Mood: vegas lucky
Topic: "Loans and Deposits" (4)
Frodo knows a lot of bankers. Upon his return to the Shire from his brief visit to the College of the Shire (comments to follow), Frodo spent this business day talking to many of them about the global fiscal crisis. What he learned gave him encouragement and a budding sense of confidence in the wisdom of those who have to this point appeared as befuddled, bamboozled, and hoodwinked.
On Friday past, the Presidents of banks all across America received a letter from the appropriate officials in the Government of the US of A. In that letter they were informed that they were allotted 3% of their current outstanding volume of LOANS as additions to their capital base. This being, of course, part of that which has been referred to as the "bailout" of Wall Street. This means, for example, that if a bank had $1 Million in loans on their books, they would then receive $30 Thousand more to loan out to other customers. Without that $30 Thousand, the bank would have to convince other customers to DEPOSIT an equivalent amount into savings, a certificate of deposit, or some other such account in order to make a loan to another customer. Since these deposits earn interest, they cut into the banks' ability to make a profit from the interest received on normal loans. By loaning out, therefore, that $30 Thousand, the bank will make more money and incur less costs than if they relied on deposits to fund the loan.
$30 Thousand might finance an awfully nice GM car or truck for a customer of the bank. Selling one of those vehicles currently sitting on a dealer's lot will certainly help the stock price of the company now facing a merger with Chrysler, or bankruptcy. At the same time, falling gasoline prices allow the dealer to obtain sufficient working capital to stay in business until "hybrids" start arriving from Detroit (or other ports).
The momentum of confidence in the flow of money is critical. The fact that there is now money that can be borrowed gets the process started again, and if that purchaser of the $30 Thousand car or truck pays his/her loan back as agreed, then the taxpayer, supporting the "bailout," gets his money back, eventually. Along the way, companies and their investors also do better than they have in recent months.
All of this, Frodo feels, will be gradual, and far from smooth. The good news is that normalcy will return when America is no longer led by an Incomparable Moron, who fiddled while the entire world almost came unglued.
As promised, Frodo notes his brief sojourn to the spot where first he met Sam. From this visit he reaffirmed the wisdom of his selection process. Frodo also shared a smile and a joke or two with many of those who cannot be forgotten.
Frodo counts his blessings (as well as his money). You, dear reader, should be so lucky.