FED POLICY FAVORS MEGA BANKS AND IS ANTICOMPETITIVE ADDING TO TRAIN WRECK

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EDITOR’S COMMENT: With 7,000 community banks and credit unions, an electronic funds transfer infrastructure enabling even the smallest bank to provide wide access ATM, internet and other conveniences, you would think that the best insurance we have against financial collapse is to make certain that the small and medium sized banks make it through this crisis — especially since they didn’t cause the problem.

But just as MasterCard and Visa adopted policies that created preferred treatment to the megabanks and forced the smaller banks to pay for the same infrastructure that was being used against them in the “free market”, the FED has adopted policies that are window dressing meant to show fairness and neutrality when in fact the FED policies are squarely in the corner of mega banks who consistently use their power and influence over the payment networks and the federal reserve to raise barriers to entry just high enough to prevent meaningful competition.

So hundreds of banks were given access to the Fed Window, but unlike their megabank counterparts, they had to come up with REAL COLLATERAL instead of bogus mortgage bonds. This policy made absolutely certain that the small banks would not start lending ahead of the mega banks and start taking back market share. It also made certain that the small banks would not start growing at the expense of the megabank share of the market which is now placed somewhere around 70%.

Thus the very same people and institutions and caused the mess we are in, and who have created a title conflagration that might never be solved as long as we continue to keep ourselves blinded by the myth and spin coming from Wall Street and government, THOSE are the people who are essentially MAKING POLICY contrary to their lip service of preserving, maintaining and promoting a free market. In a free market, the small and medium sized banks would have been given a better chance to step up to the plate and take back market share after the horrible behavior of those who have dominated the marketplace for thirty years. In a free market, the resolution of the mortgage bond issue, derivatives, and synthetic collateralized debt obligation instruments like credit default swaps, would have been achieved without causing any pain to anyone other than the people who created the problem. Instead the pain is still spreading to all the citizens of our country and around the world.

Fed Help Kept Banks Afloat, Until It Didn’t

By BINYAMIN APPELBAUM and JO CRAVEN McGINTY

WASHINGTON — During the frenetic months of the financial crisis, the Federal Reserve stretched the limits of its legal authority by lending money to more than 100 banks that subsequently failed.

The loans through the so-called discount window transformed a little-used program for banks that run low on cash into a source of long-term financing for troubled institutions, some of which borrowed regularly from the Fed for more than a year.

The central bank took little risk in making the loans, protecting itself by demanding large amounts of collateral. But propping up failing banks can increase the eventual cleanup costs for the Federal Deposit Insurance Corporation because it keeps struggling banks afloat, allowing them to get even deeper in debt. It also can clog the arteries of the financial system, tying up money in banks that are no longer making new loans.

County Bank, the largest bank in Merced County, California, took a $4.8 million loan from the discount window in March 2008 after announcing the first annual loss in its 30-year history, news that prompted depositors to withdraw $52 million.

By the fall of 2008, the bank was borrowing regularly from the Fed, taking more than two dozen loans in amounts that peaked above $60 million. It continued borrowing until the day it failed, taking a final loan for $55 million on Friday, Feb. 6, 2009.

Thomas Hawker, the former chief executive, said that the loans helped keep the bank in business, providing needed cash as deposits dwindled. But he said that it was clear in retrospect that County Bank was dead on its feet the whole time, thanks to its once-lucrative focus on financing construction of new homes in the Central Valley of California.

“I think in most cases it is a lifeline that kind of provides a bridge to survival,” said Mr. Hawker, who left the bank in 2008. “In the case here, Merced County was ground zero for everything that could possibly have gone wrong with the economy.”

The discount window is a basic feature of the central bank’s original design, intended to mitigate bank runs and other cash squeezes. But access to it historically has been limited to healthy banks with short-term problems.

Those limits moved from custom to law in 1991, when Congress formally restricted the Fed’s ability to help failing banks. A Congressional investigation found that more than 300 banks that failed between 1985 and 1991 owed money to the Fed at the time of their failure. Critics said the Fed’s lending had increased the cost of those failures.

The central bank was chastened for a generation but in 2007, facing a new banking crisis, the Fed once again started to broaden access to the discount window. It reduced the cost of borrowing and started offering loans for longer terms of up to 30 days.

More than one thousand banks have taken advantage. A review of federal data, including records the Fed released last week, shows that at least 111 of those banks subsequently failed. Eight owed the Fed money on the day they failed, including Washington Mutual, the largest failed bank in American history.

The Fed has said that it complied fully with the law in all of its emergency loans, and that its actions, including lending from the discount window, were intended to limit the impact of the crisis.

Charles Calomiris, a finance professor at Columbia University who has studied discount window lending during previous crises, said the Fed had not released enough information for the public to determine whether some of the recipients were propped up inappropriately and should have been allowed to fail more quickly.

“Do we know whether the Fed did that? No, we don’t,” he said. “But the Fed has become more politicized than at any point in its history, and I do worry very much that a lot of Fed discount window lending may just be part of a political calculation.”

In some cases the Fed’s lending had clear benefits, whether or not the loans meant going beyond the mandate.

The F.D.I.C. almost always seizes banks on Friday evenings, so the new owners have two days before reopening. In some cases the Fed kept banks alive until the next Friday. The Bank of Clark County in Vancouver, Wash., took its first discount window loan on Monday, Jan. 12, 2009. It borrowed $8 million Monday, Tuesday and Wednesday, then $14 million on Thursday and Friday. Then the F.D.I.C. closed its doors.

In other cases, the Fed stopped lending to banks as the extent of their financial problems became clear. Alton Gilbert, a former official at the Federal Reserve Bank of St. Louis who wrote a widely cited study of the Fed’s discount window lending in the 1980s, said that few banks failed with Fed loans on their books during the recent crisis. The central bank often suspended lending several months before they failed.

Still, some experts said additional scrutiny was warranted for a subset of banks that received sustained support even though they faced clear problems.

The most frequent visitors at the window were three subsidiaries of FBOP, a bank holding company based in Oak Park, Ill.

Park National Bank in Chicago borrowed regularly from April 2008 until the day of its failure in October 2009, taking 129 loans in amounts that peaked at $345 million — the longest period of sustained support for any bank that failed during the crisis. Park used some of the money to finance the acquisition of assets from other banks, expanding its own balance sheet and potentially increasing the cost of its eventual failure. Bloomberg News first reported the details of the Fed’s discount window lending to the company.

Two other failed banks owned by FBOP also took more than 100 loans from the discount window, California National Bank of Los Angeles and Pacific National Bank of San Francisco, although both stopped borrowing several months before failing.

Marvin Goodfriend, a professor of economics at Carnegie Mellon University, said that such lending placed the Fed in the inappropriate position of deciding the fate of individual banks, choices that he said should be made by elected officials.

“What I think is the lesson from this is that the Congress needs to clarify the boundaries of independent Fed credit policy,” Professor Goodfriend said. “There should be a mechanism so that the Fed doesn’t have to make these decisions on behalf of taxpayers.”

Mortgage Meltdown Consequences

 

Mortgage Meltdown Consequences — New Money, Old Money and New Dynamics — 

Cashless ATM, “second chance bank accounts” and other services auger well for Small Banks and Credit Unions.

 

The simple fact is that there isn’t any small bank who can’t provide the same services to any type of customers that a large one can. And if States would start depositing their entitlement and other money and revenue into state chartered local community banks, they would regulate their own state and local economies by insuring that reinvestment through loans would be on the local level with local deposits and a return to common sense in lending. It would also score political points for anyone running for local or statewide office. 

 

News from the Bureau of Engraving and Printing in Washington D.C. (BEP) — they are going to change the size of the various denominations of U.S. currency. There are also changes coming to prevent the Supernote coming out of North Korea which uses the same paper and managed to get the same printing presses that the BEP uses. They have been flooding the market with counterfeit currency quite successfully and the trend seems to be on the increase although, according to government reports, if they can be believed, the problem is not yet a large one.

 

A clean-out of the ATM cash locations will start to occur when the new bills come out since 85% of the cash terminals in most portfolios are unprofitable anyway and the operators will not be inclined to spend more money on a new cash dispenser for a location that isn’t making money anyway. This will present a new opportunity for those who permit or operate Cashless ATM terminal locations (Community banks, Credit Unions and Independent Sales Organizations). 

Networks like NYCE, AFFN, American Express, COOP and CU24 that allow “scrip” terminals (A/k/a Cashless ATMs) will be the prime beneficiaries of this trend. Cirrus and PLus who merely look away are likely, especially now that they are public, to specifically encourage the use of Cashless ATM after years of “opposing” it on paper. 

Companies like SMARTBanks (which has long-dominated the world of cashless ATMs) are likely to become major players in financial services as their volume once again mushrooms and their offering of services continues to diversify. It seems that with every step, the financial institutions that seek to block the ability of the small bank or credit union competitor cause another event that eventually comes up and hits them in the face, like a rake stepped upon in the field. 

Add to that the availability of “second chance checking” for those who don’t qualify to open a regular checking account and overdraft privileges on these strictly electronic bank accounts, and you have a prescription for a resounding come-back of the small financial institution and the death-knell of the once mighty giant players. 

 

“Second chance checking” places the small financial institution squarely in the path of the giants (who are now otherwise occupied with saving their skins) seizing the opportunity to provide services to the “unbanked” or under-banked population. Overdraft privileges allows small institutions to partner with -non-predatory lending vendors and offer a smart and socially acceptable way of providing short-term emergency loans placing them squarely in the way of growth of Payday loans.

 

Adding to this are world events that certain increase the risk if not the certainty that the dominance of the U.S. dollar in world currency is coming to an end, and that with constant devaluation of the dollar and inflation, merchants are starting to demand other currencies. There is even a tendency in foreign markets that will be vastly exacerbated by the advent of the new money being printed — where older wrinkled dollars are being devalued on the spot in favor of newer, crisper ones. 

 

In short, the mortgage meltdown with its CDO/CMOs, (really financial derivative breakdown, including over $500 trillion in derivative issues over the years) which undermined the confidence in American financial markets, is likely to cause a not-so subtle shift in the willingness to accept U.S. currency for payment of non-tax debt. And dollar reserves held by central bankers around the world are likely to reflect this shift by lowering the amount of dollar reserves and increasing the reserves of other currencies, especially the Euro. 

 

In short, people going to an ATM will be looking for alternatives. Even if the twenty dollar bill is preserved as to size in order to save the cash dispensing ATM terminal, the level of distrust as tot he quality and buying power of that money is likely to cause something of a shift in consumer and merchant acceptance of old dollars or even the new dollars, causing merchants to keep more than one currency in their drawers — old U.S. currency, new U.S. Currency and probably the Euro. 

 

I might add that regulatory influence European Central Bank will be probably vastly increase with respect control of financial markets all over the world including the United States where we have always jealously guarded our sovereignty but now surrendered it to a few financial “wizards” who undermined the position of the U.S., in the world at the worst possible time in the worst possible way with the worst possible outcomes for many borrowers, lenders, underwriters, auditors, investment bankers, and investors. 

 

Even if the twenty dollar bill is kept the same size there will be a run to the teller windows of banks, the drawer of merchants, and anywhere else people can lay their hands on the new currency which appears more sound. After all, since we are not on any gold standard or other back-up to the value of currency, the ONLY thing maintaining the dollar’s value is the confidence people have in it. 

 

It therefore follows that most operators of Cash ATMs are going to experience either a drop in the use of the ATM or a complete end to their use if the size of the twenty dollar bill changes — until they install a new cash dispenser. But even if a new cash dispenser is installed, merchants, as in New York City and other parts of the country are encouraging payment with Euros. The current ATM electronic and mechanical infrastructure is not sell suited at present to handle multiple currencies or multiple denominations in different sizes.

The ONLY infrastructure available to handle the versatility of demand for “money” is the merchant’s cash drawer, which will not only inure to the benefit of the operators of cashless ATM machines, but to the benefit of the merchants themselves. It is ONLY by getting a receipt and going to a live cashier that the demands of the customer will be met, at least in the short-term. 

A clean-out of the ATM cash locations will start to occur when the new bills come out since 85% of the cash terminals in most portfolios are unprofitable anyway and the operators will not be inclined to spend more money on a new cash dispenser for a location that isn’t making money anyway. 

This will present a new opportunity for those who permit or operate Cashless ATM terminal locations. Networks like NYCE, AFFN, American Express, COOP and CU24 that allow “scrip” terminals (A/k/a Cashless ATMs) will be the prime beneficiaries of this trend. Cirrus and Plus who merely look away are likely, especially now that they are public, to specifically encourage the use of Cashless ATM after years of “opposing” it on paper. 

Companies like SMARTBanks which has dominated the world of cash ATMs are likely to become major players in financial services as their volume once again mushrooms. It seems that with every step, the financial institutions that seek to block the ability of the small bank or credit union competitor eventually comes up and hits them in the face, like a rake stepped upon in the field. 

With the large financial institutions all in some sort of trouble now and the fact that the small ones were barred from playing in the CDO world (and therefore face no write-offs or liability), the time is ripe for small banks and credit unions to reassert their superiority in numbers, customer service and their ability to field more ATM locations than their largest competitors. Cashless ATMs cost, even now, less than 1/3 of the smallest cash dispensing countertop Cash dispensing ATM and cost 5% of the operating costs of the cash dispensers. Things are changing.

The good news for the consumer is that their convenience fees will go down or be eliminated in greater numbers because of the number of small banks offering surcharge-free access to a growing number of what the NYCE network calls “Point of Banking (a/k/a Cashless ATM a/k/a scrip terminals). 

 

The bad news is only for the banking giants who will see their ATM fee income and monthly statements income decline as more and more people gravitate back to their local banks. As depositors move and loan business moves and decentralization takes hold of the marketplace, supplanting what was a government-sponsored hegemony of a handful of banks, the flimsy foundation on which the giant financial services business model was built will crack and crumble. 

 

Add to that the availability of “second chance checking” for those who don’t qualify to open a regular checking account and overdraft privileges on these strictly electronic bank accounts, and you have a prescription for a resounding come-back of the small financial institution and the death-knell of the once mighty giant players. 

 

All these services and more are now available to any financial institution to offer customers who walk in through their door, through the proliferation of third party vendors who are willing to set up, sell, monitor, score risk and even take the risk on these accounts. It is the dawning of a new age, where the syndication and derivative schemes of the old fashioned giants are replaced by a better market system for distribution of credit, wealth and prosperity. Free-market enthusiasts should be excited.

 

VISA IPO FRAUD

VISA Fraud Costing New Stockholders and Consumers Billions of Dollars

The media and lazy stock analysts have failed to read what was right in front of them. Visa faces some challenging times and in-fighting between the stockholders, the junior financial institutions members and stockholders on the one hand, and the handful of controlling mega-banks on the other hand. The prospects of government anti-trust units and private actions against VISA and other networks has never been higher. It’s not the first time and it won’t the the last.

ATM Fraud and Anti-Competitive Practices

When will the media and analysts report that Visa et al are foregoing $180 million per year in profit for the sole purpose of keeping a death grip on potential competition from small financial institutions, exposing the gaping hole in the “service” offering of a few large financial institutions that control Visa policies? 

This is costing Visa shareholders at least a couple of billion dollars, and restricting the prospects of the company in the global economy. 

It is also costing the American consumers who use ATMs a whopping $5 billion per year in EXCESS fees. And it is costing the American Economy something on the order of $75 billion in revenues to small business owners, in addition to the billions in profits that small financial institutions should be making, and the resulting impact of restricting the ability of small institutions to invest money locally (for lack of deposits they could otherwise attract).

Visa and MasterCard, and NYCE, and STAR and Pulse, are all networks that are essentially controlled directly or indirectly by just a few large financial institutions for the benefit of themselves and contrary to the interests of their junior member financial institutions, the customers of smaller financial institutions, small merchants, artificially inflating costs to the operators of the terminals, the customers/cardholders that use the terminals and depressing their own revenues at the expense of what are now public shareholders.

These institutions have been using the networks to force small financial institutions to use their services (community banks and credit unions), while using their “rule-making authority” (largely regarded as quasi governmental, even though it isn’t), to make sure the smaller banks and credit unions can’t compete on a level playing field in providing ATM convenience. 

The ATM “Scrip” terminal, which performs all ATM functions and allows the merchant to fund the withdrawal from his cash drawer, is a very inexpensive, simple and small-footprint way of extending the reach of small banks and credit unions into stores and other locations that are more convenient to customers, at lower cost to the bank and the customer, and which would enhance sales at smaller merchants. 

It’s use at about 25,000 “off the radar” locations in the United States and hundreds of thousands of locations around the world also increases the volume of transactions, revenues and profit at the network level, so why wouldn’t the networks promote it? Instead they changed their policy in 1997 and have ever since been aggressively publishing bulletins containing “rules” prohibiting ATM Scrip Terminals and threatening banks with $10,000 fines per day. 

The networks enforce this policy through intimidation, and have aggressively adopted policies inhibiting fair competition between their controlling large financial institution, on the one hand —  and all the rest of the depository institutions in the country who would compete with them for deposits and loans customers if they could offer convenient low-cost or no-cost ATM access. 

This puts VISA and other network squarely in the cross hairs of DOJ and private actions for anti-competitive practices (hardly the first time they were accused of that).  

By adopting policies that are plainly contrary to its own business model in order to benefit a few large institutions VISA has decreased its revenues and profits and now threatens to decrease its prospect for maintaining or expanding market share, because the rest of the world is going toward ATM Scrip Terminals. 

Beginning in April 1997, these policies were adopted, after previously allowing, even welcoming the ATM Scrip terminal into the world of ATM convenience. The networks began systematically putting hundreds of companies and processors out of business who allow the scrip terminal to operate. 

By the way, CU24, a credit union network, NYCE and other networks expressly permit “scrip” terminals but do not promote them.  Others don’t exclude it but actively make it difficult for anyone to operate ATM Scrip terminals. The average U.S. surcharge for ATM Scrip is now under $1.00. The average ATM surcharge for the big machines is around $3.00 now. Hence the larger financial institutions, whose death grip on the system prevents smaller institutions from competing with them, are picking up $3 per transactions for those few customers of community banks and credit unions while offering free ATM service to their own customers. The small banks and credit unions can do the same thing but are prevented from doing so by the “rules” of the networks. 

These networks, including Visa with all of its other potholes, have passed rules against it. It is simply a contrived barrier to entry into the ATM convenience model, and all the resulting benefits of getting new customers, depositors and loans prospects.  

It is a barrier to small banks and credit unions who could put out 20  ATM Scrip terminals at a total cost of $20,000 into 20 locations closer to the work and homes of its customers. The networks, particularly VISA, require the small financial institution to invest their $20,000 into One machine which of course presents no competition at all to BOA, Chase etc. 

20 machines strategically placed by each small financial institution would present an intolerable competitive problem for the large banks, so they have squelched it. The cost of that policy now extends, as a result of the VISA IPO, from the financial services marketplace, to investors in Visa equities, who will be deprived of seeing their company’s revenues and profits artificially restricted by a policy that has nothing to do with the business of their company and everything to do with the business of third parties whose interests are antithetical to the interests of Visa’s business model.

Instead of carrying and operating costs of perhaps $200 per year for 20 ATM scrip terminals, small financial institutions face the daunting prospect of paying around $12,000 per month! This is a figure that would all but obliterate those smaller institutions that are profitable and would create solvency problems in credit unions.  

Thus they are required to restrict their ATM presence to one or two terminals when they could be placing dozens if not hundreds out in the competitive geographic area, producing millions of transactions, and substantial revenues to Visa et al. 

How many transactions? The answer is that back in 1997, there were nearly 13 million ATM Scrip transactions per month in the U.S. alone. Now the figure is under 1 million, and that is “sub rosa”. Allowing for the continuation of what had been meteoric growth of the ATM Scrip business, the number of transactions could today could easily exceed 200 million per month. Allowing 8 cents as the revenue of the network for each of these transactions means that Visa et al are foregoing total revenues of at least $16 million per month, most of which is profit. 

Thus somewhere around $180 million in net profit before taxes is being diverted from the networks (mostly VISA) to the benefit of third parties whose business directly benefits from these policies.

Requiring the use of big bulky, machines with vaults, cash dispensers, and other bells and whistles increases the operating cost, cash management, and insurance costs to hundreds of dollars per month, from what would be about $10 per year for the smaller “scrip” terminal. 

How will these networks explain to their member banks and now their shareholders why they are restricting electronic access to depository accounts (which is, after all, their business) and thus eliminating large revenue opportunities and profit on the bottom line? 

And if they do not change their “rules,” then the prospect of other networks or direct agreements between processor, banks and merchants becomes more likely, particularly in view of the fact that the “scrip” terminal is the dominant player in all emerging markets around the world. 

Will stockholders be pleased to learn that Visa profits and market share are shrinking because of the interests of a few large customers in the U.S. domestic banking business?

Mortgage Meltdown: You Must Act to Protect Yourself from the Coming HYPER-INFLATION


Fall of the Dollar + HYPER Inflation

The fix is out. The Fed’s last ditch effort using depression era authority to hold off Bear Stearns failure is all we need to know. Officials at the Fed admit publicly that what they are doing is not fixing anything. Economists have taken off their rose colored glasses and see a bleak landscape. The disaster is coming and there are things that can be done to soften or hedge the blows that are coming down the pike. 

Whatever part of society you are in, whatever your job or occupation or status, it is wise to study up on this, but even wiser to act now. The dollar is in free fall, “bank failures” are not being used except in code, but will soon become unencrypted. Inflation is about to take a toll unlike anything in our personal memory. Society is about to change. It’s not happening for the next generation either. It is here and now, a clear and present danger.  The risk we are talking about is a likelihood that inflation will rise to not less than 2-3% per month, most likely peak at 15%-25% per month and could spin out of control  equalling historic highs of 2500% per month or more. 

This is information for individuals, banks, non-institutional lenders, electronic fund transfer networks, gateways, intercept processors, card issuers, lenders, private companies and investors can either adapt or “die.” The concept of immediate settlement, electronic payments (and ATM) settlement overnight (or even within hours), check payments and cash payments must be re-examined from the perspective of hyper inflation — where the value of the U.S. dollar changes (downward, for the most part) by the hour. 

CHANGES IN BANKING: Only Point of Banking ATM (and to a much lesser degree) Point of Sale (POS) terminals that allow the merchant to issue currency from the merchant cash drawer can possibly adapt quickly to this very likely development. These terminals are very inexpensive, easy and inexpensive to operate and maintain, and perform all the same functions as their larger version bank ATMs. 

It might be possible that different currencies might be preferred in different parts of the country. On the East Coast it might be the Euro, on the West Coast it might be the Yen or Yuan, in the Southeast United States it might be the Brazilian Real or even the Mexican Peso, and in middle America it could be the Canadian dollar. These terminals exist in relatively small numbers throughout the United States, and are expanding rapidly in emerging nations all over the world for precisely this reason. The same patterns could emerge in other parts of the world. The existing electronic funds infrastructure is ill-suited to timely adapt to current developments.

As an example, take the worst hyper inflation in recent history where the German currency in the 1930’s was inflating at the rate of 2500% per month. It is possible the fall of the dollar could be worse because the inherent weakness of the dollar combined with the inherent absence of productive assets, combined with outright anger and resentment against the U.S. could and probably will be worsened by the usual “overselling” panic that always attends a crashing marketplace. This is not a prediction of 3000% per month or any other percentage. It could be as low as 1-2% per month. 

For educational and analytical purposes, let’s look at a hyper inflation rate of 3,000% per month. What does this mean? Basically 10% per day. If you buy a newspaper for $1 today, the merchant is losing value at the rate of 1/24th of 10% per hour, assuming straight line depreciation of the dollar. The merchant must pay for something or convert the currency immediately. If he makes 5 cents on the newspaper, and he waits one day before he spends the dollar or converts it to another currency, he makes no revenue. 

In fact, the value of the dollar you gave him has declined by 10% and is now worth only $0.90. If he promised to pay the newspaper publisher $0.95, the $0.05 he thought he was making is gone and now he has a $0.05 in negative revenue, let alone profit. If he is on a 35% profit margin, he makes no profit. His opportunity to make any money at all passed him by a few hours after he sold the newspaper to you. 

This requires fast action on his part. Even if he is successful at getting rid of the dollar you gave him within 24 hours, he is losing substantial money selling newspapers. So he raises his price each day by $0.10 per day, and the newspaper is similarly raising prices, by the end of the month he is charging $30 for that newspaper and praying for $1.50 revenue. Since all prices are going up, the increase to $1.50 represents not an increase in the value of his revenues or profits but only break-even, along with the insecurity of not knowing if he is raising prices enough to overcome the effects of inflation.

In the banking world this is called a credit component. It is one which the current players ignore because it doesn’t produce any real effect in an environment where inflation is not a significant factor in commerce, loans, or payments. But in a hyper-inflation environment, the merchant is not actually doing a cash transaction with you; in fact, he is giving you credit for the the value of the cash you give him and delivering merchandise or services based upon that credit. 

That is what is meant in public trust or faith in currency, something which is rapidly disappearing from the current landscape as it pertains to the U.S. dollar. If he is unable to to achieve full value for the cash you give him, then he will charge you to compensate him for the known prospective loss, plus an amount to compensate him for the risk that the mutual projectors (buyers and sellers) might be wrong.

The meaning for every individual is that every effort should be made to move toward a job or negotiation in your current job in which your compensation is tied to inflation. If you make $3,000 per month and your rent is $1,000, that is fine. But if the rent is tied to inflation, which it will be, and you get only $3,000 because your income is not tied to inflation, then in our model above, your rent could have increased to $30,000. Sounds ridiculous! But it has happened many times in history and several times in American history. 

Another meaning for individuals who own homes is that they are sitting on a veritable gold mine, particularly if they have a mortgage. First, even if your income does not go up with inflation, you will still be able to pay your mortgage payment. Here the bank takes the full loss from inflation, getting pennies in value on the dollar they bargained for when they set the terms of your mortgage. So stay in that house if you possibly can. 

Second, the value in dollars of the house is going to go up even if there is a decline in demand. So if the demand goes down 20% and inflation is up by 3000% (in our exaggerated —we hope — example), then your $400,000 house is now priced at $12,000,000 less 20%. Real estate brokers who receive their compensation as a percentage of sales price will see the dollars go up but they too will be stuck in the same cycle of the newspaper seller — what to do with the money when they get it and how fast can they do it? And by the way, if you sell that house, you are also in that same position as the newspaper seller and if you want some place to live you will be paying the same inflated prices. 

The message here for banks who give loans, issue credit cards, or even prepaid debit cards is clear. They must develop a mechanism acceptable to consumers that will protect the issuer of credit from losing money and in fact going out of business by lending $1.00 and getting back $0.03 WITHOUT A DEFAULT. It therefore behooves all issuers of credits to re-negotiate their loans with incentives to borrowers to accept an index to inflation, which we have been proposing for months. 

By reducing the principal that is amortized on the loan and cutting the payments so that it is irresistible for the borrower to stay in the house, the bank’s loan can be saved, the capital reserves can be preserved, and the financial markets stabilized. It is even possible that the dollar will stabilize or find some equilibrium. Most likely though, the Euro will become the dominant currency. This is a message for investors. Get out of U.S. dollar denominated “safe’ investments and convert to equivalent Euro and Asian investments whose currencies are NOT tied or pegged tot he dollar.

For the companies that process or handle payments, ATM transactions and credit transactions, they too must adapt to the new environment and possibly hedge with Euro or other currency accounts. Ironically payday loan companies might be the least susceptible to losses and might be the beneficiaries of outside investments since their loan cycles are so short. Hence their risk of loss is minimized by time and their ability to change loan terms to index on inflation is much easier. 

For the rest of the electronic data processors and networks, the problem is severe. Nearly all transactions are primarily based upon upon fixed charges (with some exceptions in credit and foreign exchange fees) per transactions rather than a percentage figure. Hyperinflation will put these companies out of business as their cost of business goes up with inflation and their revenues remain flat. Further, the settlement lag, while shorter than any other time in history could still negatively impact several of the players. 

A $100 purchase might be credited to a merchant within a few days. By then the value of the credit to his account is less than the value of the transaction performed. Unless intercept processors, gateway processors, networks (VISA, MasterCard, STAR, NYCE, COOP, CU24, Pulse etc) can provide some protection to themselves, their settlement banks, their sponsor banks, the merchant or ATM operator for inflation, we might travel backwards from an electronic payment society to a cash society. This will increase the demand for printed currency which the Bureau of Engraving and Printing is ill suited to satisfy. Increased demand for scarce dollars that are barely worth anything to begin with might ameliorate or aggravate inflation depending upon how it actually plays out. 

Most likely, as in New York, the Euro or some other currencies will be the currencies of choice which will pull down the value of the dollar further. ATM’s will have to issue Euro and/or other currencies. 

Only Point of Banking ATM (and to a much lesser degree) Point of Sale (POS) terminals that allow the merchant to issue currency from the merchant cash drawer can possibly adapt quickly to this very likely development. It might be possible that different currencies might be preferred in different parts of the countries. On the East Coast it might be the Euro, on the West Coast it might be the Yen or Yuan, in the Southeast United States it might be the Brazilian Real or even the Mexican Peso, and in middle America it could be the Canadian dollar. These terminals exist in relatively small numbers throughout the United States, and are expanding rapidly in emerging nations all over the world for precisely this reason. 

Dollar denominated accounts are going to be hit with Foreign exchange (Forex) fees while double denominated accounts (two or more currencies) will avoid the problem. A proliferation of a basket of currencies supporting a single depository or investment account is likely to occur to assist people in coping with the changed landscape of American society and economics. 

Government money managers, notoriously risk averse, as they should be, a slow to react, are like to get hit hard. If they do not hedge their agency or government or pension funds, the losses to fixed income individuals, the loss of services in local, state and federal government circles will be staggering and life-altering.

Whatever part of society you are in, whatever your job or occupation or status, it is wise to study up on this, but even wiser to act now. The dollar is in free fall, “bank failures” are not being used except in code, but will soon become unencrypted. Inflation is about to take a toll unlike anything in our personal memory. Society is about to change. It’s not happening for the next generation either. It is here and now, a clear and present danger.  The risk we are talking about is a likelihood that inflation will rise to not less than 2-3% per month, most likely peak at 15%-25% per month and could spin out of control  equalling historic highs of 2500% per month or more. 

Mortgage Meltdown: How the Big Boys Control the Rules

Unfair Competition by Large Banks Created the Infrastructure for this Mess

A few people have asked: Why not do a story on the alternative to the cash-dispensing ATM? After considering the research, and seeing a connection with the mortgage meltdown crisis because this situation is the single greatest marketing tool used by  large financial institutions to decentralize banking deposits (sucking local deposits out of the places they were earned and placed for safe keeping and putting them all over the country, if not the world) and to attract banking customers away from their small local bank or credit union who can and does service their needs far better and far more safely than any large company could with its headquarters and decision makers located thousands of miles away.

If you look at this week’s Economist, you will find on Page 86 that countries in Africa (“third world?”) have discovered a far more elegant and inexpensive solution: The customer activated Point of Banking ATM. In fact, if you look hard enough you will find that more than 25,000 ATM’s are already running in this country. If we used that system as extensively here, crime would be reduced to zero at the site of an ATM, ATM fees paid by consumers would be slashed by at least 2/3, more locations and more convenient locations would provide ATM access, and local bankers and credit unions would start getting their share of the business stolen from them by the oppressive tactics used by large financial institutions to undermine the ability of the small financial institution to compete on a fair and level playing field. 

The Point of Banking ATM is what it sounds like. You perform any of the transactions that are currently available on those monstrosities you see attached to banks, in malls, or in large merchant locations. However instead of an “automated” (which frequently does not work) cash drawer and “vault” (which is fairly easy to penetrate), the customer must go to the cashier to receive their cash. Anonymity and embarrassment of NSF works the same way as all ATMs. But in 21 years of use all over the world there has not been a single criminal act against the user of such a machine, the merchant who maintains the store in his location, or the machine itself. Te concept was started by two ex-American Express managers who had been downsized out of their jobs in the 1980’s.

The standard ATM in this country quite successfully invites all sort of criminal behavior ranging from banging a customer on the head for the cash to using construction equipment to break the machine out of the wall. Only in the United States is the far smaller, far less expensive (in cost and operating expenses) Point of Banking terminal in “disfavor”. 

The reason is the usual — those who disfavor it, do so because it would increase competition, lower consumer fees for access to their money, require virtually no maintenance, require no increase in insurance, and require no extra cash on premises because the Point of Banking terminals produce an astonishing rate of 72% sales. In other words, for every $1 taken out of their account, they spend 72 cents of it on average. Thus the unfair hold that these large institutions and large merchants have over others offering or who would offer the same services, is stifled.

Thus competition generated by ATM convenience would be leveled out between small merchants and large ones if merchants could spend a few hundred dollars (there are even Independent Sales Organizations that will install them for free), and receive interchange revenue from the banking system as well as providing their customers with greater flexibility in their payment options and the convenience of going home both with the groceries (or whatever) PLUS the cash. and most of all, enable small banks to effectively compete against large banks.  

Like all ATM’s the Point of Banking terminal gives a receipt. With the cashless ATM the customer presents the receipt to the store operator or cashier and the customer receives his cash, less any purchases he made (if any). The merchants gets the withdrawal electronically deposited to his designated depository account at his choice of financial institution, just like the use of credit and debit transactions — but in this case the merchant makes money rather than loses it to fee charged to him by MasterCard, Visa, STAR etc.

The odd thing about all this is that the machine used to drive Cashless ATM machines is that not only is it readily available, it already exists (by the millions) in almost every merchant location, large and small. It is the exact same terminal you see in every merchant location that accepts credit and debit for payments. It is programmed over the phone to do ATM transactions instead of or in addition to the “Point of Sale” debit and credit. The card is swiped, the PIN inserted and the choices appear on screen as to what you want to do.

So why wouldn’t small merchants, community banks and credit unions demand access to Point of Banking? The reason it turns out is that the banking associations (or the “networks” as they are commonly called), have passed regulations either banning Point of Banking terminals or severely restricting their usefulness or their ability to generate revenue to anyone who installs one. It seems that to small fearful community bankers and credit unions and small merchants these behemoth data processing centers known as MasterCard and Visa, have taken on the aura of a quasi-governmental entity. 

Thus when the networks say the rules are changed, nobody challenges the rules because “you can’t fight city hall.” The networks have deftly positioned themselves as “city Hall” when in fact they are simply private data processing centers controlled by the largest banks in the country — and clearly doing so against the fair trade and practices statutes of every state, against the rules of the Federal Reserve and against the federal and state antitrust laws. The networks have gone even further by publishing information that associates the Point of Banking ATM with strip clubs, gambling prostitution and other vices, whereas the cash dispensing ATM the largest banks use, are genuine banking machines. it is the same tactic being employed in reverse by the ‘Community Association for responsible Lending” which is trying desperately to legitimize the practice of payday predatory lending charging interest upwards of 500% per year. 

The reason is simple. In economic terms it is called “barriers to entry.” There are 6,000 financial institutions in the Untied States alone. About 1% of these banks control the rules, and have in the recent mortgage meltdown, reduced the Federal Reserve to a whimpering ineffective vehicle for monetary policy. The 1% cannel all the fees, perks from deposits and the customers by offering conveniences that the small bank presumably cannot. 

The small bank or credit union cannot create a network of ATM locations that has convenient locations all over the its own marketing area, let alone the region, the country or foreign countries. But they could do so if they only had to pay a few hundred dollars per location and receive a revenue return on that investment. And the merchants whose daily foot traffic can’t justify the large ATM (with all its insurance, cash loading, armored car, security, maintenance and repair problems, not to mention its sheer size) could benefit along with the small friendly community banker or credit union that “installed” his ATM allowing him to put a sign in his window like “ATM 99 cents”, which is about one-third (1/3) the price charged by Bank of America and other banks at their ATM’s. 

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