Better Than a Bank?

I saw an interesting article yesterday titled “Bank Deposits Soar, Despite Rock Bottom Interest Rates” By E. Scott Reckard, of the Los Angeles Times. Click on the link to read it.

The one line in the article that really sums it up is “Banks and credit unions are doing everything they can to get rid of cash except make loans,” said Mike Moebs, a banking consultant.

This caused a neuron that I haven’t accessed since undergraduate Finance 101 to tingle. Back in those days banks and other financial institutions were much more regulated. “National” banks meant that they were organized under federal rules – not that they covered the entire country. There were also banks chartered under state rules and in many cases banks could operate only in the county where they were incorporated and the contiguous counties.

Besides banks and credit unions there were “Savings and Loan Associations” which were also known as “Thrifts.” As I recall, the banks, known then as “Commercial Banks” had traditionally dealt almost exclusively with companies rather than individuals. Hence the “Commercial” delineator. I’m sure they wouldn’t have turned John D. Rockefeller away, but they did not deal with most individuals. This limited most people significantly, particularly with regard to purchasing a home.

Someone came up with the idea of starting an institution that would accept money from individuals as deposits and loan that money to individuals in the form of a mortgage. They had existed in various forms in Great Britain for years, but really came into their own in the US in the early twentieth century. It was a win-win situation. At one point there were even provisions that permitted Savings and Loan Associations to pay a higher rate on deposits than banks. They were focused on deposits and mortgages; for example, they were prohibited by law from offering some bank services such as checking accounts.

Over time the role of the Savings and Loan Association was absorbed by banks and credit unions. In many cases this is because these institutions arrange mortgages (and other loans) then sell these off to others such as Freddie Mac and Fannie Mae. In the 1980’s corners were cut, fraud occurred and questionable loans written ultimately leading to the death of the S & L’s. (Note: I wonder where those managers who killed the S & L’s found new jobs…)

However, these days we have people who wish to deposit money and receive interest on their deposits. We also have people who either wish to purchase a home or possibly refinance an existing one. Maybe the Savings and Loan Association is due for a second life.

As I recall, back in those days the mortgages were not bundled into indecipherable derivatives, but held by the Savings and Loan Association. This avoided many of the ills that the real estate market has recently endured. Back then people were more closely associated with and knew one another better which reduced the risk to at least some degree. Not only did the depositors know the borrowers, but the borrowers certainly did not want to fail both financially and in the eyes of their friends and neighbors (aka the depositors.) Finally, if there were a financial set back, it was in everyone’s interest to try to work things out.

Maybe if an organization like a church or fraternal group set up something like a Savings and Loan for their members it could correct at least some of the financial problems we’re currently facing. I know there are rules and regulations, but certainly there must be a lawyer somewhere who could figure out how to make it work.

The Savings and Loan idea worked once. It just might work again, or maybe this discussion could lead to something else that might work.

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