Tuesday, December 30, 2008

Credit Expansion

Talifaitasi W. Satele

Some say that credit through fractional reserve banking is a result of “greed”. Many liken anything to do with making money to that ugly term; I just commend it as a good idea. But lending out depositors’ savings while only keeping a fraction of deposits in reserves is not done out of philanthropy. It is to make money or profit, and lending credit is not only beneficial for the banker but the depositor and borrower as well.

If banks didn’t make money through lending, they would have to charge their depositors additional fees. Banks do have to pay for the overhead it takes to secure their depositors’ money. But instead of having their customers pay more in fees for the privilege of having their money in a secure vault (instead of under one's mattress), the bank makes your money work to pay its rent.

And let’s hope banks are profitable while they lend! Profit attracts new entrepreneurs into the market (which means more banks to choose from) and determines whether someone stays in business or not. Economists call profit an opportunity cost, which is the value of the best alternative use of a resource. For example, if you profit only $20,000 from your business, but can make a salary of $25,000 working for the government, would you stay in the market or go to work for the ASG?

For borrowers, getting a loan often means having the funds necessary to seize upon an opportunity that they just didn’t have money at the time to pursue. You take out a loan at the prevailing market rate betting that you’ll make more than principal plus the interest later on. From big and small businesses to homeowners, they are all betting on future success.

Banks, on the other hand, set the interest rates by the level of risk, competition, and the amount of profit they’re seeking. They measure risk by level of income, payment history (credit score), and length of employment of new applicants. Banks too are betting on their borrowers’ future success, and they lend accordingly.

Credit, made possible through fractional reserve banking, allows banks to make a profit, pays to secure depositors’ savings, and provides funds for the economy to expand.

It’s a system that serves the purposes of the banker, the depositor, and the borrower, and it is beneficial to all as long as the bets made are good ones.

Otherwise, like a bubble, it pops.

Tuesday, December 02, 2008

Who Will Mow My Lawn?

Talifaitasi Satele

When I have a discussion with supporters of the minimum wage law, I start by asking whether they would pay $7 an hour for someone to cut their lawn. Most are caught off guard by my question. I guess that when it comes to their support of the minimum wage, they are thinking of someone else paying it and not themselves.

When they have figured out that I’ve put them on the spot to assume some responsibility for their beliefs, most are quick to defend themselves by saying, “Yes, I would pay $7 an hour for someone to mow my grass!”

I realize that their answer is most likely a knee jerk reaction made in self-defense, so I come back with another argument of minimum wage supporters and ask, “But how can someone live off of $7 an hour? Why not pay your worker $8, $9 or $15 an hour? Surely they can pay their bills if you pay him at least $10 or more.” Usually, by this time, I get the answer, “Well, if I have to pay that much, I might as well cut my own grass.”

Just for kicks and giggles, I ask supporters, “What if someone came to you and offered to cut your grass for less than the minimum wage? Would you pay him, because, you know, that would technically be against the law?”

We are seeing that the minimum wage reduces employment and raises costs for everyone, because the only way wages can go up without those side-effects is by increasing productivity. Any leader who is truly concerned about lifting the standards of living for our people would focus public policy on making that happen.

But blaming the disasters of the minimum wage on corporate greed and threatening the canneries’ federal incentives as Faleomavaega is doing won’t help us address a long term problem. Especially for those who we want to hire to mow our lawns.