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The myth of free banking

The joke is part of American comedian Emo Phillips’ stand-up. It is a papraprosdokian, Greek for ‘beyond expectation’; an ostensibly innocuous build up guides us in, a sinister punchline swings out of a shadowy corner. Known in comedy circuits as the ‘garden path gag’ its a favourite amongst satirists, and it seems, bankers.

For a decade since the last decade in which the economy imploded, as consumers we have been encouraged down ill advised financial paths to unmanageable debt. Meanwhile, well-dined bodies in bespoke suits have been racing from London’s Square Mile and New York’s Wall Street in Porsches for second homes in the country. Now, as the global economic down turn tightens its grip millions of people are choking on the credit spoon fed to them by high street advisors, credit mustered out of thin air by the big stock market players enjoying massive profits by risking our security to satisfy their own greed. Individuals eager to safeguard their futures with home ownership are suffering if not repossession crippling debt as banks demand contractual obligations be met regardless. But as the recent trend towards state bail outs of private lenders, and their insurers, is demonstrating, financial institutions are exempt from the accountability they impose on the rest of us. The grim reality is galling; we now have no choice but to pay the poison sellers for their antidote.

Do As We Say Not As We Do

Banks and the transactions that pass through them penetrate too deeply into our lives for governments able to prevent their bankruptcy not to do so, if it comes to that. Even if we are not in debt they hold our savings; cheques and debit cards are worthless if the bank whose name they carry can’t guarantee a release of funds. With that level of immunity, and therefore power, must come the highest level of responsibility. But banks are private corporations, not elected governments held accountable by voters. Despite assurances during the boom years that our power as consumers to tart around from one interest free credit card to another, transferring our steadily increasing negative balances, would act as the best, and only necessary, watchdog of financial practices, it seems the total power invested in banks was corrupting them totally. And we have to pay for their excesses. Interest on what were sold as low rate loans and mortgages has rocketed as lenders try to fill holes they have created by over speculation from our pockets. Millions have been wiped off the value of pension funds joined by the prudent, and gambled by the reckless. Money we have given up to the government as tax to educate, heal, rehabilitate, and keep us during old age is being sucked into state sponsored rescue packages and nationalisation.

Lucky for us we still have free banking.

Back in 2005 some British customers rebelled against the banks’ practice of charging up to £40 a pop for unauthorised overdrafts, failed cheques or returned direct debits, and demanded reimbursement. To silence these initial trouble makers, the banks gave in. By spring 2006 the media had got hold of the story. The resulting publicity encouraged tens of thousands of account holders to write to their banks asking for money paid in exorbitant fees back. Faced with the prospect of laying out billions in reclaims, the industry threatened that if campaigners were to succeed in their attempts to claim back up to six years of past charges it would spell the end of ‘free banking’.

Around the same time a similar, longstanding insurgence against the all powerful banking cartels was rising to a head across the Atlantic, and American account holders were also told they had never had it so good. Fritz Elmendorf, VP of Communications for the not-for-profit Consumer Bankers Association, (a US trade organisation representing financial institutions offering retail lending and services like credit cards, mortgages, student and small business loans) said: ‘Banking was never free because [prior to deregulation] consumers were not getting a market rate on their savings and were paying a lot more for loans.’ Elmendorf was quoted in 2002, in a CNN Money article highlighting fees as a product of the increased competition faced by US banks after deregulation. Fees, argued advocates, represent a fairer banking model; those who cost the bank money through unauthorised borrowing pay penalties, while everyone else enjoys current accounts at no cost.

Stephen Rotella, President and Chief Operating Officer of Washington Mutual, the largest savings and loans association in the US, disagrees. Speaking to USA Today in March 2006 he warned: ‘A lot of banks are claiming to have free checking. What you’ve found is there are a lot of barriers and hooks for consumers.’ Barriers like minimum balance requirements and hooks like temporarily low interest rates on overdrafts or balance transfers to their credit card; enticements to buy now and worry later, when whatever you bought is costing you significantly more in repayments than the price paid by people able to pay outright that day in cash.

Watch Your Pockets

For UK customers at least, Rotella’s concern has since been upheld by the British judiciary. Far from being intrinsic to the fabric of fairer banking, in late April 2008 a British High Court judge confirmed that UK banks’ penalty charges are subject to the same fair practice rules as the rest of their products, services, terms and conditions. The banks have been given leave to appeal the decision. Currently the UK Office of Fair Trading is determining whether the fees are actually unfair.

Pre-emptive of an unfavourable decision, banks are now saying that if they can’t take money out of the pockets of those who exceed their agreed limits, often by as little as £5, via a series of hidden charges they will take money from all our pockets. The move seems designed to divide those in credit against those in debt (or who simply forgot to cancel a direct debit). What our financial institutions neglect to mention is that our global banking system is anything but free. And as usual the poorest pay the most.

There’s nothing funny about the current economic crisis, which is why we don’t let comedians make our financial decisions. Why then can bankers get away with telling us that we enjoy ‘free’ use of their services when the reality is that we pay them while we diligently look after their fabricated credit, and pay them even more when they piss our real money up a wall in the South of France? Bankers receive huge annual bonuses based on the number of deals they make, bonuses which are theirs to keep irrespective of how the market performs. And funding the extravagant lifestyles those bonuses afford are the family now living in at best in cramped temporary sheltered accommodation.

Crime And Punishment

‘Council War To Flush Out Benefit Cheats’. It is the front page splash of the Stratford and Newham Express, my local weekly. The article reports how a local man in his fifties has ‘received a suspended jail sentence for dishonestly obtaining nearly £14,500 in benefits.’ He must pay back the money, plus £350 in court costs. The man’s name and address are included next to his crime. Justice is done; taxpayers deserve to expect that while they support the welfare state through taxation, the system must not be abused for private gain. The Plaistow man got less than £15,000, which he has been ordered to return. When will we as taxpayers be reinbursed the £50 billion it cost to nationalise the mismanaged Northern Rock?

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Banking Crisis Timeline (source: BBC): http://news.bbc.co.uk/1/hi/business/7521250.stm

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‘Bank failures are caused by depositors who don’t deposit enough money to cover losses due to mismanagement.’

Dan Quayle, US 44th US Vice President under George Bush (1989-93). b.1947

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‘I hate banks. They do nothing positive for anybody except take care of themselves. They’re first in with their fees and first out when there’s trouble.‘

Earl Warren (US Republican Politician and Judge, 1891-1974)