Financial Flow & the Banking Business: They’ve Got you by the Heart Strings
Systems are at the core of efficiency. It’s probably why all the vital processes are systematized. The respiratory, cardiovascular, digestive, climate, and educational systems come to mind. It wouldn’t make much sense if blood circulated or air flowed haphazardly. Systems provide structure. They permit predictability. They chip away at the defining element of the future: uncertainty.
I want to bring another system to your attention, one you use whether you like it or not everyday. The more productive you are, the more you use this system. In fact, if you tried to totally avoid this particular system, you may not last long in this earthly existence. Unfortunately, what’s out there in the way of “education” about this system is at best inadvertently wrong and at worst outright corrupt. It’s a sad state of affairs for a system so vital that comparing it to the flow of blood, water, and air is natural and appropriate.
I’m talking about monetary systems.
Words have a devious way of absorbing the connotations we impose on them. Just by invoking the term “monetary,” I probably evoked notions of the Federal Reserve, your local commercial bank, the dollars in your pocket, the digits on your mobile banking app, or a recurring, obnoxious CNBC commercial. Americans are downright inundated with all things monetary, and in recent years we’ve even started hearing about monetary systems. This is a step in the right direction, but listening closely to the various financial noise that parades as meaningful, helpful education about monetary systems usually constitutes a major leap backwards.
Let me explain how I’ve come to think about monetary systems. Maybe you’ll see why I think so critically of what passes for monetary system education.
Air, blood, water, and food all flow. They must. If air didn’t flow in and out systematically, then I couldn’t write this article, and you wouldn’t have made it this far in reading it. Uncontroversial, you say, OK. But consider this: the exact same is true of money.
Your income, your investment earnings, your bill payments are all evidence of the fact that money flows, but little attention is paid to this startlingly fundamental fact. Young adults devote a hefty chunk of their lives to studying the flow of blood. Entire professions are devoted to studying, tweaking, and augmenting the flow of it.
Ask yourself how many money flow specialists you know.
Don’t get me wrong. It isn’t the case that there aren’t any specialists in the science of money flow — of monetary systems. There are. But learning who they are comes with the painful price of self-awareness. Consider this: the monetary specialist in your life is probably not you. Of course, not everyone is a cardiovascular expert, and it’s silly to think that everyone should be their own monetary system expert too. But you know something. The heart, the arteries, the veins. You get the basics. And you know that it’s a good thing that you’ve got your own heart, your own arteries, your own veins, and so on. Many Americans — particularly of the diabetic type — fear not having their own well-functioning blood-flow system, and rightly so. Who wants their blood flowing through someone else’s system?
What constitutes the heart of your monetary system? Maybe you’ve never been asked. We can forgive the financial gurus and advisers who should be asking you. They probably don’t think about money in these terms. After all, they’re a product of the same money education system you see bits and pieces of in the news, in newspapers, and on TV commercials. They don’t know any better. And despite Masters and doctoral training in economics, I didn’t know either. Stunning and sad, but true.
Maybe the question doesn’t even make sense. You’ve got a job. You earn income from the job. Maybe that’s the heart of your monetary system. But what happens when you change jobs? Last I checked you don’t swap out your blood-pumping heart at 20, 30, or 40 years of age. No, your money heart, like your blood heart, is much more permanent. It’s a fixture of your existence.
I’ll cut to the chase. Your money heart — the place through which all your money flows before it’s directed to the various aspects of your life — is probably a commercial bank. By that I mean those giant financial institutions like Bank of America, Wells Fargo, or maybe a community-based credit union.
Here’s the rub folks: your current money heart isn’t actually yours.
“But it’s my account Ryan!” I understand that. In fact, if you called your bank and asked them whose account your money is flowing through, sure as the day is light they would tell you it’s “yours.” Bless their hearts — they don’t know any better. Hardly anyone does. And why would they? Why would you? Have you read the 838 pages of the “Dodd-Frank Wall Street Reform and Consumer Protection Act?” How’re they to know that Dodd-Frank authorizes “bail-ins” whereby the federal government may legally seize creditor funds deposited at commercial banks in order to liquidate the bank in times of financial crisis?
Let me say that again in English: why would financial advisers know that their own clients’ funds that are kept at commercial banks may be legally taken by the government when a financial crisis hits?
Maybe they should.
Imagine the following scenario. There’s an unusual outbreak of disease in your town. The afflicted require blood transfusions. The local clinics don’t have sufficient blood in storage to meet the needs of the afflicted. As a result, the local government notifies healthy citizens that their blood will be taken and given to the afflicted. Is the situation becoming clear?
The above scenario is dramatic and unrealistic. I recognize that. After all, your blood is yours. It’s flowing through your system. It’s pumped by your heart. The government has no right to it. If they claimed that it was their’s, and acted on such a claim, you can imagine the public’s reaction. So of course the government couldn’t take your money to “bail-in” insolvent banks. Right?
Before reading further, recall my warning as to the cost of self-awareness. It’s not fun. How could it be? Who wants to learn that the money people think is their’s in accounts people think they truly “own” is actually, technically, legally the property of the bank? See, it’s technically incorrect to say that you’re a “depositor” at a bank. OK, maybe your banker calls you a depositor, bless his heart. But in reality, you are a creditor to the bank. You lend the bank your money. When you do so, that money ceases to be yours. It becomes the property of the bank.
Just like when you take a loan — a mortgage, a business loan, an auto loan, what have you — the money that is lent to you becomes yours to use for a given purpose. The situation is no different with banks. You lend (deposit) money at a bank and the bank uses it for it’s purposes.
Let’s recap. Money must flow. Money systems are structures through which this flow occurs. Most systems have a heart — a core, a headquarters, a primary residence — that serves as the foundation for the system. Most people’s money systems are headquartered at a bank. The bank is the heart of most people’s money systems. You do not own the bank. The money you send to the bank, once sent, is no longer yours. Most people’s financial heart is owned by someone else.
I don’t want to go too far with the implications of what this means. It can get depressing. If you really want to go nuts, send me an email. As a reward to you for being so kind to me in reading this through to the end, I will send you a two-part article series I’ve organized, written by Carlos Lara. He’s co-author of the Lara-Murphy Report — a leading, proprietary financial publication — that explains Dodd-Frank in greater depth. Shoot an email to email@example.com and I’ll send them to you.
Let’s end on a positive note. The current state of most people’s monetary system — whereby folks have delegated ownership of their own financial hearts to Wall Street bankers and Washington DC politicians — is admittedly grim. The good news is that it doesn’t have to be this way. You can reclaim your financial heart. You can own the headquarters of your wealth.
Yes, there is a price to pay in order to do so. Reclaiming your financial independence isn’t cheap. But the price is not denominated in dollars. It’s counted in minutes and hours. The price to establish your own financial headquarters, to reclaim the heart of your money flow, is your attention. Unfortunately, most people are reluctant to devote the attention necessary to change how they think about money and its flow.
That said, congratulations are in order, because if you’ve read this far, you’ve demonstrated that you aren’t one of them.