This week’s material contained some interesting aspects directly related to Macroeconomics. One of the most important ones being Money and Banking. Monetary tools like cowry shells have changed and evolved over the years. From using different foods or gold to trade to paper money and coins. Is evident that the next generations will also make changes to monetary tools, a concept that has been already evaluated by different federal institutions. The new trend of mobile pay, plastic money like credit and debit card and cryptocurrency are some of the trends we can see today. Banks have also evolved and will continue to do so by incorporating several innovative portfolios like car insurance on customer’s credit cards and travel insurance to name a few.
Keynesian perspective was created in 1936 by the economist Jonh Keynes. This theory suggests that the economy is mainly controlled by aggregate demand. This means that the economy does not always obey it’s ow growth rate but tend to fluctuate up and down based on consumer preferences. On the contrary, the neoclassical perspective differs by relating supply and demand using mathematical calculations. This concept suggests that consumers make the decision based on personal situations and that price is controlled by consumers instead of the cost of productions.
What are the risks for the macroeconomics if a bank fails, that does not exist for other businesses? If a bank fails it could drag several institutions with them. This is called systematic risk; in simple terms, by failing the banks could drag with them several other businesses who have direct relations with this institution. This domino effect will cause a chain reaction that affects different businesses directly involved with this bank and as a consequence, a shift on the economy will result. Another consequence of banks failing would be consumer trust, is proven that word of mouth could be very powerful. If rumors of a bank closing down are spread, then most customers will take action and withdraw their savings regardless of which bank they used. As a result, the economy will be affected and could create a recession where money is not flowing.
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Banks influence Macroeconomics directly as banks hold a very high percentage of any country’s GDP due to concentration, banks hold even 50 percent of the overall economy in some countries what makes one think; banks are really in charge of any countries economy due to the vicious cycle of debt pumping the economy to keep it balanced. If banks could participate in other lines of business, what benefits would there be for consumers? Banks provide several services to customers including, loans, credit cards, mortgages, and Investments like savings, among others.
In the case that banks will diversify their portfolio to include other services like insurance or real state; these will be very convenient for consumers. The reason behind this is that most people will have more access to financing with higher odds of loan approval and as a direct result, less time to close a deal on a mortgage. The buyer will also benefit from appraisals fees because the bank already knows the property value and could suggest the customer to skip the step altogether. Insurance policies could also become more affordable if banks were allowed to offer those. The reason is that right now insurance policies can be pricey. By getting into this market banks could compete with current giants like Liberty Mutual for example, by offering lower policies.
These benefit could directly increase the number of citizens with life insurance policies, especially Low and middle-income consumers. Also, this diversification of Banks could translate to bundle discounts for using one institution for all your needs, something that people look for in their financial institutions. From the bank perspective, more revenue will be created and several portfolios would be appealing to investors. Overall, discuss whether or not banks should be allowed to enter other lines of business. Provide support for a position from a course and/or outside materials. Banks should not be allowed to enter other business areas like insurance, there are many reasons to support this statement.
One reason is the conflict of interest, in reality, banks could force its customer to use the banks own services for mortgage and life insurance at the moment the customer applies for a mortgage. If the customer passes away, the bank insurance policy would have to disburse money to cover the family. By also holding a mortgage on this person’s name, the bank could use the money to pay off the mortgage instead of letting the beneficiary make the decision. If banks were allowed to sell the real state, the approvals for mortgage loans would be biased by the bank’s own interest.
The goal of selling these properties could make the banks qualify people that otherwise would not qualify for loans. These approvals will translate to a higher risk of the economic stability, the same way the recession of 2009 occurred. The Bank could also have their own appraisal service and ask the buyer to use it, which could make the transaction less transparent. Because of the special conditions bank has, the more transactions the bank makes will only be backed up by the 10 percent deposit required by the government, this means that a lot of money will be created to boost the economy but also as a direct result, a higher risk of recession for the country. There have been discussions regarding the diversification of banks, in November of 2017, a proposal to change the actual Glass-Steagall Act emerged, a regulation passed in 1933 which separates commercial banking from investment banking which purpose is mainly to rebuild customers trust.
According to the Federal Reserve History (2013), the creation of Federal Deposit Insurance Corporation which current limit of 250,000 dollars, was created to rebuild customers trust. This act controls commercial Banks from entering other areas like the Stock Market for example and divides banks into two different groups, commercial and investment (p.1), but no final decision has been made. Banks are very powerful and should be watched closely. This special conditions make banks one of the most economy boosters but also one of the economies biggest threat.
