Are banks bad?

Are banks bad?

Photo by Michael Longmire on Unsplash

I suspect that most people believe that the primary job of a bank is to look after their cash. 

Deposit your money and, at any point in time, you can rock up at a branch or a hole in the wall and receive your cash up to the amount that you put in, minus a few fees. 

The reality is that banks only provide a haven for our cash because it allows them to leverage the money held into investments. They borrow against their available capital and invest funds into a wide range of assets that they expect will yield more than what they’re giving you for the privilege of looking after your money. 

It’s a fantastic financial model.

It’s the reason that having conquered the world of futures trading, capital gains, and hedge funds, Bobby Axelrod, the megalomaniac character in the Stan thriller Billions, played by Damian Lewis, decides he wants to become a bank. 

Essentially it’s a license to print money. 

Banks are always looking for assets that will yield investment returns in the shortest space of time. Their mantra, indeed their requirement under the law, is to profit, and they are ‘in the pound seats’ to do it, literally. 

They have the scale and capacity to invest in projects that your average Joe couldn’t dream of, from skyscrapers to industrial plants, freeways, and airports. The kinds of investments that require tens to hundreds of millions of dollars to see them to fruition. 

Banks have the advantage of using other people’s money and the advantage of scale. They make huge sums from investments that yield high returns for long periods, partly on the fact that no one else can invest in them. 

And so it is and has been. 

The banks make money, but the projects they fund often deliver utility.

Banking externalities

It is not always good.

The pursuit of profit is relentless and ruthless. 

Goldrush mentality attracts the most ardent and most skilled as well as the opportunist. Money gives banks the very best people with a sharp mind and a ruthless attitude. They quickly find the best ways to reduce costs and maximise returns.

No surprise that banking can support projects that have severe externalities and direct impacts on the environment. Recall an externality happens when the cost of an activity is not absorbed but shipped out. The commons are excellent dumping ground because no one person or entity gets hit with the liability.

Capitalism degrading the environment is profound. Development has to happen, but it becomes pointless if humanity has no safe place to live.

So who is to blame? 

The reality is that we, the people, want roads, skyscrapers, and industrial plants that deliver raw materials for all of the stuff we want to buy. 

We are the ones that live in large houses with more bedrooms than you could ever need, more luxury than you could ever really afford. And yet, everyone wants a better life, and it is forever the human condition to want betterment. 

In other words, the consumer is ultimately responsible. 

Instead of blaming the banks, what if we blame the consumer? 

Maybe get consumers, us, to give up our desire for stuff, our emotional and mental drive to better ourselves and provide for our families. Quosh those innate biological feelings to make more that is in all of us. 

Well, good luck with that one.

Perhaps there is a compromise position where both individuals and the finance community begin to work together to look long and prosper. 

Currently, we do this through regulation. 

Governments curtail the riskiest financial behaviours through legislation limiting the amounts of money banks can borrow, their financial ratios, and their ability to exploit customers, in itself a significant ongoing task. 

Governments are in a difficult position. They see growth as a political necessity and are reluctant to curtail development activity or the banks that finance it. Yet, all the while, development activity is damaging the planet. 

If we can’t blame ourselves or the banks for doing what we want them to do, humanity has a problem. 

People’s choice

We do have a choice.

We can accept that consumption and more-making has an impact and try to do something about it. Even a little is better than doing nothing. Light bulbs, anyone? 

But fiddling just puts off the inevitable. Instead, something dramatic is needed. The doughnut, perhaps?

Alternatives to historic capitalism exist, and many of the options are maturing nicely.

For example, ‘cooperative enterprises’ where workers make the major enterprise decisions rather than boards of directors selected by shareholders. This alternative is called economic democracy.

Only this is not a million miles away from what we already have. The people choose, but this will not guarantee decisions in favour of anything other than the people. 

Robin Hahnel’s book Of the People, By the People: The Case for a Participatory Economy describes the participatory economy where all citizens, through the creation of worker councils and consumer councils, deal with large-scale production and consumption issues without the need for appointed representatives. The participatory economy is the origin of the Green New Deal, a package of policies that address climate change and financial crises.

A participatory economy is different. Imagine the circus of state and national politics banished to the bench. 

Doughnut economics is an economic model proposed by Kate Raworth that combines planetary boundaries with the complementary concept of social boundaries. Look after everyone and the planet.

Doughnut economics is different too. 

And these are just three of the many alternatives with potential.

Source: DoughnutEconomics, CC BY-SA 4.0 <https://creativecommons.org/licenses/by-sa/4.0&gt;, via Wikimedia Commons

What do the alternatives require of us? 

Most of the alternative economic systems require a shift in responsibility. 

It would be on us, not the banks or the government or the unscrupulous developers. We will all have to step up and understand the consequences of our choices. 

The banks would continue to do their thing on our behalf; only we would be responsible for the consequences of what they do.

And so we get to the rub.

Capitalism has delivered growth and, on average, betterment for humanity. Only it comes at an uncomfortable cost. And the only way to pay back that cost is to take responsibility for it.

Are banks bad? No, they are a caricature of our abdication from personal responsibility.


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What’s with all this individual enrichment?

What’s with all this individual enrichment?

Capitalism is a powerful force.

Simplistically, it mobilises funds — capital — to secure peoples time and effort — labour — that converts or generates goods and services, often from a natural resource or two, that when sold becomes more capital.

The basic idea is the conversion of one thing to another for monetary gain.

The deal with capitalism is that for this process to work, the enriching part, some capital is needed to begin the process. There is an investment required in the extraction or conversion or creation of a resource that can be rented or sold.

How to start becomes the problem if you have no access to capital.

Hence for centuries workers felt exploited as they lacked access to the monies to get themselves off the treadmill. In modern times more westerners feel they have access to capital, sufficient at least for a house, a car, and the luxuries of life.

That they are indentured to the banks for this cash seems to pass them by as they trudge along to the workplace as enslaved as the poor buggers who used to do it for peanuts. Quite literally in the slave systems of the 1800s.

Then there is the inbuilt reality to capitalism that is starting to bite very hard.

When capital is used to create more capital, the original owners of the capital stand to gain the most from the process — the rich get richer.

The argument that wealth creation raises all boats, the more money made, the more money there is to pay workers and their lives improve is also true to a degree. The average wage in mature economies tends to rise over time and the standards of living along with them.

The problem is that individual enrichment is still at the core of the process. The owners of the capital gain the most, the get bigger boats as all the little rowboats slosh about on the tide.

A report published by Oxfam in January 2020 ‘Time to care’ found that the world’s 2,153 billionaires have more wealth than 4.6 billion people.

In other words, a little over 2,000 people hold more wealth than over 60% of the world’s population.

These numbers show what has and continues to happen. Fewer and fewer people have a greater and greater proportion of the wealth.

A riddle

Suppose the board of a large company has seen some good numbers from the CFO and decides to redistribute some of the profit to the workforce as a bonus.

Rather than do this on some arbitrary merit score they decide to give everyone at the company a one-off bonus that is 10% of their gross salary.

Is this fair?

Check out one answer at the end of the post.


A moral conundrum

Should this aspect capitalism be allowed to continue, this appropriation that is an inevitable consequence of the paradigm?

Well, obviously there are plenty of people busting everything to be one of the 2,000 with more money than any one person could realistically spend.

Then there is just about everyone else who would like more money than they have. They might not need billions, even millions, but most people would like even a little bit more to help with the school fees, the rent and maybe even a holiday sometime.

The 4 billion people living on less than $10 per day certainly would. For them over half the money they earn is likely to go on food.

The 800 million of these people that the United Nations says live in extreme poverty are desperate for more cash simply to not go to sleep hungry and maybe a leg up to get themselves out of their poverty.

Unless there is a better way to redistribute, it would seem that we need an alternative to creating wealth for these people.


Are there alternatives to capitalism?

A question asked many times by folk far more erudite in these matters than Alloporus will ever be.

The answer is, of course, several alternatives. Here are a few of the common ones.

Communism

Communism was tried and failed the pub test. People hate being told what to do, especially when it comes to money.

Variants on the tried communist model have been proposed including a few based on anarchism

  • Anarchist communism, that advocates decision making by consensus democracy, the abolition of the state, and the abolition of private ownership of the means of production.
  • Post-scarcity anarchism, an economic system based on social ecology, libertarian municipalism and an abundance of fundamental resources.
  • Anarcho-syndicalism, an ideology centred on self-management of labour, socialism and direct democracy.

Heritage Check System

Then there is the retention of the market economy but with banks stripped of their lending power and with constraints on governments printing money and when they do the money is only used to “buy materials to back the currency, pay for government programs in lieu of taxes, with the remainder to be split evenly among all citizens to stimulate the economy”. This is termed a “heritage check”.

No doubt the originator Robert Heinlein, the American science-fiction author, knew what he meant.

Economic democracy

Economic democracy is where the workers control the companies in some sort of democratic system and social investment is carried out by a network of public banks.

Sounds good until we all suffer death by democracy for the crowd is not always operating in its own best interest let alone the interest of the individual.

Knowledge economy

In a book Post-Capitalist Society published in 1993, Peter Drucker described a possible evolution of capitalistic society where knowledge, rather than capital, land, or labour, is the new basis of wealth.

The thing about this option is not everyone, including an orange-haired president and his supporters, respect knowledge enough. People are quite good at rejecting evidence they don’t like.


Individual enrichment

We could go on for there are dozens of others and maybe one day there will be one that has a chance.

That system will have to allow people the chance for betterment no matter where they currently sit within the system. This is the essence of capitalisms success — even the lowly janitor has a chance of making it.

It’s a slim chance but it is not zero.

This is how people are at the core. They want, desire, need the opportunity to get better, to be better and to live better.

This great urge for betterment is understandable for those whose life is a struggle. However, it does not stop when you get the Porsche and the air-conditioned mansion with heated indoor pool

Maybe not even when your incense burns and your chakras are in blessed harmony, for your ego will still be lurking somewhere deep in your psyche just waiting for you to slip out of nirvana.

Whatever the system it has to allow for individual enrichment.

Answer to the riddle

Is a 10% pay rise across the company fair?

Well, it sounds fair enough. But 10% for the office junior might buy a weekly trip to the fast-food court. The CEO, on the other hand, gets a new car.

Not so fair after all.


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