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Of Banks And Vampire Squid

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http://business.timesonline.co.uk/tol/busi...icle6822866.ece

The row over the usefulness of bankers rumbles on, with many of our leaders rushing to the defence of the indefensible. The original remark by Lord Turner, the chairman of the Financial Services Authority, that some banking was socially useless, is on the face of it incontestable. Never mind useless, some banking has proved to be spectacularly harmful. Surely, with £1.3 trillion of public money committed to the bank bailout and business failures and unemployment soaring, we can at least agree on that?

Apparently not. Alistair Darling, despite plenty of encouragement from John Humphreys on the Today programme yesterday, refused to concede even this much, giving no support to the FSA head and absolutely opposing his suggestion that the City needs to shrink back.

The normally sure-footed Richard Lambert, head of the CBI, the employers’ body, attacked Lord Turner for even raising the issue. “In a free society, it’s not the job of a politician — or, for that matter, of a regulator — to argue that a particular form of activity is or is not of social value,†he opined.

There is so much to challenge in this assertion, it’s hard to know where to start. Perhaps with the suggestion that, in a free society, everyone — even regulators — should be free to express an opinion, even if Mr Lambert doesn’t like it.

Even the most rampant of free-market fundamentalists would hesitate to ignore social value. Consciously or not, policymakers weigh it up in all their calculations. That is why petrol is taxed and food is not. It is why defence and media companies are given special privileges.

Lord Turner’s assessment that the wholesale finance industry has swollen to excessive proportions deserves better than this kneejerk dismissal. If ever there was a time when we should scrutinise its real contribution, it is now.

There is strong evidence, as suggested by George Soros, that the sector has grown out of all proportion to the wider economy. Why are the orders of magnitude for banks’ balance sheets bigger than a decade ago? Why have takeovers and mergers grown in 20 years from 2 per cent of GDP to 20 per cent? Why in 40 years has turnover in UK equities soared from 10 per cent of GDP to 200 per cent. Why has the volume of derivatives trading grown from near zero to $1,000 trillion?

Above all, why, during this unprecedented explosion in activity and supposed financial innovation, have long-term real investment returns fallen to levels not seen for almost a century? It’s hard to see how this whirlpool of extra activity benefits anybody except the bankers, brokers, traders, consultants and fund managers who keep the maelstrom turning.

To use the vivid phrase of Charlie Munger, No 2 to Warren Buffett, too many of the benefits of capitalism are swallowed up in “the croupier’s take†— the portion taken by those running the game. And, for them, the more frequently the wheel spins, the better.

The City, says Mr Lambert, is “not some bloated excrescence throwing the whole UK economy out of balanceâ€. Even that claim may be challenged: Bill McKelvey, of UCLA, argues that the rise of London as a key financial centre has driven up the value of sterling to the detriment of other UK industries trying to compete internationally.

Rolling Stone magazine’s recent description of Goldman Sachs as “a giant vampire squid wrapped round the face of humanity, relentlessly jamming its blood funnel into anything that smells like money†is unforgettable, and many would see the entire wholesale finance industry in much the same way.

That may be too much of a caricature. Perhaps a more accurate analogy would be a vast shearing shed. A shearing shed that savers, businesses and even governments have no choice but to enter; one through which they are herded with ever increasing rapidity, each time emerging with less wool on their backs.

Something to slow the traffic must surely be a good thing.

Richard Lambert is clearly some sort of genius, apparently in a free society no one is allowed to voice their opinion especially not politicians or regulators. :unsure::unsure:

The sh1t certainly has risen to the top, mediocrity is clearly what is needed to succeed as well as the ability to be an expert in doublethink.

His statement will have been said with a straight face with no hint of irony.

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Good article. Nearly choked on my full english breakfast...

Takeovers and mergers have grown in 20 years from 2 per cent of GDP to 20 per cent

In 40 years turnover in UK equities soared from 10 per cent of GDP to 200 per cent.

Volume of derivatives trading grown from near zero to $1,000 trillion

and best of all..

Above all, why, during this unprecedented explosion in activity and supposed financial innovation, have long-term real investment returns fallen to levels not seen for almost a century? It’s hard to see how this whirlpool of extra activity benefits anybody except the bankers, brokers, traders, consultants and fund managers who keep the maelstrom turning.

and..

Perhaps a more accurate analogy would be a vast shearing shed. A shearing shed that savers, businesses and even governments have no choice but to enter; one through which they are herded with ever increasing rapidity, each time emerging with less wool on their backs.

Squiddie is hungry and he needs his feed. Patrick Hosking should avoid hill walking for a while. These are dangerous thoughts.

Edited by HostPaul TAFKA Rover2000

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Anything that makes price speculation in real estate profitable is the problem. The finance sector is just a likely looking scapegoat.

Edited by Stars

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Good article. Nearly choked on my full english breakfast...

Takeovers and mergers have grown in 20 years from 2 per cent of GDP to 20 per cent

In 40 years turnover in UK equities soared from 10 per cent of GDP to 200 per cent.

Volume of derivatives trading grown from near zero to $1,000 trillion

and best of all..

Above all, why, during this unprecedented explosion in activity and supposed financial innovation, have long-term real investment returns fallen to levels not seen for almost a century? It�€™s hard to see how this whirlpool of extra activity benefits anybody except the bankers, brokers, traders, consultants and fund managers who keep the maelstrom turning.

and..

Perhaps a more accurate analogy would be a vast shearing shed. A shearing shed that savers, businesses and even governments have no choice but to enter; one through which they are herded with ever increasing rapidity, each time emerging with less wool on their backs.

Squiddie is hungry and he needs his feed. Patrick Hosking should avoid hill walking for a while. These are dangerous thoughts.

To be honest, whats been said is completely true. The facts speak for themselves. But as everyone here knows the vested interests will always argue otherwise if there is money in it for themselves. Lord turner sold his sense of morality to personal greed decades ago. These parasites would eat cow shit if they could make a fast buck from doing so.

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I have just got round to reading The Grapes of Wrath by John Steinbeck about the 1930's depression and there is a great couple of lines when a tenant farmer is told by the banks that he and his family must leave the farm that he and his family has lived on for generations. The farmer talks about the banks like it is a monster.

" But you see a bank or a company cant do that, because those creatures don't breathe air, don't eat side meat. They breathe profits and they eat interest on money. If they don't get it they die the way you die without air, without side meat.

It is a sad thing, but it is so. It is just so".

Made made monsters that have got out of control and devouring everything in its path.

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Anything that makes price speculation in real estate profitable is the problem. The finance sector is just a likely looking scapegoat.

Can you have speculation without the finance sector?

The finance sector has certainly made it worse because it's allowed leverage to increase the price speculation. Leverage helps to escalate the price of real estate and for a time the paradigm is that house prices can only go up which further encourages speculation, for those that can achieve leverage the profits are great. The downside is what happens when people question the paradigm and they realise real estate is overvalued.

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Can you have speculation without the finance sector?

Of course you can.

But, more importantly positing the absence of a finance sector is like positing and absence of counting or wheels or basic logic. If you disbanded the finance sector, speculators themselves would create their own finance sector to speculate in real estate.

The finance sector has certainly made it worse because it's allowed leverage to increase the price speculation. Leverage helps to escalate the price of real estate and for a time the paradigm is that house prices can only go up which further encourages speculation, for those that can achieve leverage the profits are great. The downside is what happens when people question the paradigm and they realise real estate is overvalued.

To my mind you have the relationship between the two the wrong way around

The freebie in real estate comes first and has distorted the finance sector. Most of the work of the finance sector in the boom has been trying to provide new and more effective way to give money to people to speculate in real estate - to give people what the rewards appear to indicate is the most wanted thing - speculation in real estate. To say that this problem is caused by the finance sector is to misunderstand it badly imo; the distortion comes from the destructive rewards of real estate speculation and it twists the entire economy, including the finance sector, around it.

Edited by Stars

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To my mind you have the relationship between the two the wrong way around

The freebie in real estate comes first and has distorted the finance sector. Most of the work of the finance sector in the boom has been trying to provide new and more effective way to give money to people to speculate in real estate - to give people what the rewards appear to indicate is the most wanted thing - speculation in real estate. To say that this problem is caused by the finance sector is to misunderstand it badly imo; the distortion comes from the destructive rewards of real estate speculation and it twists the entire economy, including the finance sector, around it.

Real estate speculation did not force financiers to engage in near-zero-tier 1 capital-lending by using derivatives creatively, nor did it force Paulson to lobby for increased leverage limits while at GS, nor did it force financiers to create the securitisation MBS-CDO3 machine, nor did it encourage ratings agency malfeasance, nor fraudulent asset valuations nor SIV and other Enronesque dodges.

All these are the fault of the finance sector, and the politicians and regulators they bribed

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One telling feature of the explosive growth of "financial services" over the past few decades is the fraction of the means of exchange that is issued debt-free by the State in comparison to that fraction which is lent into existence at interest by the profit motivated commercial banks.

This has dropped from approximately 50% after WW2 to less than 3% currently, so the provision of our means of exchange has been now almost completely privatised.

We are forced to borrow our means of exchange into existence and we have forfeited the almost cost-free provision of it for ourselves, primarly as a utility for productive enterprise.

As a very rough calculation, the cartel of providers rakes in of the order of £100 billion per year gross profit from the difference between the interest charged for lending us their money-numbers and the lesser interest paid to us when the money-numbers are deposited back with the providers.

For a "product" that has negligible production costs, that's not bad.

Why do we allow such a monstrous parasite to keep us enslaved on this all-pervasive, debt-based monetary leash?

As a society, as a sovereign nation, there is no fundamental reason why we should pay a privileged cartel so handsomely for the provision of our money-numbers, a utility that we could provide for ourselves far more cheaply, stably and transparently.

Please read my signature, and think about what sort of money system you would choose if you had the chance.

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As a very rough calculation, the cartel of providers rakes in of the order of £100 billion per year gross profit from the difference between the interest charged for lending us their money-numbers and the lesser interest paid to us when the money-numbers are deposited back with the providers.

No they don't.

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No they don't.

Back of a fag packet calculation:

£2T broad money (BoE stats), 5% p.a. interest rate differential (guess), so gross profit £100 billion p.a.

"Order of magnitude" means its more like £100 billion than £10 billion or £1000 billion.

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The freebie in real estate comes first and has distorted the finance sector. Most of the work of the finance sector in the boom has been trying to provide new and more effective way to give money to people to speculate in real estate - to give people what the rewards appear to indicate is the most wanted thing - speculation in real estate. To say that this problem is caused by the finance sector is to misunderstand it badly imo; the distortion comes from the destructive rewards of real estate speculation and it twists the entire economy, including the finance sector, around it.

I'm not entirely sure about that. The finance sector totally failed to price risk. Indeed it was passing risk onto to other mugs.

We know that liar loans distorted the real estate market, and we know that high LTV's force up house prices. Also ignoring securitisation and ponzi schemes there is always going to be a finite pool to fund real estate speculation; the savings held by the finance sector itself.

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Back of a fag packet calculation:

£2T broad money (BoE stats), 5% p.a. interest rate differential (guess), so gross profit £100 billion p.a.

"Order of magnitude" means its more like £100 billion than £10 billion or £1000 billion.

Their liabilities to their creditors - people that have accumulated £bns through the housing market - have offset any worth the banks once had. We both know this so I don't know why you're deliberately hoodwinking yourself over the bank cartel's profitability. Edit; the banks are in debt to the land speculators.

In fact I even contest the point that its a cartel, there aren't limited spaces available you just need to get a banking licence to operate. Would you say that drivers form part of a cartel because you need to get a driving licence to legally drive?

Edited by chefdave

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Their liabilities to their creditors - people that have accumulated £bns through the housing market - have offset any worth the banks once had. We both know this so I don't know why you're deliberately hoodwinking yourself over the bank cartel's profitability. Edit; the banks are in debt to the land speculators.

In fact I even contest the point that its a cartel, there aren't limited spaces available you just need to get a banking licence to operate. Would you say that drivers form part of a cartel because you need to get a driving licence to legally drive?

Yes, their "business" of providing money-numbers has exploded beyond the economy's capacity to service it. The parasite has over-reached itself, mainly as you say through the real estate market (and BTW I do appreciate Georgist analysis). Sadly, we are now seeing the parasite's political clout, as we are forced to bail it out, paying for its continuance in another way.

My previous post was to describe the nature of the banking beast and its unnecessary cost to us in more "normal" circumstances.

On the cartel question, perhaps the banking system is better described as more of a single entity monopoly, though one with multiple quasi-competing interfaces to the rest of the economy.

Yes, supposedly you can join the banking club, but I suspect that in practice the barriers to entry are high, and that the existing members are more than capable of molding you to their ways of business if you challenge them, but then why would you?

More generally you, Stars and some others do a good job by bringing Henry George's theories to the debate, and I wish you well. To my mind the land cartel and the money-issuing cartel reinforce each other and together make a formidable tag team to impoverish the rest of us. In appropriate circumstances each could operate independently, but their combination seems worse than the sum of the parts.

As an aside, have you seen this: http://www.henrygeorge.co.uk/ :lol:

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Yes, their "business" of providing money-numbers has exploded beyond the economy's capacity to service it. The parasite has over-reached itself, mainly as you say through the real estate market (and BTW I do appreciate Georgist analysis). Sadly, we are now seeing the parasite's political clout, as we are forced to bail it out, paying for its continuance in another way.

We've paid dearly; not to save the banks but to save depositors with their vast wealth which has been built up through playing the housing market . The long term share holders have been getting a hammering because of this which has ruined many a pension and endowment fund.

My previous post was to describe the nature of the banking beast and its unnecessary cost to us in more "normal" circumstances.

Yes I agree, however I do think that there's a natural market for risk arbitration which could be provided by banks if people chose them. Lets say we were all able to write out our own IOU's, would some people choose to accept a little less for the security that somebody else is prepared to take the risk if the debtor fails to pay up? I think under free market conditions that this would be a useful service.

On the cartel question, perhaps the banking system is better described as more of a single entity monopoly, though one with multiple quasi-competing interfaces to the rest of the economy.

Injin once described it as a franchise, I've been quite fond of that description since I read it.

Yes, supposedly you can join the banking club, but I suspect that in practice the barriers to entry are high, and that the existing members are more than capable of molding you to their ways of business if you challenge them, but then why would you?

Yes, I would expect the barriers to entry would be high but I would expect the risks would be high too. Imagine if you were running a bank mid boom with the strictest and most respectable lending criteria in the market, you would be probably shut out of most of the lending that occurs as a huge portion was based on risky/fraudulent mortgage applications. In other words a bank that acted decently would have to taken the desicion to lend less and less as the market spiralled further out of control with a considerable impact of their profits. No business wants this but with the two markets being so tightly linked any decision to 'stay out' of the market would have amounted to a political decision and not one the banks should be concerned about. Ultimately it was only the politicians with their control on fiscal policy that could have stopped this madness; they're more than happy to let the banks take the blame though.

More generally you, Stars and some others do a good job by bringing Henry George's theories to the debate, and I wish you well. To my mind the land cartel and the money-issuing cartel reinforce each other and together make a formidable tag team to impoverish the rest of us. In appropriate circumstances each could operate independently, but their combination seems worse than the sum of the parts.

As an aside, have you seen this: http://www.henrygeorge.co.uk/ :lol:

:lol: ROFL

Edited by chefdave

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In fact I even contest the point that its a cartel, there aren't limited spaces available you just need to get a banking licence to operate. Would you say that drivers form part of a cartel because you need to get a driving licence to legally drive?

Barriers to entry????

To get a banking licence don't you need capital?

Where are you going to get that from? If it was so easy to set up a bank why haven't all the current banks been replaced by new ones with no debt liabilities?

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Barriers to entry????

To get a banking licence don't you need capital?

Where are you going to get that from? If it was so easy to set up a bank why haven't all the current banks been replaced by new ones with no debt liabilities?

The point is they can be replaced, so that limits their ability to act as a 'cartel'.

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