that they could not stay in business is unfounded. High profile accounting firms, whose services are of greatest benefit to mid- to large sized companies, employ the best and brightest in the field to provide solutions that help their client in ways a less thorough or diligent accountant would overlook. Just as in most professional occupations, from lawyers to doctors to engineers, the highest paid among them are nicely compensated for a reason - they are the best at what they do. I picked this bank because they are a client of mine. Every quarter I discuss the progress of the bank with the CFO and he provides me with their financials, call reports and any other information I ask for. I provide an opinion on the value of the common shares. I am intimately knowledgeable about their finances. You have just asserted this, but not shown it. Do you know anything about bank finance and accounting? Please tell us, in detail how this would work. Other wise it is just a bad idea drive by wishful thinking. Another question is why should the government be given the power to force banks to operate in only your prescribed way?
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Post by turbonium on Sept 11, 2005 21:02:35 GMT -4
You have just asserted this, but not shown it. Do you know anything about bank finance and accounting? Please tell us, in detail how this would work. Other wise it is just a bad idea drive by wishful thinking. I am involved every day in financial matters - it's what I've done for over ten years. I can detail certain aspects if I have some more information. In your example, for instance, how does the total non-interest expense break down? What are the bank's assets? What percentage are loans/leases? What are its retained earnings? Dividends to shareholders?
Without the balance sheet and income statement, and important line item details, it's not possible to make any accurate assessments.
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Post by Joe Durnavich on Sept 13, 2005 22:38:49 GMT -4
Because as I was pointing out earlier, with fee based loans, the banks still would take in substancial revenue.
No you haven't. What you pointed out was that a bank would take in over seven times less interest revenue on a $100,000 loan with your fee-based system.
Their margins are huge...
Seven-times huge?
So, rather than hurting the depositors to benefit the borrowers, your plan would be to hurt the shareholders to benefit the borrowers. You are still playing Robin Hood with the market. You are seeking to re-distribute wealth when the objective should be to increase wealth.
Do you really think your system makes good business sense? What you are proposing is forcibly turning banks into a business that loans money cheap, but pays relatively high interest rates to depositors. The public is simply going to borrow money from your banking system and deposit it elsewhere in it to earn more in interest than you charge as loan fees. That sounds like a recipe for quick bankruptcy.
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Post by turbonium on Sept 13, 2005 23:35:32 GMT -4
So, rather than hurting the depositors to benefit the borrowers, your plan would be to hurt the shareholders to benefit the borrowers. You are still playing Robin Hood with the market. You are seeking to re-distribute wealth when the objective should be to increase wealth."Hurt the shareholders"? You mean I dare suggest a plan that hurts the privileged few who have amassed fortunes by doing nothing but rake in money through usury? Yes, that is true. Robin Hood of fable was greatly admired for taking money from the few extremely rich land barons and aristocratic elites who had acquired more wealth and property than they could ever need in 100 lifetimes, all at the expense of the serfs and commoners who sweated for a pittance from their slave master employers. I do seek a system to assist in correction of this massively disproportionale distribution of wealth. That is key to increasing the wealth of the majority. A quick glance at the historical progression charts of wealth distribution in the US makes the validity of this claim perfectly clear. The below chart shows the current wealth distribution. It's from this link www.levy.org/www.pbs.org/newshour/bb/economy/july-dec02/democracy_7-17.htmlFrom the above link I have posted part of an interview on wealth distribution PAUL SOLMAN: Then came the roaring '20s and wealth was for a while more equally distributed. But by 1929, the fortunes of the top 1 percent had reached another of their historic highs-- 45 percent of American wealth. And then the stock market crashed.
KEVIN PHILLIPS: What we saw in 1929 was not just the stock market surge, but a surge in wealth concentrated at the top. The smallest group of Americans generally came out so much better than anybody else that when the bubble popped, it produced a reaction. The people who ran the banks and the investment firms and a number of the big corporations had almost been charlatans in the way they handled the people's money. [/b]
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Post by turbonium on Sept 14, 2005 0:12:39 GMT -4
Do you really think your system makes good business sense? What you are proposing is forcibly turning banks into a business that loans money cheap, but pays relatively high interest rates to depositors. The public is simply going to borrow money from your banking system and deposit it elsewhere in it to earn more in interest than you charge as loan fees. That sounds like a recipe for quick bankruptcy.
No - the bank making the loan does not lose out. The loan fees are still paid to the bank, along with the principle. The borrower can direct his loan into any number of different private investments that are capable of higher returns than the interest earned by putting it all into a savings account. The bank doesn't care if the borrower makes a 100% profit on the loan the day after he gets it. Or if he sinks it all into a startup business with a slow return on his investment. It only considers that it gets the fees and principle paid back.
This also is the case for our current interest based loans. The bank knows it will still be owed the interest and principle it loaned to the customer. The bank also knows the loan is not likely to sit in a bank account to gain interest, either its own or another bank's. If the borrower gets higher returns on his personal investment of the loan elsewhere than the interest charges of the loan, the bank still gets back the same amount it is owed.
The bank gets its money in both loan systems. And the borrower can choose what to do with his loan in both systems as well.
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