Can We Fix the Unable Banking Marketing?

Why are the banks unstable?

In the traditional view, the role of banks was simply to accept money in form of savings and make loans to individual persons and companies. In addition, banks also participate in distributing securities, trading and borrowing of money. However, the traditional system was far from perfect.   There are two main reasons why banks are unstable and fail, mainly, macroeconomic shock and adverse macro economic shock.  Macroeconomic shock is when there is a change in the economy that affects its performance, in particular events, such as inflation, consumption and unemployment ¹.

These events  caused  the banks  to take greater risk, by giving out more riskier loans then usual. adverse macro economic shock is when banks demand repayment of loans. Many unable to repay their loans begin to default, thereby forcing the banks to reduce the amount of lending, the economic worsens, in turn bank debt rises and leads the bank to insolvency.

Is there a solution ?

Unstable and failing banks are not uncommon in times of economic problems, the first financial panic happened in 1819 , followed by the great crash of 2008, and now, we have the issues with pandemic and wars that have once again caused many banks to fail or become unstable . What is the solution?  how can we create a banking system that does not rely on the ups and downs of the economic and world events.  Well,  we need to create a new form of borrowing money that is not risky for the bank nor the lendee., namely the gold standard solution.

What is the gold standard?

According to Investopedia, The gold standard is a monetary system where a country’s currency or paper money has a value directly linked to gold. Money backed by gold, countries agreed to convert paper money into a fixed amount of gold. A country that uses the gold standard sets a fixed price for gold and buys and sells gold at that price. That fixed price is used to determine the value of the currency. For example, if the U.S. sets the price of gold at $500 an ounce, the value of the dollar would be 1/500th of an ounce of gold.

Our  monetary system is based on debit. So, when the bank  borrows you money, you receive the benefit and the bank receives the debit of that money. Although, these days debit can be a profitable business for the banks, with the buying and selling of debt. Still, it does not solve the problem of unstable  bank systems and failures,  due to the influence of  economical conditions.

A change in our monetary system may provide a more stable banking system. The appeal of a gold backed dollar would essentially mean that , when a bank gives you a loan, you receive the benefit of that loan and the bank received  the value of money, that being the gold. In essence, the bank system would hold value from its borrowings. Therefore, avoiding devastating bankruptcies and bank bailouts. In turn, the gold standard would also be a way to eliminate at least in part the evils of inflation and deflation².

Mortgages should be a thing of the past.

The average person, today, does not want to be tied down to a 20 or 30 year mortgage. They would prefer to save their money or invest their money to create wealth and then buying their home without the use of a bank loan.  This means that banks are forced to create new products that serves the needs of the newer generation. One such product could be Micro loans. As the name implies, these are loans for short term, such as from 3  months to 5 years. These  types of loans can have two main benefits;  firstly, the average person is likely to not default on them and secondly,  good and quick returns for the banks.