Quelle horreur, some smart people are starting to question whether banking serves a redeeming social function.
Of course, in the abstract, it does. Banking (or more accurately, extending credit) is essential for commerce. But any essential support function, if it overpriced in relationship to its true value, becomes a drag on the productive economy. And our modern system is extracting a very large toll relative to its actual worth.
One argument against banking comes from Roger Bootle at the Telegraph (hat tip Swedish Lex); the other from Bill Black. Bootie makes a broader, philosophical argument, starting by distinguishing activities as creative (making something out of nothing and increasing net enjoyment) versus distributive (something that merely shifts benefits from one party or group to another). Activities fall along a spectrum, and Bootle asserts:
Successful societies maximise the creative and minimise the distributive. Societies where everyone can only achieve gains at the expense of others are by definition impoverished. They are also usually intensely violent.
He assesses modern finance against this standard and not surprisingly, finds it sorely wanting:
A leading British journalist recently decried the widespread condemnation of bankers’ and hedge fund executives’ high remuneration on the grounds that these people, it said, were “the wealth creators”…This completely misses the point….the question is, what has the process that generated this money contributed to the common weal?
Much of what goes on in financial markets belongs right at the purely distributive end. The gains to one party reflect the losses to another, and the vast fees and charges racked up in the process end up being paid by Joe Public…
Even what the great investors do belongs at the distributive end of the spectrum. The genius of the great speculative investors is to see what others do not, or to see it earlier. That’s all. This is a skill…I am not convinced, though, of the social worth of such a skill, still less of the wisdom of encouraging society’s brightest and the best to try to perfect it.
This distinction between creative and distributive goes some way to explaining why the financial sector has become so large in relation to GDP – and why those working in it get paid so much. Even when a certain sort of financial activity is purely distributive, the returns to the winning parties are so enormous that the activity is immensely seductive – and the professionals who appear to be responsible for securing these gains are highly sought after and highly rewarded….
And we need to consider the identity of the investors who are making a lower return to make it possible for hedge funds and their like to make a higher return. They are the investors in slow-moving and restricted institutions such as pension funds and insurance companies, or central banks whose market activities are dictated by some objective of public policy, rather than private gain.
Yet there are reasons why we should want such institutions to be this way. Pensioners do not want their pension funds to be run like hedge funds – or their insurance companies, or their central banks. So we have allowed, and even encouraged, a system to develop in which clever people make huge amounts of money out of institutions that, for reasons of public policy, we constrain in a way that allows scope for such profits to be made. Is that clever or what?
Perhaps the greatest problems are caused by the interaction between financial markets and the real economy. There, time horizons are longer, price adjustments are more sluggish, and motivations less single-mindedly selfish. And so much the better – for them and for us. But how are they able to withstand the onrush of supercharged greed that floods out at them from the financial markets? If we think that it is right and proper – and economically advantageous – that some parts of the economic system should not be organised like investment banks, then we should make sure that they are protected from those parts of the system that are organised like investment banks.
Bill Black, in “How the Servant Became a Predator: Finance’s Five Fatal Flaws,” at New Deal 2.0 is far more casutic. He starts by taking a position near and dear to the Japanese, that financial firms should not be very profitable, because high profits mean they were operating at the expense of the “real” economy (of course, the Japanese bank managed to wreck the economy anyhow, but that was partly if not largely the result of rapidly deregulating a very primitive banking sector. And I am not exaggerating in my characterization; recall I consulted to them in the mid-1980s. They had NO concept of cash flow based lending, for instance).
Black’s key arguments:
….the finance sector is worse than parasitic. In the title of his recent book, The Predator State, James Galbraith aptly names the problem. The financial sector functions as the sharp canines that the predator state uses to rend the nation. In addition to siphoning off capital for its own benefit, the finance sector misallocates the remaining capital in ways that harm the real economy…:
• Corporate stock repurchases and grants of stock to officers have exceeded new capital raised by the U.S. capital markets this decade. That means that the capital markets decapitalize the real economy….
• The U.S. real economy suffers from critical shortages of employees with strong mathematical, engineering, and scientific backgrounds. Graduates in these three fields all too frequently choose careers in finance rather than the real economy because the financial sector provides far greater executive compensation….
• The financial sector’s fixation on accounting earnings leads it to pressure U.S manufacturing and service firms to export jobs abroad, to deny capital to firms that are unionized, and to encourage firms to use foreign tax havens to evade paying U.S. taxes.
• It misallocates capital by creating recurrent financial bubbles. Instead of flowing to the places where it will be most useful to the real economy, capital gets directed to the investments that create the greatest fraudulent accounting gains…. Unless there is effective regulation and prosecution, this misallocation creates an epidemic of accounting control fraud that hyper-inflates financial bubbles….
• Because the financial sector cares almost exclusively about high accounting yields and “profits”, it misallocates capital away from firms and entrepreneurs that could best improve the real economy (e.g., by reducing short-term profits through funding the expensive research & development that can produce innovative goods and superior sustainability) and could best reduce poverty and inequality (e.g., through microcredit finance that would put the “Payday lenders” and predatory mortgage lenders out of business).
• It misallocates capital by securing enormous governmental subsidies for financial firms, particularly those that have the greatest political power and would otherwise fail due to incompetence and fraud.
The remarkable thing is that despite the ample evidence of the damage wrought by the financial sector, it has managed to secure even greater rewards for its predation and incompetence. But that is largely a function of media coverage, which has presented a picture flattering to the Obama Administration and and the perps. A Pew Research Center study on the coverage of the crisis concluded:
The gravest economic crisis since the Great Depression has been covered in the media largely from the top down, told primarily from the perspective of the Obama Administration and big business, and reflected the voices and ideas of people in institutions more than those of everyday Americans…
Citizens may be the primary victims of the downturn, but they have not been not the primary actors in the media depiction of it.
A PEJ content analysis of media coverage of the economy during the first half of 2009 also found that the mainstream press focused on a relatively small number of major story lines, mostly generating from two cities, the country’s political and financial capitals.
A companion analysis of a broader array of media using new “meme tracker” technology developed at Cornell University finds that phrases and ideas that reverberated most in the coverage came early on, mostly from government, particularly from the president and the chairman of the Federal Reserve, and that few Republicans in Congress articulated any memes that got much traction.
As the story moved away from Washington—and the news about the economy seemed to improve—the amount of coverage of the economy also dropped off substantially.
So with vested interests firmly in control of spin, is it any wonder that most people have been lulled into complacency, or at worst, sullen resignation?