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Running head: BANKING IN AMERICA

Banking in America
Austin Dunn
University of Kentucky

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Abstract
International economics and finance go hand in hand. The United States has become one of the
global leaders in the finance field over the course of its existence. The economic system that the
country was founded on has slowly been corrupted through political power and misguided anger
towards the one percentile in this country. The American people have begun the witch-hunt to
find the group responsible for the lack of jobs and loans available to the average person. The
people who should be on trial for the national financial crises are not in the readerr banks and
investment firms. They are located in buildings that have far more corrupt ideas of what a selfcorrecting economy actually looks like. The buildings Im describing are the readerr local, state
and federal government institutions.

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Banking in America
The banking institutions in America are no longer serving their purpose. The purpose is
to serve citizens to the best of their abilities. It is easy to blame these organizations for the
downfall of the United States economy. Unwarranted regulation by the government is actually
the most important cause of the housing and stock market crash that occurred just several years
ago.

Capitalism in America
This country was founded upon the belief in capitalism. Most of the amendments in the
constitution were solely based on protecting the principle of capitalism. Capitalism is a system
that gives the government only a few responsibilities: (a) Private Property Rights (b) marketbased incentives for the individual (money and safety) (c) prices are allowed to fluctuate freely
based on supply and demand (d) a broadly obeyed legal system with a climate of fairness.
Simply put, this economic system is based on competition. This system not only provides better
prices through competition, it induces fairness.
Under these rules, the government should have almost no say in what goes on in the
market. The market is a word used to embody the system of buyers and sellers of goods and
services. The competitive market makes things fair as well. With a lack of government input,
government officials cannot be bribed by the highest bidder to support the business cause. Small
businesses with a great product or service can thrive in this environment. Capitalism, despite
what many believe, actually helps the less fortunate thrive. This economic system worked very
well for banking in the United States from its inception until a few relatively recent events
occurred.

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Government Regulation
The government of the United States began as a small part of the way economics and
banking works in the United States. Today, the government is involved in every pursuit of the
banking industry. The explanation of how this came to be and how it affects our economy is
staggering.
There was a huge financial crisis known as the Banking Panic of 1907[Gill,].This panic
was initiated by the lack of confidence in the investment system. Simply put, investors in the
stock market did not feel that the risk of investing was worth the reward. Banks began to suffer
because of the lack of trading. The only way banks can make money is by trading properties
(assets, bonds, futures, loans, and other investment tools). The banks trade for these properties by
using the money that their customers give to them. If banks arent making profits, theyre less
likely to give money to new customers. So, there was a general lack of money all across the
country in 1907. Historically, the UNITED STATES makes major changes of the status quo
during times of panic and disaster. The next step changed the way the banks functioned in
America forever.
Instead of allowing banks to fail, the Federal Reserve was created in 1913 by the United
States government. The Federal Reserve, also known as the FED, is a central bank that regulates
privately operated banks. There are a few tools that the FED uses to do so: (a) Increasing or
decreasing the amount of money in the market [e.g. when the treasury prints a considerable
amount of dollars bills, the value of the dollar goes down] (b) The FED forces all banks to keep
ten percent of their money at a local federal reserve bank. This ensures there will be enough
money for customers of the bank to make withdrawals on a daily basis.

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This example of regulation seems to protect the people against banks. But, in fact, it does
the opposite. Beginning in the late nineties, the Federal Reserve began an unprecedented
monetary policy which made interest rates and qualifications for getting a home loan extremely
low. People who could not afford a house were getting loans because banks were encouraged to
do so by the FED. In some cases, these people were buying two or three homes because the
monthly payments were so low.
After a few years a problem arose. New houses were getting built to meet the demand for
all the new home buyers. After the houses were built, people moved in and began their monthly
payments to the banks. The banks started to realize that the guidelines set in place would not be
feasible to make a profit. Unlike most loans, a majority of these loans were variable loans.
Variable loans can increase or decrease monthly based on what the bank wants to charge. There
is usually a restricted range on these loans. Most of the unqualified homebuyers began paying
the bare minimum payment. After a while, the banks raised the amount due per month sharply.
Consequently, this group of homeowners began to default on their loans. To default means that
the person who borrowed the money no longer has a feasible way of paying for the loan. The
banks repossessed the real estate with no probable way of selling the properties to make up for
their losses. There were so many new houses being built that the value of real estate went down
[personal communication, December 15, 2013]. So as the reader can see from this brief
explanation, the FED cannot make reliable decisions about finance because it is almost
impossible to speculate on an economy of this scale and variation.
Another key problem with the FED is mentioned in How an Economy Grows and
Crashes, The Feds decisions are always determined by political, rather than economic,
considerations. As low rates tend to make the economy appear better on the surface, push down

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the cost of servicing mortgages and other loans and help financial firms make money, there are a
great many people who want lower rates. Presidents seeking reelection will always bang the
drum for lower rates, and they will pressure the FED to help out. On their part, FED policy
makers naturally want to be seen as the good guys who help the economy, not the tight-fisted
Scrooges who push it into depression. [A. Schiff & P. Schiff, 2014]
The two ideas mentioned above show how artificially changing the basic measurements
of the economy can be horrendous. It seems that banks are no longer private businesses whose
main goal is to make money. Without this incentive, customers of the banks will not receive
premium service.
As the reader may know banks who are protected by the Federal Deposit Insurance
Corporation can insure money up to two-hundred fifty thousand dollars through the government
[Federal Deposit Insurance Corporation,2014]. So if by the off chance it is stolen or the bank
folds, the customers will receive up to the aforementioned amount. Does this make banks safer
in reality? The answer is no. Imagine if there were no laws in place to protect consumers of
banks like the FDIC insurance policy. Would people not place their money in banks out of fear
of it being taken from them? Once again, no. Banks would actually become a safer place to put
the money. Lets remember that banks do not deposit the customers money into a safe and call
it quits. They lend the money to people who can make the bank money. After all, banks would
not exist if there was no profit motive.
The government also has programs for individuals who would not qualify for loans under
normal circumstances. Banks are forced to offer money to the people who qualify in these
government programs. These loans give certain groups the opportunity to buy things they

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would otherwise not be able to purchase. This affects the whole customer base. Unqualified
individuals were able to receive bad loans. The probability that this loan will end in a default
is high. In this situation, the bank actually does lose money. Consequently, the bank must raise
interest prices to make up for their losses.
If the banks do fail and lose their customers money, they are not affected, perversely.
The customers money is guaranteed up to two hundred and fifty thousand dollars. There is no
other industry with such a convoluted way of providing a service. Financial institutions should
cringe at the idea of losing peoples money. Banks should fear that if they do not do a good job
with their customers money, they will no longer receive business. But as the reader can see, this
is no longer the case. Large banking corporations and investment firms have become
irresponsible.
The government trillion-dollar bailout program has been a hot topic of debate in recent
years. In Figure 1, a majority of this trillion-dollar plan was awarded to financial institutions.
The companies were awarded this for poor performance. All of these companies would have
simply become nonexistent if not for this bailout plan. But, since these companies are investing
with the people of Americas money, the government decided to intervene to prevent a huge loss.
This goes against the capitalist principle that America was founded upon. If a company cannot
be profitable, it should not exist. As shown below, this is not small sums of cash that has been

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awarded to these companies. These companies are receiving millions upon millions of tax-payer

aid.
Figure 1: Top recipients of bail out money Bailouts to Banks by B. Ritholtz, November 6th, 2008, Big Picture. Retrieved
from http://www.ritholtz.com/blog/2008/11/bailouts-to-banks/

The bailout all began when a company named Goldman Sachs became highly publicized
in the public eye by the news and government officials for mal practice[A. Schiff & P.
Schiff].The leading officials of the company were not responsible and the company was simply
going into bankruptcy. The companys main source of income was real estate loan interest. This
company was a product of the Federal Reserves monetary policy discussed earlier in the paper.
This company was no longer profitable so it should have failed. It may have been a difficult

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time for loan holders and investors, but without the presence of profits, a company cannot exist.
Most likely, the company wouldve reformed after bankruptcy and start their business again with
better practices. But, when the bailouts became a reality, poorly ran companies grabbed the
money and still continue to grow. As they grow through this artificial profit they receive, their
importance increases. Until, once again, they begin to fail. Then the government will react to
the crises as it has done in the past. Every time these companies will need even more assistance
than before. This cycle is continuous. The longer it survives the more people it will affect.

What Should Banking Be Like?

Many of my family members work at local banks. All of them say they have the best jobs in the
world. As I talk about one of my close family members, the reader will begin to realize that most local
banks have a family-like aspect to their business. For example, my great uncle George Parker is the vice
president of Whitaker Bank for all the locations in Scott County. His account of how he got hired is
astounding:
Well, it was just an accident, back in 1973 I went at that time to Whitaker bank to talk to
someone about possibly inquiring about buying a house, and we talked for a long period in time
and actually about an hour and a half later he offered me a job and I still didn't know if I was
going to take it or not. So, I went home over the weekend and talked it over with my wife and
decided that at the time things weren't going the way I wanted to where I was working at so I just
tried it out and see in 1973, now it's 2014(he grins).[personal communication, October 7, 2014]
George and his chain of banks are extremely successful. The key to their success is being the
most community-oriented bank in the area. This bank has supported agriculture and real estate in Scott
County for over fifty. Unlike the financial institutes that took bailouts, this banking company works for
its customers. For example, a local farmer inquired about receiving a loan from the bank. George only
asks one question when a local farmer asks for a loan. It is, When can I come see what youre doing?

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He goes on location and looks at the product the farmers are selling. My great uncle is a perfect fit for
this job. He worked on my great grandfathers farm for over twenty years. This skill of knowing the
actual business he loans money to is extremely helpful. It also makes the bank profitable, which is a
responsibility that he should have.
Through hard work, he has helped Georgetown become what it is today. Georgetown was once a
small town. Now, after a company named Toyota relocated here, the town is remarkably larger. Over ten
thousand new jobs were created locally. This surge of bank customers made Whitaker Bank one of the
most profitable chains in Kentucky. During the early two thousands, the bank restructured because more
and more of their business was real estate based. George recounts the change during our interview:
Okay, let's go back in time, back in the 70's and 80s; this is an agricultural bank mostly. But
when Toyota came to Georgetown it switched over to commercial, and now it's commercial and
homeowners, we don't do a lot of cars now because car dealerships are financing for 0 percent
and we can't compete with 0 percent, because we have to make money off of something. So now
it went from agricultural to commercial bank and that's what we do. Through the years we've
changed it, through the years with times changing. Like all banks have to, or everybody has to
change to sooner or later over a 40 year period.[personal communication, October 7, 2014]
I tell this story to share this idea with the reader. Banks should be the most personable,
respectable companies that a person comes in contact with on a daily basis. These are the people that the
customers trust with their money. Right now, its difficult to tell which banks to trust. This is mostly
caused by the lack of competition between banks on account of regulations. The people that go to
Whitaker Bank know and trust my great uncle to make the right decision on their behalf. Local banks like
Whitaker Bank are what finance should be about, helping people. All of the regulation above hurts small
banks who did not do anything wrong. During the interview I had with George he pulled out a stack of

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papers for a home loan that was at least four inches thick. The thud it made when he dropped the stack
onto his desk was a testament to how banking has changed.
The current state of banking should not be a debate between two political parties. The people of
the country need to understand and oppose the idea of getting rid of the capitalistic system of banking.
There is one point that I would like the reader of this paper to remember. Banks exist to make money.
Making money is not a horrible crime that should be punished. The government has ruined the incentive
for banks to make money for their customers. There is only one thing that will change this; the
distribution of information similar to the ideas provided above to every person. The knowledge of how an
economy works is incredibly important to American success in banking.

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References
Gill, K. (n.d.). The History of US Government Financial Bailouts. Retrieved October
15, 2014. http://uspolitics.about.com/od/economy/ig/Financial-Bailouts---A-History/Panic-of1907.html
Schiff, P., & Schiff, A. (2014). Infrastructure and Trade. In How an Economy Grows
and Crashes (Collector's ed., Vol. 2, pp. 78-79 & 149-153). WIley.
Federal Deposit Insurance Corporation. (n.d.). Retrieved October 19, 2014.
https://www.fdic.gov/
Ritholz B.. Bailouts to Banks[November 6th, 2008].
[Table]Retrieved from http://www.ritholtz.com/blog/2008/11/bailouts-to-banks/