Your Money Isn't Your Money.
Sometimes I wonder why most of the giant mega-banks are based in New York. They should be here in Las Vegas, the gambling capital of the world. Because that’s precisely what they’re doing with your money. Actually it’s not even your money. From a legal perspective, every single penny you deposit at the bank becomes THEIR money. You’re nothing more than an unsecured creditor of the bank. And now that they legally own what used to be your money, the bank can gamble it away on whatever crazy investment fad best serves their interests. Here’s an easy way to understand it: Imagine you were moving and needed to rent a storage facility for a few months to store your stuff. You rent a U-Haul and move everything into the storage unit. The way banking works, the second you drive away, the storage company now owns your furniture. Not you. And as the brand new owners of what used to be your furniture, the storage company can do whatever they want with it. They can rent out the furniture to another customer, charging steep fees to let a complete stranger sit on your sofa and watch your TV. (Naturally you’ll never see a penny of that money.) Of course, that complete stranger might not treat your furniture all that well. He might even destroy it. No more furniture. Often the facilities get in on the business together; one storage company will rent your furniture to another company, which rents it to another, and then another. After a while no one actually knows where your sofa is. But it doesn’t matter because the storage companies are all making lots of money, and few people ever really ask. Eventually their standards drop so low that they stop performing credit checks altogether when someone wants to rent furniture from them. They’ll rent your dining room table to anyone who walks through the door, even if that person has a history of destroying other people’s furniture. After a while, these deadbeat rental customers have destroyed so much of other people’s furniture that there’s very little remaining. A lot of the smaller storage companies aren’t able to stay in business as a result. But the big ones... they all get together and go to the government, claiming that they’re way too important to go bankrupt. They demand to be bailed out and tell all the politicians that society would collapse if their businesses failed. The government listens, and the big storage companies receive a massive taxpayer bailout. The Federal Furniture Reserve even turns on its manufacturing operation, creating countless sofas, love seats, and dining room sets out of thin air. And they give it all to the big storage companies for free. The big storage companies are back in business, with top management rewarding themselves with record bonuses. Funny thing, though, their bad behavior doesn’t really change. They still rent out your furniture to other people and provide zero transparency into those specific deals. And rather than competing to provide the best service for their customers, they get together to fix their prices and bilk the consumer even more. Hardly a month goes by without a major scandal where some storage company was found engaging in extremely unethical behavior. One day you decide that you’re ready to move in to your new house, so you go down to the storage facility and ask for your furniture back. Instead, the storage facility treats you like a criminal suspect and gives you a bunch of excuses about why they can’t release “their” furniture. And as soon as you walk out the door they file a report with the government claiming that you’ve been acting suspiciously because you had the audacity to ask for your own sofa back. Clearly no rational person would ever trust his/her furniture to such a corrupt and absurd storage industry. Yet as ridiculous as it sounds, that’s pretty much our banking system in a nutshell. And we trust our life’s savings to that system... something far more important than furniture. The storage industry would never become that rotten because it’s still a relatively free market. If the industry were screwing its customers, a bunch of entrepreneurs would start better, more honest storage companies, driving the bad apples out of business. That can’t really happen in the banking industry because starting a bank is almost impossible-- trust me, I’ve started two of them. I’ve had success, but it’s been one of the most time consuming, frustrating business ventures in my life. And not enough people are doing this, so there isn’t going to be any serious competition to the mega banks anytime soon. But there is a positive trend brewing: technology is starting to make banks obsolete. Any basic retail function of a bank-- deposits, loans, foreign exchange, funds transfers, etc. can already be done better, faster, and cheaper outside of the banking system. You can keep funds in the blockchain, crowdfund a loan, use social networks and mobile apps to change money. None of this requires a bank. So, long-term, the banks are finished. But for now, it makes sense for anyone who truly understands this scam to become your own banker, which you can do simply by holding some physical cash in a safe. The fewer middlemen you have between you and your money, the safer you are. And given that interest rates are still hovering near 5,000-year lows, it’s not like you’re giving up any meaningful interest. So there’s practically no downside in taking this very simple step.
Have a good weekend,