Banks stepping up to a more-strategic role

Financial-services must find how to play a truly-strategic role within the global economy – and not be incentivized toward short-term culling of temporary-weaknesses


Banking similarly serves a vital purpose, but even so, the financial-services industry desperately needs reform. Banks are crucially important to stimulate and facilitate the global economy. However, they are not particularly helpful when they exaggerate trends by betting on whether something like a company’s value, a currency or a commodity-price will go up or down. The unfettered Boundaryless People-Power of The Market has become too damaging and too unquestioned for its own good. Whatever traders typically claim to me, that sort of behavior is not always an example of ‘corrections in The Market’ – it is often pure guesses and gambling. And despite the argument that such well-considered bets uncover existing financial weaknesses and therefore help improve the world economy by removing those vulnerabilities, the reality is that such culling is chronically short-term and non-strategic.

As shown on the Capitalism System chart, the net result can in fact be to lose forever potentially crucial options for the future. Genuine strategic investment in companies or countries, which as a result can grow better, is a win-win for both parties. But simply placing bets on them with the detachment of a spectator-sport risks being parasitic. Although the extremely clever people who analyze various financial markets and bet accordingly claim quite rightly to me that they have sometimes served a useful purpose by pointing out where the market has ‘got it wrong’, that skill would have proved more useful to the community at large (and their line of defense would be demonstrably less self-serving) if they had, for example, been working as analysts to assist the government rather than to line their own pockets.

Many traders go on to point out to me that they risk losing their shirts if they do not get their bets right. That sounds good on a TV interview, but it is usually far from the truth. More accurately, most of them only risk losing other people’s money and their own bonuses. And when such casino-banking unnecessarily damages the effectiveness of the global economy as whole, it becomes unacceptably risky both for nations and for individuals.

There is another problem with how The Market is allowed to operate. For the lauded ‘market forces’ to work, Capitalism requires orderly failure of some organizations in order that other more-competitive organizations can take their place – albeit, as just explained, it is in fact only those that are more-competitive in the immediate-term. That applies to banking as well. But modern banks have engineered a form of partial immunity because they tend to get the upside of economic booms while the taxpayer gets the downside (because the banks are too crucial to be allowed to fail). As a result, the financial institutions that constitute The Market do not live or die according to the same rules they insist apply to everyone else.

Even those banks that receive no formal government bail-outs nevertheless often benefit greatly from the tax payers in the country where they are headquartered. The reason is that everyone around the world assumes that the banks will, if necessary be protected by their respective governments, and therefore those banks are able to borrow money for less than they otherwise could. Thanks to the assumed protection afforded by potential bailouts funded by taxpayers, lending to most banks has long been seen as a very low-risk loan. So they are more profitable. So they have more money to pay themselves in the form of bonuses.

It is the general taxpayer who effectively pays for the implicit ‘insurance’ that the banks enjoy and that gains them privileged interest rates (and bonuses) unavailable to anyone else. Consequently, during a credit-crunch, when those same protected banks choose not to lend money to the very taxpayers that fund the banks’ special privileges, it is hardly surprising that the resentment of a future backlash continues to build.