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Banking 102

We have been brainwashed to believe banks exist to serve us. We have been mislead into thinking their purpose is to help us buy a house, or start a business, or pay for our college tuition.

Banks are in business to make money.

Banks make money by charging INTEREST on loans.

Let me reiterate: banks do not make money loaning out money. Their sole revenue stream is the INTEREST on those loans.

When AIG etc. chirp about lost profits, they are referring to LOST INTEREST. The principle of the loans matters very little. As I explained in my last post, it is not technically ‘their’ money anyway.

Banks do not care if you pay off principle. In fact, they would prefer that you DO NOT pay off principle. This is why certain loans have ‘pre-payment penalties’. Banks do not make money if you pay off principle. They ONLY make money by charging you interest.

This is why no one on Capitol Hill proposed the idea of giving those billions back to the populace in the form of debt relief. While this would’ve freed up untold millions of dollars for the consumer to spend (and overall would’ve been better for the economy), the lenders would’ve lost revenue.

That lost revenue is INTEREST, not priniple.

This is why the Big Bank Bailout (aka TARP) did not produce any more loans. These companies did not need the money to loan out (they don’t loan out ‘their’ money anyway); they needed it to replace their lost revenue.

It is revenue/interest that pays all those ungodly salaries and bonuses; not principle.

Congress was never concerned with easing the consumer’s debt burden, or slowing foreclosures. Signing TARP was only meant to shore up the lenders’ lost revenue.

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