Thursday, January 31, 2008

Could This Be a Conflict of Interest?

Now that our feds have once again cut the rate by a disporportional percentage, I had to do a bit of research.  This emergency 3/4 of a point cut, a couple of weeks ago and now this regularly scheduled 1/2 point cut amounts to economic shock treatments.  I'm sure most people caught the headlines that December was not a good economic month for retail sales.  When December retail lags in a materialistic economy through the biggest commercialized holiday of the year, something is more than just a little bit WRONG!
I've done a bit of checking and I stumbled across some very interesting information.  It seems that after the Great Depression, Congress passed a law mandating that Investment Banking and Commercial Banking remain separate.  It appears to have been a good plan.  In 1999, Congress repealed that law and allowed the merger of Investment Banking and Commercial Banking.  This brought about an interesting safety net for both.  Commercial banking became a financial middle man between the average depositor and Wall Street.  Investment banking, in turn became the actual provider for commercial banking.  No longer did commercial banking have to rely on depositor's interest to operate, and investment banking could better structure the give and take to keep the economy balanced in 
a positive momentum, at least positive for the bottom line of investment capital.  The small town, local banks no longer had to operate on a contained budget.  They could invest in themselves, so to speak, with new buildings, lower interest rates, and riskier loans.  Investment banking could then make the excitement of Wall Street available to everyone.  The real kicker here, is the safety net provided by the merger of these  very separate banking institutions.  In the case of a default loan in commercial banking, the liability could simply be passed on to the larger market, through investment banking.  And in the case of shakey investments by investment banking, the bottom line instability could simply be padded by increased credit interest rates.  Ultimately, if nobody could afford to save, the saving interest was of little consequence and when savings interest plummetted, Investment banking made it possible for investors to purchase as little as ten stocks, rather than the former blocks of 100.  
Absolutely none of this made for a stronger economy, it made for enough variables to never know where the hot potato would land.  The problem that Congress didn't consider, and the problem that our nation's banks have overlooked in this merry merger is, once the people on the commercial end of banking are tapped out, foreclosed upon, and only paying interest, investment banking will have difficulty keeping investors in the game and commercial banks with enough carrots to dangle before the check writing public that is 
drowning in credit card interest.   So ultimately, there is nothing left to stand on.
I read the overview of how this drastic drop of the interest rate will help.  It may be good, if . . .  
If you purchased a home in the past few years with an arm and are looking at an increase in your mortgage payment, the lower interest rate may be offered, if you can refinance . . .
If you purchased a vehicle, the rate is locked in at the contract, so no help there.
If you are looking to buy a home, the real estate market is depressed and homes may be cheaper, but lender rules have become stricter, so financing will be more difficult . . .  if
Your credit card interest may be reduced, but they don't have to follow the fed's guidelines, so they may not be reduced . . .  if
If you are saving and seeking a good rate of interest, the news is simply BAD.
Charge them that are rich in this world, that they be not highminded, nor trust in uncertain riches . . . New Testament
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