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Do Borrowers Need Banks?

AMA9-30-14Banks are an essential part of the financial landscape – or at least, they’d like you to think so. But are they? New banking alternatives may be making the traditional bank loan a thing of the past.

The traditional banking model has been around for centuries, supersized to today’s massive institutions like Bank of America, Citi and J P Morgan Chase – the ones deemed “too big to fail even when caught red handed in some shady and downright illegal activity in the wake of the financial crisis of a few years ago.

The nation’s big banks were largely responsible for that crisis. Riding the expanding housing bubble, they underwrote massive numbers of highly risky loans that allowed unqualified borrowers to buy houses. But when those loans ballooned and the housing bubble burst, those unprepared borrowers were left with mortgages they couldn’t pay and houses lost to foreclosure.

As the dust settled, details emerged about widespread abuses on the part of those big lenders, including the infamous ”robosigning” scandal that had banks using fake signatures to block process foreclosure paperwork – often on houses that weren’t up for foreclosure in the first place. Add in a seemingly never ending string of Justice Department investigations and lawsuits – some civil, some federal – against Bank of America and others, and legislation demanding better accountability and trust in the nation’s lending system fell to an all time low.

That heightened oversight also meant new hurdles for borrowers. Lending standards tightened as banks tried to avoid penalties for writing bad loans. And interest rates and other fees made transactions more costly for many individual and small business borrowers. Even smaller banks felt the pinch, struggling under a new burden of regulations and oversight triggered by the sins of the big institutions.

Most of us have been trained from childhood to see banks as friendly depositories for our cherished savings, but the real business of banks — how they make money – is in making loans. And big loans to corporations and international entities make the most money of all. Even in the best lending atmosphere, smaller borrowers may be left out in the cold, with more limited borrowing opportunities and higher rates – if they’re served at all.

Enter a host of new alternatives such as monetary exchanges, peer-to-peer lending groups and crowdfunding sites. All these entities share one key feature: they offer a neutral ground for two interested parties to meet and conduct business. Borrowers can find lenders, sellers can find buyers, and individuals can join groups to spread the risk.

Digital currency exchanges may be the best publicized of the new banking alternatives. A whole culture sprang up around virtually anonymous digital currencies such as the Bitcoin and similar monies like the Litecoin, which could be used in any transaction that two parties agreed on. Exchanges provide an interface between the world of digital currency and that of “real” money, offering users a way to convert from one kind of currency to another, buy digital coin and conduct transactions without much of a trace. Much beloved by users in parts of the world that lack stable currencies of their own, the Bitcoin and others like it have survived a few dings to the image from links to online drug trafficking sites like Silk Road to achieve a relatively stable status as a legitimate kind of currency.

Peer to peer lending groups, made easy by the Internet, take the spirit of social media to the investing world. Entities like Lending Club cater to those small businesses and individuals who find it tough to get loans from established banks. These new lending alternatives position themselves as lending marketplaces, where people looking for investment opportunities and those needing funding come together. Like an online dating site, once the two parties meet up, they’re on their own. And while the sites advise participants to exercise due diligence, they don’t monitor the transactions once the parties agree to conduct business.

Crowdfunding takes the process a step farther. Sites like EquityNet, Crowdfunder, IndieGoGo and even Kickstarter let individuals and enterprises get projects that need funding in front of potential investors and supporters. There are no fees involved, and the project creators are free to set any terms they wish. Transactions are one time only and don’t ‘involve much by way of traditional lender paperwork. When the bank says no, these options give startups and new entrepreneurs a foothold for launching enterprises of all kinds, from buying real estate to creating a boutique baby shop.

Advocates of the new lending and money exchange models say they return the power to the people, bypassing lender fees and restrictions to allow two parties to agree on their own. They stimulate economies too, by helping launch startups and encouraging investment. And by focusing on doing one job and doing it well, they avoid much of the fraud and manipulation that came to light with traditional banks.

The downside, say critics, lies in the most prized aspects of peer-to-peer transactions. Though they’re completely independent of the banking system, they also lack the safeguards around traditional lending. Both parties are largely on their own if the deal goes bad. And the anonymity promised by Bitcoin exchanges and other sites means it can be hard to track illegal transactions and fraud.

Concerns aside, peer to peer financial exchanges are here to stay – and growing. Reflecting both a mistrust of the old ways and an eye to the future, peer-to-peer platforms may not put banks out of business – but for some borrowers, they’ll give those institutions a run for their money.  (Top image: Flickr/KevFoster)

Cohen, William. “Bypassing the Bankers.” The Atlantic Business. Atlantic.com 13 Aug 2014.

Read more from The American Monetary Association:

The Fed’s Stimulus Strategy: Silencing Skeptics?

Money Talks – But What Does It Say?

The American Monetary Association Team




The Fed’s Stimulus Strategy: Silencing Skeptics?

AMA9-16-14In the end, did hard easing work?

That contradictory term for Qualitative Easing version 3, the Federal Reserve’s controversial and much disputed stimulus plan, has been in the news and on the minds of economists and financial advisers since it was conceived in 2012 as the latest attempt to boost the nation’s economic recovery.

From the beginning, the plan to force interest rates to historically low levels faced harsh criticism from experts worried that it might do far more harm than good. But several months into the slow ‘tapering’ of the stimulus, the sky hasn’t fallen, interest rates haven’t skyrocketed, and the dollar has surged back stronger than ever. That’s news to silence the skeptics, but does it indicate a rosy future?

What’s Qualitative Easing?

QE3 is the third incarnation of “easing,” an unconventional strategy to jump start the economy by buying up securities and bonds in an effort to keep interest rates low. Banks that sold those securities to the government wouldn’t have to raise interest rates to consumers, who could then get more loans to buy more things, such as houses and cars.

Or so the theory went. This kind of strategy was first fielded back in 2009,the year after the famed bursting of the housing bubble and the historic collapse that saw millions of people losing their home to foreclosure and banks caught red handed in a variety of financial scams and schemes.

The nation’s consumer economy was in ruins. The banks held trillions of dollars in bonds and securities backed by mortgages – many of them held on foreclosed properties. Quantitative Easing version 1 was put into place in 2009, tapered lightly later that year and then rebooted as QE version 2 in 2011.

QE3, the current version, hit the scene in 2013 with the ambitious goal of buying up $85 billion worth of bonds and securities every month until further notice. When would the Fed “taper,” or wind down the plan? No one was exactly sure. It all depended on the health of economic indicators such as job growth and housing starts.

QE3 Under Fire

The very scope of the plan raised concerns. Criticism came from without and within, as the chairs of regional Federal Reserve banks expressed doubts that the stimulus would be sustainable.

Others worried that artificially holding interest rates to historically low levels thanks to the bond buyup would mean a drastic rebound once the stimulus was withdrawn. Rates would suddenly shoot up, they fretted. That could shut off the credit pipeline to millions of borrowers, casting a chill over the still recovering housing market and slowing the purchase of other kinds of high-end consumer goods. And that might depress the job market even further.

Other kinds of worries surfaced, too. Some analysts claimed that the plan, which was supposed to help average Americans get loans, actually did just the opposite, enriching banks, which happily took government money but never passed on those benefits to their customers.

International money market observers were also concerned. Thanks to the effects of the economic collapse, the dollar had suffered a bumpy ride in the global currency world, with cycles of slumping and then rallying briefly against other currencies such as the euro, pound sterling and yen. The plan also affected international interest rate calculators such as LIBOR, with ripples in markets halfway around the world.

Although critics had to grudgingly admit that the lower interest rates were helping to boost housing and help breathe new life into other areas of the economy, they weren’t convinced that the recovery would hold up once the Fed decided to really ease back on the throttle.

That didn’t happen until the early summer of 2014, when after months of debate and equivocation, the Federal Reserve under its new chair Janet Yellen opted to start a cautious tapering down, pruning a mere $10 billion off the monthly stimulus tab in response to better job numbers and more housing activity.

The financial world watched with bated breath. Critics waited to be vindicated.

But not much happened. Interest rates have begun a slow creep upward, pushed by market forces now that the Fed’s artificial manipulation is slowly being withdrawn. There’s been a slowdown in mortgage applications, but industry analysts blame tighter regulations ad stricter lender accountability for that as well.

Perhaps the biggest challenge to the plans’ naysayers comes from the performance of the dollar. Amid dire warnings that the stimulus could destroy he dollar and drive inflation to recorded levels, the greenback has surged in world money markets, posting its best performance in over a year.

What Investors Need to Know

The economy still isn’t in perfect health. And the Fed has the option of stopping –or revering – its taper-down if conditions worsen again. Interest rates can still raise more –and the housing market struggles with a 19 year low in homeownership. But as the dollar outpaces the currencies of countries that have taken a more conservative approach to managing their economic crises, even critics of “hard easing” are admitting that maybe the Fed was right after all.  (Featured image:Flickr/eguidetravel)


Roesler, Matthew. “A Complete History of Quantitaive Easing in One Chart.” Business Insider. businessinsider.com. 25 Jan 2014.

Weisenthal, Joe. “We Might Be Witnessing the Final Humiliation of the Fed Haters.” Business Insider. businesinsider.com 16 Sept 2014

Read more from The American Monetary Association:

International Conflict Hits Americans in the Wallet

America’s Forum With J D Hayworth

The American Monetary Association Team



International Conflict Hits Americans In the Wallet

International conflict hits local walletsIt’s a small, small world, as the old song goes. And that’s increasingly obvious as events across the globe have the power to hit Americans hard at home. In a world that’s ever more connected, global conflicts can quickly become local ones, with consequences for the US dollar, energy reserves and consumer goods, and the economy as a whole.

The ongoing Russia-Ukraine crisis offers a real time example. Many Americans would be hard-pressed to locate this former Soviet republic on a map, let alone pronounce the names of its cities and leaders. But as sabers rattle, discourse heats up and the world ponders what to do, events on the economic front are rippling quietly through the countries of Europe and across the oceans.

At the heart of the battle is conflict over Ukraine’s unpopular leaders to pursue closer ties with Russia and abandon a pact with the European Union, which many Ukrainian nationalists hoped to see.

Rhetoric gave way to violence, with Russia trying to assert some of its age-old aspirations for dominance over the region. One key reason; Ukraine’s rich reserves of oil and gas, and the area’s agricultural productivity, which helps feed not just Russia, but also Europe and the rest of the world.

Energy and Agriculture

Though Russia dominated the news about the conflict, it’s not the only country with significant interests in Ukraine. The country hosts several major oil and gas pipelines that feed resources to Europe and the energy markets of the rest of the world. That could mean significantly higher prices for gas and oil in an energy-starved global community.

And while Ukraine’s status as the “breadbasket of Europe” accounts for about 20% of Russia’s agricultural imports, numerous other global powers including China, the US and Canada have a substantial interest in Ukrainian products. And disruption in agricultural production and exporting from Ukraine could mean higher prices and shortfalls of some products not just in neighboring countries, but anywhere Ukrainian products are sold or used for the manufacturing of food and other goods.

Business and Investing

Travel and tourism also take a hit during conflicts – and Ukraine’s pretty Black Sea beaches and picturesque landmarks won’t see many foreign tourists for some time. That affects not just the country’s own economy but also the travel industry as a whole, forced to readjust plans and prices to accommodate the risky political situation.

Foreign investments in real estate and other local assets can also be affected by a country’s political and economic turmoil. Foreigners with money to spend look for stability and reliability in their assets. And a shifting political and economic climate that could turn violent at any time makes investors leery of starting or continuing investments in local land and business.

Loopholes in US tax laws allow companies to practice “tax inversion” – a practice of moving operations to another country with lower costs and lower wage workforce in order to avoid US corporate taxes. The practice allows American corporations to take advantage of a country’s troubled economy buy partnering with a local business, which offers a way to move all operations offshore.

But serious instability in that region could compromise the US side of such a merger. And even though those companies don’t pay American corporate taxes on their earnings overseas, their US connections and subsidiaries do, in a domino effect that affects shareholders, workers and consumers at home as well as abroad.

Currencies and Debt

As political conflicts veer toward violence, a nation’s currency may take a tumble in world markets, losing value due to the instability. Financial experts expect the Russian ruble to take a dive in the face of world outrage and the specter of sanctions. But once a major currency falls, others scramble to regain footing, with repercussions for the values of major monies such as the US and Canadian dollars, the euro and the Chinese Yuan.

The threat of armed conflict isn’t the only reason a country’s currency and contributions to the world markets go on the rocks. Mismanagement and corruption, or forced regime changes in an area or country can also ripple out to touch Americans where they live-in the wallet. A poor economic outlook in one area can touch us thousands of miles a way – sometimes in odd ways

Currency problems, the availability of essential resources and the iffy nature of investing in unstable countries can all affect what we do with our money every day. The crisis in Ukraine offers just one example of how interconnected the world really is. It doesn’t take bombs and warplanes to force changes that affect people on the other side of the globe – sometimes; the merest fluttering of butterfly’s wing will do the trick.  (Top image: Flickr/jayalaharam)

Read more from The American Monetary Association:

FICO Score Changes: A Boost For Risky Borrowers?

Money Talks — But What Does It Say?

The American Monetary Association Team


FICO Score Changes: A Boost For Risky Borrowers?

FICO Changes Boost Scores for Risky BorrowersFair Isaac is changing his game. And that has some financial experts worried.

The nation’s premier credit scoring agency, the Fair Isaac Company, has come to an agreement with the Consumer Financial Protection Bureau to change the way credit scores are calculated. It’s a move that could boost lower end scores by 25 points or more by ignoring certain kinds of bad debt.

And that, financial experts fear, could create a landslide of bad debt, as risky borrowers are suddenly able to qualify for loans they can’t actually pay off. That scenario raises the specter of another economic collapse like the one that hit the housing industry back in 2008.

Why the Changes?

The housing crisis of ’08 put the spotlight on a bevy of bad practices on the part of both lenders and borrowers. As the housing bubble began to expand, banks made home loans available to just about anybody who asked. Adjustable Rate Mortgages made initial payments low and easy – and many borrowers didn’t understand that that could change dramatically in a few months or years.

Then the crash happened. Homeowners fell behind when those balloon payments came due. Houses everywhere fell into foreclosure. And the nation’s big banks were caught in a variety of fraudulent practices, including faking foreclosure paperwork and lying to customers.

All that led to the implementation of some wide-ranging legislation to try to keep it from every happening again. The Dodo Frank Act took effect in 2010 – an attempt to protect consumers by imposing tighter lending standards and penalizing banks that chose to keep writing loans that fell outside the provisions of the new Qualified Mortgage Rule.

But those standards locked many borrowers with lower credit scores and trouble meeting down payment requirements out of the process. The result? Far fewer loans for major purchases such as home buying – and that raised worries about the future of the economic recovery.

Enter the Consumer Financial Protection Bureau. Created under the provisions of the Dodd Frank Act, the CFPB’s job was to do exactly as its name says – to protect people from bad and misleading financial practices and to help borrowers in trouble.

Now, in a move that ironically reverses tenets of the Dodd Frank Act that created it, the CFPB is asking FICO to loosen its standards to allow more people with blights on their credit report to qualify for mortgages and other kinds of loans. It’s a move that, the government hopes, will jump-start the sluggish housing market and the economy as a whole.

FICO’s New Moves

FICO scores set the standard for most borrowing the US. According to a recent Huffington Post article on the CFPB’s actions, over 90 percnet of all loans in the country are based on FICO scores. Those scores help lenders set interest rates and determine their own level of risk. They’re also used by employers as part of the hiring process.

Fair Isaac is not a government entity – but in this case it’s changing major parts of its credit scoring process to address the CFPB’s concerns. Those involve:

Bad debt discharged through collections. If a borrower clears an unpaid debt through an arrangement with a collection agency, that debt won’t be a factor in calculating the FICO score.

Medical debt. It’s well known that medical debt, especially hospital related debt, is one of the leading causes of bankruptcy in the US. Under the proposed FICO changes, medical debt would have less impact on credit scores. And if it’s the only debt a person has, their score might jump 25 points or more.

People with skimpy credit history. It’s always been true that the less debt you have, the more of a credit risk you are. Now, FICO is implementing new ways to calculate creditworthiness for people with little credit history, so that they can end up with a higher score.

Who’s Affected?

The changes to FICO’s scoring system are intended to directly affect those who have been denied credit in recent years because their scores fall below the cutoff point for what lenders have determined to be safe lending.

That should open doors for these marginal borrowers to qualify for loans to buy homes and other big purchases, which in turn would jumpstart the economy. Advocates of the changes, which include consumer advocates as well as financial professionals, praise the move as a way to encourage more participation in the economy and help people build stability and security.

But critics of the move argue that the change in scoring is nothing but a numbers game. The higher scores borrowers would have under the new system don’t actually reflect an improvement in their ability to repay a loan – and ignoring bad debt cleared through collections won’t make the borrower’s behavior improve next time around.

That, they say, could create a backlash that forces lenders to tighten standards even more, or raise interest rates. Another housing crisis could hit as risky borrowers default again, with conseque3nces for the economy as a whole.

The changes to FICO”s scoring system won’t take effect until this fall, so it’s too early to tell which scenario will play out. But the CFPB’s plan to change the borrowing landscape has the potential to affect borrowers everywhere – even if their own credit is sterling.   (Featured image: Flickr/JanetRath)


Frankle, Neal. “How Upcomng FICO Credit Score Changes Might Rock the Economy.” The Huffington Post. Huffpost Business. huffingtonpost.com. 26 Aug 2014

Read more from The American Monetary Association:

Money Talks — But What Does It Say?

America’s Forum with J. D. Hayworth

The American Monetary Association Team

The American Monetary Associaiton



Money Talks — But What Does It Say?

Money Talks But What Does It Say?What does your money say? Of course, most of the time, we’re more concerned with what money can buy – and what various institutions like the Federal Reserve and the megabanks are doing with it. But a country’s history, culture and values are written on the coins and bills it keeps in circulation. Case in point: the lowly US dollar bill, which contains in its often-misunderstood symbols and slogans the dreams and aspirations of its founders.

The images and words that appear on paper and metal money aren’t static. They change over time to accommodate new circumstances – and political conditions. US currency alone has undergone several permutations as a result of the country’s changing configurations and events like the Civil War. And in other parts of the world, new money commemorates changing regimes and leaders.

Money Talks In Symbols and Slogans

Because money acts as a kind of shorthand for what the issuing country stands for, every image and word printed or stamped on stands as a symbol with layers of deeper meanings behind it. And as those meanings become hazy with time, the symbols themselves can take on entirely new meanings their creators never intended.

Most officially circulated currency carries at least the image of a prominent individual, a motto or slogan, and a symbol representing what the country stands for. Beyond that, money can carry a variety of images and slogans.

Take the dollar, for example. The greenback and its cousins the bigger denominations are recognized around the world. Everybody knows who’s on the bill – George Washington  – but what done the other parts of the dollar represent?

Seals, Symbols and Portraits

Franklin wasn’t always on the bill, though. Back in the 1860s, the face on the dollar bill was actually that of Salmon P. Chase, the Secretary of the Treasury. And at that time there were actually several currencies in circulation as the Confederacy printed its own money and Texas declared itself a Republic with its own money too.

Those things aside, though, the key elements of American money haven’t changed too much since their creation not long after the country was born. And those mysterious symbols that raise the specter of black magic and Satanism were the brainchild of a designer inspired by the poetry of Virgil and the history of Egypt.

The face of the dollar, like other denominations, has a Treasury Seal. It consists of a scale, representing balance, a chevron with 13 stars for the 13 original colonies and a key symbolizing official authority. Until 10996 each banknote carried a Federal Reserve Bank designator that indicated where it was produced. Now, only the dollar and $2 bills carry this unique designator, a letter that proclaims the bill’s origin. Larger denominations simply carry the general Federal Reserve System Seal.

The Great Seal: Eagle and Pyramid

The dollar bill and others also carry the Great Seal of the United States – complex creation consisting o an eagle and an unfinished pyramid.

The eagle’s meaning is pretty clear – but even at that, its symbolism has stirred some controversy. The Eagle of course represents freedom and independence, soaring high and strong. There’s a shield on its chest, covered with the red, white and blue stripes and stars we’re familiar with: thirteen stars for the original colonies and blue for justice, white for purity and red for valor.

This eagle bears thirteen arrows in its left talon, representing war, and an olive branch in the right representing peace. But it’s the other part of the seal, with its mysterious eye atop a pyramid, that fuels speculation of darker meanings.

What does an unfinished pyramid with an all seeing eye on top say about the country? This symbol on the Seal, along with its inscription, “Novis Ordo Seclorum,” – “New World Order” — has fueled speculation about Masonic influences, alchemy and even Satanic references. But according to Charles Thompson, who designed the Seal in 1782, the truth is more mundane.

The pyramid, deliberately left undone, was meant to symbolize strength and duration. While that may call for a stretch of the imagination, the all seeing eye, said to represent watchful Providence, is clearer. And the inscription, inspired by Virgil, was meant to indicate that the birth of the country introduced a new direction into the world – not world domination.

The dollar and its relatives in the higher denominations have been redesigned and refurbished from time to time. Colors have changed slightly and the relative prominence of various elements has shifted. The symbols and messages on the greenback may have been misunderstood and even maligned, and its fortunes go up and down in the world’s money markets. But still it bears on its printed face keys to the early days of the country – and the vision its founders had for the future.  (Featured Image:Flickr/imagesofmoney)

Read more from The American Monetary Association:

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