- Business and Employment
Why Banking Needs to Die
At the heart of banking is the concept of “No Risk”. There is a saying that a bank is like a person who will lend you an umbrella when the sun is shining and take it away if it looks like it is going to rain – and this is correct. When you go to a bank to lend money to (say) start a business, you have to provide a guarantee that you can pay it back whether the business is a success or not – like offering up your home for sale should the business fail. So they make money regardless of whether you do and without any risk.
Now I am sure that the bankers amongst us are now arguing that the function of the bank is simply to allow someone to get the money from an asset without the need to sell the asset and for this, they charge a fee. And this, too, is quite correct. The problem comes when you add greed to the equation. When the banks want to make record-breaking profits this year and then even bigger profits next year. This is because there is a limited supply of people who want to borrow money and who also have the collateral to borrow against. So once you have loaned money to them, where do you go? Well you either stop or you start borrowing to people and organizations who do not have sufficient collateral to borrow against and that exposes you to risk. And as you exhaust the number of borrowers who have less collateral, the difference between the amount you borrow and the collateral the borrowers have becomes greater and greater and so does the risk of non-payment. At the end of this search for greater and greater profits, you get the situation where banks are lending people money to buy houses when they are unemployed and have no way of paying it back. This actually happened.
The problem is that banks just cannot handle risk of any kind; it is not in their nature. You might as well ask a fish to yodel. In order to get the profits from such ventures whilst completely eliminating the risks (they thought), you simply sell the debts onto someone else before they go bad. So the banks created Toxic Debt. Toxic Debt falls into two camps: False Toxic Debt and True Toxic Debt. The example mentioned above of giving a mortgage to someone unemployed is a clear case of True Toxic Debt. There is no way that that person is going to be in a position to pay back the loan. But if there is the situation where the loan can be paid back, this represent False Toxic Debt and is actually a source of huge rewards for the lender if he is prepared to accept a little risk. Take the example of someone who suddenly finds it hard to pay the full extent of his monthly mortgage payment but could pay half. To a business that is not adverse to risk, by rescheduling the mortgage to a longer time period to reduce the monthly repayments or by allowing the person to borrow against his equity at a higher rate of interest, it means more profit – not this year but overall. True Toxic Debt only represented a tiny proportion of what was called Toxic Debt. The rest were a massive opportunity to make greater long term profits that were squandered by the banks
Instead of making money, their knee-jerk reaction to the Toxic Debt that they had created was the Credit Crunch where all people who had some kind of debt were punished for the banks' stupidity and greed with the consequence that many good people and good businesses were brought to their knees. This meant that even more wealth production was destroyed as banks clamoured to reduce their exposure to risk. As you look over America and the rest of the world, people have been thrown out of their homes who could have kept them and continued paying something but now they are bankrupt and paying nothing. And the banks do not even have their homes to sell because people have broken in and stolen anything of value leaving worthless husks that cannot be sold on. It would be difficult to imagine a war bringing more devastation and ruin to our countries. Thomas Jefferson once said:" I believe that banking institutions are more dangerous to our liberties than standing armies". Now I would say that that banking institutions are more dangerous than terrorists. Both the Baader Meinhof group and the IRA did not manage as much devastation during their respective bombing campaigns as the banks achieved in a very short period. Perhaps it would be a fair statement to say that the Credit Crunch should be labelled as World War III for the amount of suffering and destruction it has caused and is still causing.
Now that they have been bailed out by governments, the banks have gone right back to their destructive ways. While they exist, they will continue to harm people and businesses which is why they must die in order to stop the harm. I do not mean that the particular banks will necessarily vanish. The names may remain but the core view of “No Risk” must die. If we do not kill banking, it will us.
needs to be replaced with more Venture Capitalist-style business.
In fact, Sovereign Wealth Funds are doing a very good job of killing
banks and long may they continue. Sovereign Wealth Funds have been
around since 1956. There is an older form of organization that has
been around since the 1700s that also a great contender. It has many
names: friendly societies in England and Credit Unions in America and
Co-operatives everywhere. As a whole, they were described as
Community Development Financial Institutions. A more modern and less
wordy name that I have adapted is Community Development Initiatives.
Apart from accepting risk as a natural part of business, they also
have the added advantage of not having shareholders so they can take
a longer term view to profit so minor fluctuations do not bother them
as much as banks. In fact, credit unions flourish during the
depression of the 1930s. And because they have members instead of shareholders, any benefits they created go directly to their members
What will happen if we do not kill banking? Well, I shall return to Thomas Jefferson:
“I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a moneyed aristocracy that has set the government at defiance. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs … If the American people ever allow private banks to control the issue of currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered."