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Banking In America

Banking In America
Austin Dunn
University of Kentucky

Comment [KW1]: Hi Austin. Make sure you

check APA format for your running head label and
for your font. Check out the example paper I posted
in Blackboard.

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Banking In America

Abstract
Im a fFinance mMajor at the University of Kentucky. I was interested to learn and discuss the

Comment [KW2]: These arent proper nouns

(formal titles), so they wouldnt be capitalized.

industry that I would like to be in after college, so. I asked a few of my relatives about where to

Comment [KW3]: I just suggest this to vary your

sentence structure.

find information about banking in America. My dad recommended a book called How an

Formatted: Font: Italic

Economy Grows and Crashes. This book informed me about some of the follies of modern day
banking. I also received two testimonials about what banking is like in the real world. The
culture of banking as a whole has changed in recent years according to most professionals. I will
be discussing the current banking climate and history that led up to the present. The opinions
provided below are shared by most economists in America.

Comment [KW4]: Can you work on the

transitions in these sentences here? Vary your
sentence structure to smooth out your work.
Comment [KW5]: Overall, this is a well-written
abstract. Kudos.

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Banking In America

Title of Your Paper Here

Formatted: Centered

The industry of banking in the United .States. has always been misused and
misunderstood by the general population of the country. When something goes wrong in our
economy, there is one group that always gets penalized and attacked. When you delve into the

Comment [KW6]: Avoid you in formal papers/

actual cause of the current economic crises, youll see that modern banking is the product of
Comment [KW7]: You could add more meat
to this intro, which mean you could add more
sentences that give more detail.

misconduct across the board.

Capitalism In America
This country was founded upon the belief in capitalism. Most of the amendments in the
constitution were solely based on protecting the principle of capitalism. Capitalism is a system
that gives the government only a few responsibilities: (a) Private Property Rights, (b) Marketbased incentives for the individual (money, safety, etc.), (c) Prices are allowed to fluctuate
freely based on supply and demand, and (d) A broadly obeyed legal system with a climate of

More importantly, make absolutely certain you add

a thesis that summarizes your paper. If you had one
sentence to explain to someone what your paper is
about, what would you say? Take a look at your
heading level titles to help you.
Comment [KW8]: I like the color, but you would
just use a heading level 1 format, like Ive done
here.
Additionally, watch your spacing between your
paragraphs and between your headings. Everything
should be double-spaced.
Formatted: Font: (Default) Times New Roman,
12 pt, Bold
Formatted: Font: (Default) Times New Roman,
12 pt, Font color: Auto

fairness. Simply put, this economic system is based on competition. This system worked very

Comment [KW9]: Dont capitalize things that

arent proper nouns and dont start sentences.

well for banking in the United .States. from its inception until a few relatively recent events

Comment [KW10]: Avoid etc. in formal

papers
Formatted: Highlight

occurred.

Formatted: Highlight

Government Regulation
The government of the United States began as a small part of the way economics and

Comment [KW11]: Such as what? As a reader, I

feel like youre glossing over a lot that you could
expand on in this section. For instance, consider
talking more about governmental responsibilities.
Right now, you have it all in a short list, but you
could expand on each of those points. Does that
make sense?

banking works in the United States. Today, the government is involved in every pursuit of the
banking industry. The explanation of how this came to be and how it affects our economy is
staggering.

Comment [KW12]: This is a bit choppy at the

moment. Could you expand on this, or can you add
these basic ideas to the next paragraph?

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Banking In America

There was a huge financial crisis known as the Banking Panic of 1907 ([K. Gill,
n.d.2014)].This panic was initiated by the lack of confidence in the investment system. Simply
put, investors in the stock market did not feel that the risk of investing was worth the reward.

Comment [KW13]: Unless its a personal

communication reference, you wouldnt have the
first initial here. Also, your reference list says this
source has no date, so Im confused why you list
2014 here.

Banks began to suffer because of the lack of trading. The only way banks can make money is by

Otherwise, you cited in the right spot.

trading properties (assets, bonds, futures, loans, etc.) for the money that their customers give

Formatted: Highlight

to them. If banks arent making profits, theyre less likely to give money to people like me or
you. So, there was a general lack of money all across the country in 1907. Historically, the

Comment [KW14]: Avoid you in formal

work.

United .States. makes major changes of the status quo during times of panic and disaster. The

Comment [KW15]: Can you work on this

transition?

next step changed the way the banks functioned in America forever.
Instead of allowing banks to fail, the Federal Reserve was created in 1913 by the U.S.
government. The Federal Reserve, also known as the FED, is a central bank that regulates
privately operated banks. There are a few tools that the FED uses to do so: (a) Increasing or
decreasing the amount of money in the market [e.g. when the treasury prints a considerable
amount of dollars bills, the value of the dollar goes down] (b) The FED forces all banks to keep
ten percent of their money at a local federal reserve bank. This ensures there will be enough
money for customers of the bank to make withdrawals on a daily basis.
This example of regulation seems to protect the people against banks. But, in fact, it
does the opposite. Beginning in the late nineties, the Federal Reserve began an unprecedented
monetary policy which made interest rates and qualifications for getting a home loan extremely
low. People who could not afford a house were getting loans because banks were encouraged

Comment [KW16]: Im going to stop here to be

fair to other students, but do let me know if you
have questions.

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Banking In America

to do so by the FED. In some cases, these people were buying two or three homes because the
monthly payments were so low.
After a few years a problem arose. New houses were getting built to meet the demand
for all the new home buyers. After the houses were built, people moved in and began their
monthly payments to the banks. The banks started to realize that the guidelines set in place
would not be feasible to make a profit. Unlike most loans, a majority of these loans were
variable loans. Variable loans can increase or decrease monthly based on what the bank wants
to charge. There is usually a restricted range on these loans. Most of the unqualified
homebuyers began paying the bare minimum payment. After a while, the banks raised the
amount due per month sharply. Consequently, this group of homeowners began to default on
their loans. The banks repossessed the real estate with no probable way of selling the
properties to make up for their losses. There were so many new houses being built that the
value of real estate went down [personal communication, December 15, 2013]. So as you can
see from this brief explanation, the FED cannot make reliable decisions about finance because it
is almost impossible to speculate on an economy of this scale and variation.
Another key problem with the FED is mentioned in How an Economy Grows and
Crashes, The Feds decisions are always determined by political, rather than economic,
considerations. As low rates tend to make the economy appear better on the surface, push
down the cost of servicing mortgages and other loans and help financial firms make money,
there are a great many people who want lower rates. Presidents seeking reelection will always
bang the drum for lower rates, and they will pressure the FED to help out. On their part, FED

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Banking In America

policy makers naturally want to be seen as the good guys who help the economy, not the tightfisted Scrooges who push it into depression. *A. Schiff & P. Schiff, 2014+
The two ideas mentioned above show how artificially changing the basic measurements
of the economy can be horrendous. It seems that banks are no longer private businesses whose
main goal is to make money. Without this incentive, customers of the banks will not receive
premium service.
As you may know banks who are protected by the FDIC can insure your money up to
two-hundred fifty thousand dollars through the government[Federal Deposit Insurance
Corporation,2014]. So if by the off chance it is stolen or the bank folds, you will receive up to
the aforementioned amount. Does this make banks safer in reality? The answer is no. Imagine if
there were no laws in place to protect consumers of banks like the FDIC insurance policy.
Would people not place their money in banks out of fear of it being taken from them? Once
again, no. Banks would actually become a safer place to put your money. Lets remember that
banks do not deposit your money into a safe and call it quits. They lend your money to people
who can make the bank money. After all, banks would not exist if there was no profit motive.
Another assumption can be made about how banks will act when the FDIC insurance
policy is in place. Banks can risk lending to unqualified candidates because they lack incentive to
not to do so. If the banks do fail and lose their customers money, they are not affected,
perversely. There is no other industry with such a convoluted way of providing a service.
Financial institutions should cringe at the idea of losing peoples money. Banks should fear that
if they do not do a good job with their customers money, they will no longer receive business.

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Banking In America

But as you can see, this is no longer the case. Large banking corporations and investment firms
have become irresponsible.
The government trillion-dollar bailout program has been a hot topic of debate in recent
years. As you can see in Figure 1, a majority of this trillion-dollar plan was awarded to financial
institutions. The companies were awarded this for poor performance. All of these companies
would have simply become nonexistent if not for this bailout plan. But, since these companies
are investing with the people of Americas money, the government decided to intervene to
prevent a huge loss. This goes against the capitalist principle that America was founded upon. If
a company cannot be profitable, it should not exist. As shown below, this is not small sums of
cash that has been awarded to these companies. These companies are receiving millions upon
millions of tax-payer aid.

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Banking In America

Figure 1: Top recipients of bail out money Bailouts to Banks by B. Ritholtz, November 6th, 2008, Big Picture. Retrieved from
http://www.ritholtz.com/blog/2008/11/bailouts-to-banks/

The bailout all began when a company named Goldman Sachs became highly publicized
in the public eye by the news and government officials for mal practice[A. Schiff & P. Schiff].The
leading officials of the company were not responsible and the company was simply going into
bankruptcy. The companys main source of income was real estate loan interest. This company
was a product of the Federal Reserves monetary policy discussed earlier in the paper. This
company was no longer profitable so it should have failed. It may have been a difficult time for
loan holders and investors, but without the presence of profits, a company cannot exist. Most

Comment [KW17]: Good.

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Banking In America

likely, the company wouldve reformed after bankruptcy and start their business again with
better practices. But, when the bailouts became a reality, poorly ran companies grabbed the
money and still continue to grow. As they grow through this artificial profit they receive, their
importance increases. Until, once again, they begin to fail. Then the government will react to
the crises as it has done in the past. Every time these companies will need even more assistance
than before. This cycle is continuous. The longer it survives the more people it will affect.

What Should Banking Be Like?

Many of my family members work at local banks. All of them say they have the best jobs in the
world. Im from a relatively small town called Georgetown that is in Kentucky. The bankers in my family
are not stereotypical bankers. For example, my great uncle George Parker is the vice president of
Whitaker Bank for all the locations in Scott County. His account of how he got hired is astounding.
Well, it was just an accident, back in 1973 I went at that time to Whitaker bank to talk to
someone about possibly inquiring about buying a house, and we talked for a long period in time and
actually about an hour and a half later he offered me a job and I still didn't know if I was going to take it
or not. So, I went home over the weekend and talked it over with my wife and decided that at the time
things weren't going the way I wanted to where I was working at so I just tried it out and see in 1973,
now it's 2014(he grins).[personal communication, October 7, 2014]
George and his chain of banks are extremely successful. The key to their success is being the
community-oriented bank in the area. This bank has supported agriculture and real estate in Scott
County for over one hundred years. Unlike the financial institutes that took bailouts, this banking
company works for its customers. For example, a local farmer inquired about receiving a loan from the
bank. George only asks one question when a local farmer asks for a loan. It is, When can I come see

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Banking In America
what youre doing? He goes on location and looks at the product the farmers are selling. My great
uncle is a perfect fit for this job. He worked on my great grandfathers farm for over twenty years. This
skill of knowing the actual business he loans money to is extremely helpful. It also makes the bank
profitable, which is a responsibility that he should have.
Through hard work, he has helped Georgetown become what it is today. Georgetown was once
a small town. Now, after a company named Toyota relocated here, the town is remarkably larger. Over
ten thousand new jobs were created locally. This surge of bank customers made Whitaker Bank one of
the most profitable chains in Kentucky. During the early two thousands, the bank restructured because
more and more of their business was real estate based. George recounts the change during our
interview.
Okay, let's go back in time, back in the 70's and 80's, this is an agricultural bank mostly. But
when Toyota came to Georgetown it switched over to commercial, and now it's commercial and
homeowners, we don't do a lot of cars now because car dealerships are financing for 0 percent and we
can't compete with 0 percent, because we have to make money off of something. So now it went from
agricultural to commercial bank and that's what we do. Through the years we've changed it, through the
years with times changing. Like all banks have to, or everybody has to change to sooner or later over a
40 year period.
I tell this story to share this idea with you. Banks should be the most personable, respectable
companies that you come in contact with on a daily basis. These are the people that you trust with your
money. Right now, its difficult to tell which banks to trust. This is mostly caused by the lack of
competition between banks on account of regulations. The people that go to Whitaker Bank know and
trust my great uncle to make the right decision on their behalf. Local banks like Whitaker Bank are what
finance should be about, helping people. All of the regulation above hurts small banks who did not do

Comment [KW18]: Check how to cite and

format block quotations.

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Banking In America
anything wrong. During the interview I had with George he pulled out a stack of papers for a home loan
that was at least four inches thick. The thud it made when he dropped the stack onto his desk was a
testament to how banking has changed.
I hope this paper shows how banking should not be the focus of the current economic problem.
Modern day banking is a result of the government making poor decisions about how to manage banks
and the economy of the United States. People like George are examples of how this industry should be
run.

References
Gill, K. (n.d.). The History of US Government Financial Bailouts. Retrieved October 15,
2014. http://uspolitics.about.com/od/economy/ig/Financial-Bailouts---A-History/Panic-of1907.html
K. Howard(2014) (personal communication, December 15, 2013)

Comment [KW19]: Dont put personal

communication citations in your references.

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Banking In America

emphasized the role of finance in major economic downturns

Schiff, P., & Schiff, A. (2014). Infrastructure and Trade. In How an Economy Grows and
Crashes (Collector's ed., Vol. 2, pp. 78-79 & 149-153). WIley.
Federal Deposit Insurance Corporation. (n.d.). Retrieved October 19, 2014.
https://www.fdic.gov/
Ritholz B.. Bailouts to Banks[November 6th, 2008].
[Table]Retrieved from http://www.ritholtz.com/blog/2008/11/bailouts-to-banks/
G. Parker(2014)(personal communication, October 7,2014)
Discussed his forty years of experience working in the banking industry