Financial Industry

[Traktion]

Having listed to various comments about the city being profitable, the financial "industry" being key to our economy and such, I have found myself questioning why this is the case.

If banking is there to enable us to trade with ease, why is it such a big part of our economy? Is playing with numbers to try to make other numbers not a pretty strange business to be involved in? Why do other countries need to come for us for such services when any country can have its own banks?

Basically, I would be interested in hearing the arguments of why having a big financial "industry" is a good thing and why it is something we are in a unique position to offer.

[jonpo]

in a capitalist society... banking is actually one of the purest forms of wealth creation...

"from each according to his riches to each acordding to his ability"

in no other system is the productive capacity of the nation channeled so effectivly to those with the ability to enrich it...

of course... the bailouts are a perverse distortion of that logic....

as a nation we have the following advantages:

1 central timezone... lots of wrold trade goes on during UK business hours.

2. close to europe but not too close.

3. language... no one LIKES speaking french except the french.

4. percived low corruption and reasonably balanced regulation (not to strong not too weak)

5. rule of law.

oh and ...

free free money no printy printy at bank of england... too unstable sell sterling... no good for asians just paper money...

badger say he not stupid he not borrow off other people... now he just printy printy..

Edited September 28, 2009 by jonpo

[Authoritarian]

You only have to look at the vast number of countries that have suffered from hyperinflation to see how easy it is to get things wrong. When I looked it up on Wiki a while back the list seemed endless!

The banks have become the scapegoat for all our problems so its easy to overlook the useful stuff that they provide, day to day life would be unthinkable without a banking system and ours is still pretty good compared to many places in the world.

Although Britain is crap, there are so many other places out there that are much much worse than here so perhaps thats why we happen to be in a unique position to offer financial services.

Edited September 28, 2009 by chefdave

[wonderpup]

The only argument I have heard in favour of banking is that it facilitates the optimum allocation of capital.

This may have been a joke.

[jonpo]

This may have been a joke.

in the context our our financial industry yes! lol

[Authoritarian]

The only argument I have heard in favour of banking is that it facilitates the optimum allocation of capital.

This may have been a joke.

Unfortunately this crisis has nothing to do with capital. Its to do with land.

We need a few more real capitalists in this country, not rent seeking opportunists that want to enrich themselves at the expense of others.

Edited September 28, 2009 by chefdave

[Traktion]

"from each according to his riches to each acordding to his ability"

Yes, this is very logical, but does banking in itself create wealth? I can understand how those with money can invest it in business which may create more money - this process, the banks can handle. I can also see how the banks can cream some off the top for themselves.

Are we therefore saying that our banks know to find good businesses to invest in better than others in other countries? Wouldn't other countries be better placed to know this themselves?

[Authoritarian]

Yes, this is very logical, but does banking in itself create wealth? I can understand how those with money can invest it in business which may create more money - this process, the banks can handle. I can also see how the banks can cream some off the top for themselves.

Are we therefore saying that our banks know to find good businesses to invest in better than others in other countries? Wouldn't other countries be better placed to know this themselves?

The banking system is wealth, and just like any other tool it allows us the flexibility to create more wealth.

Any system that we create that gives us more choice in how we run our financial affairs has to be a form of wealth IMO because of the new range of options available that we didn't enjoy previously. You don't have to use it but its there and its convenient if you decide to do so.

But then I'm a Georgist so I'm not as prone to bank hating as many others.

[porca misèria]

Yes, this is very logical, but does banking in itself create wealth?

Yes, it provides a service to people and businesses. The wealth it creates is the value of that service. In the same way as, say, a retailer provides a service.

Or a hairdresser, come to that. Big and small businesses alike create value when they provide a service. The exception to that is those businesses that rely on money that is not willingly given (spent) by legitimate customers: that is to say bailout recipients consume more wealth than they produce. That can be acute (banks) or chronic (cars).

I can understand how those with money can invest it in business which may create more money - this process, the banks can handle. I can also see how the banks can cream some off the top for themselves.

That, with related services (above all, the plain old current account) is precisely the legitimate business of a bank.

Are we therefore saying that our banks know to find good businesses to invest in better than others in other countries? Wouldn't other countries be better placed to know this themselves?

There may be an element of that. But what I suspect you're getting at is the dark side of city finance. Financiers control mindblowing amounts of money, and are tempted to abuse it. Leave that to brew, and bad money drives out good: that is to say, the ethical become uncompetitive. Long-term they might win, but not while the bad get bailed out.

Perhaps you're also distinguishing between banks as a facilitator of actions by others and banks which make themselves the focus of action? Yes, the latter is AFAICS pretty-much universally bad, in that when they play zero-sum games they do not provide value, and the wealth that "creates" is in fact creamed off from the real economy like a tax. And then there's what we've just seen: channeling money into unsustainable leverage, driving up inflation.

[jonpo]

Yes, this is very logical, but does banking in itself create wealth?

It facilitates wealth creation and that in itself is a service creating wealth.

there is however no reason that this must take place within a traditional banking setting. and not some type of syndicated loan exchange (like Zopa) or within an asset management type basis (mutual funds etc).

the clearing systems and regulatory biases of course conspire to produce sub optimal results.

[Bloo Loo]

Banking cannot create wealth.

It makes nothing.

except the means of exchange. which only has a value based on what it can be used to exchange for.

Banking should allow those with excess means of exchange or wealth to invest in wealth creating activities.

sadly, bankers find that task a bit too hard. there are bonuses to be found and risk to be avoided.

so what do they do....they find the investors...easy, and ponzi the funds out to householders, increasing the " value" of static assets.

some goes to industry, but boy do they pay for THAT.

there are just too many bankers...we didnt need to bail them, the money wouldnt have gone anywhere, but investors would have lost out on their poor bets, and bankers would have lost their jobs. Deflation would have hit, and probably gone away BY NOW!.

[The Spaniard]

There are three functions to consider:

1) The origination/creation/provision of the means of exchange.

2) Utilitarian banking.

3) Investment banking, the allocation of capital.

The first should be done only by a public body, fully transparently and scrupulously regulated. This is so obvious when you think about it. Read my signature.

The second and third should be in the private sector but they should separated, e.g. Glass-Steagall. Joe Public does not want the City gambling with his money.

Unfortunately since “big bang†all three functions have been amalgamated and we see the horrific consequences.

[JustYield]

It facilitates wealth creation and that in itself is a service creating wealth.

That's not creation then, is it?

If the economy is a dog, which in the UK it most likely is, then the financial services sector should at most be the tail. And it should only wag if the dog is happy.

The banking sector cannot fundamentally create wealth, at best it can help unlock potential wealth, which otherwise would remain untapped. Given that's what they're supposed to do, why are they so well rewarded for this utility function?

[Injin]

Nice summary.

More like communist fail.

[The Spaniard]

More like communist fail.

There are two ways to issue/provide a means of exchange in a way that does not put that power into the hands of a privileged minority.

1) A public body, with all the necessary transparency and oversight.

2) Free-for-all DIY money.

Both systems effectively distribute the all-important power to create money amongst the people, though in radically different ways.

I think that for a modern complex economy the benefits of the former outweigh those of the latter, you disagree.

I am not at all advocating communism, as I think you already know.

I propose a publicly issued money supply as a utility for a maximally free-market economy.

If, as we now have, money itself is a profitable “product†then its commercial providers inexorably come to dominate the economy, politics and society, to the detriment of almost all of the people.

[babesagainstmachines]

Banking ensures that those who have existing wealth can extract some of the production of others, through usury. It's morally wrong in my opinion. Wealth should come from labour and invention, not from resting on your laurels.

[the end is a bit nigher]

Yes, this is very logical, but does banking in itself create wealth? I can understand how those with money can invest it in business which may create more money - this process, the banks can handle. I can also see how the banks can cream some off the top for themselves.

Are we therefore saying that our banks know to find good businesses to invest in better than others in other countries? Wouldn't other countries be better placed to know this themselves?

Nothing creates 'wealth' except the printing of more money and the creation of more debt.

[Stars]

Nothing creates 'wealth' except the printing of more money and the creation of more debt.

Not true

Wealth is the stuff people want. If you create something that people want, you create wealth.

[Traktion]

There are two ways to issue/provide a means of exchange in a way that does not put that power into the hands of a privileged minority.

1) A public body, with all the necessary transparency and oversight.

2) Free-for-all DIY money.

Both systems effectively distribute the all-important power to create money amongst the people, though in radically different ways.

I think that for a modern complex economy the benefits of the former outweigh those of the latter, you disagree.

Can both monies not live side by side?

What we seem to have currently is a state sanctioned currency (like 1), but private businesses then duplicate, share out and profit from. This is surely the worst situation to have.

If we say that banks don't create wealth themselves, but merely redistribute/create "money" to other people, then surely they need other people to do something profitable with that money in order for it to create wealth? It seems that this part may have been sidelined, with blowing up a credit bubble, via monetary inflation, becoming a priority instead (which would never be sustainable).

Why not have both 1 and 2? A state money and alternative monies? If it is impossible (or at least illegal - no FRB) to inflate 1 and foolish to inflate 2 (as it would debase the currency relative to 1 and other 2s), would there be a world where only potentially profitable loans are given?

[Injin]

There are two ways to issue/provide a means of exchange in a way that does not put that power into the hands of a privileged minority.

1) A public body, with all the necessary transparency and oversight.

2) Free-for-all DIY money.

Both systems effectively distribute the all-important power to create money amongst the people, though in radically different ways.

I think that for a modern complex economy the benefits of the former outweigh those of the latter, you disagree.

I am not at all advocating communism, as I think you already know.

What you advocate is in the communist manifesto.

I propose a publicly issued money supply as a utility for a maximally free-market economy.

Maximally free market while telling me what I'll use as money at gunpoint, righto.

If, as we now have, money itself is a profitable “product†then its commercial providers inexorably come to dominate the economy, politics and society, to the detriment of almost all of the people.

It's.

Not

Your

Choice.

[Traktion]

Go to the FT site and read Willem Buiter and Martin Wolf on banking. Strongly argue for 'utilitarian banks' with a very much reduced scope of services - this is what would be subject to any tax payer guarantee.

Or read Adair Turner's intelligent questioning of the City's broader role and whether it adds value or extracts it like a tax on the rest of the economy.

Thanks, I will have a read.

My feeling is that they have become more of a private tax than a mechanism to add value.

It is probably important to define what wealth is too. Some see it as money in the bank or the number of assets someone owns. Surely though, wealth is more about gaining more (freedom, better standard of living etc) through less toil. A good banking system should surely allow the populous it supports to work less or gain more. This would be through businesses making efficiencies, so doing more with the available resources (be it people or materials).

If it has become about making the few more wealthy by making the many less wealthy, then has it not failed to add wealth universally?

[the end is a bit nigher]

Not true

Wealth is the stuff people want. If you create something that people want, you create wealth.

I was thinking wealth in monetary terms. How can everything be worth more than the total available with which to purchase it?

[Traktion]

My own idea would be to without bonuses beyond a certain size, such as $50,000. If a bonus is bigger than that, then it should be paid out over a longer period, such as 5 years or longer, with maybe 20% paid per year. The bonus pool funds could them be invested in preferred stock of the bank, or in "their own cooking"- products, like mortgage backed securities. By forcing the bankers to "eat their own cooking", you may move them towards more responsible behavior. Also, the bonus pool monies would be a first line of defense, ahead of government bailouts, in rescuing the banks if they got into trouble. (I have thought I would write an article about this- it seems and obvious idea. Why is no one else proposing it?)

This seems to be the current line of thinking by the politicians - an improvement to the current system, rather than wholesale change. Do you think such measures can/would work? Would they not find a way around a capped bonus system? Even if they were told that they must reinvest a certain amount of profit back into the bank, are we not just trying to micro manage a flawed model?

Should we not strive for a system which does not require intervention/regulation from an external body? It seems while we are all fallible, no one body or person can possibly know what is the right/wrong way to do things. If, for instance, the above mechanisms to make a bank sound were in some way circumvented, would the regulators spot it? Indeed, it seems like they didn't see the obvious danger that many of the products the banks were peddling presented pre-crash.

IMO, if we are going to have a system which is sustainable, it needs to be one which is self correcting.

EDIT: sp

Edited September 29, 2009 by Traktion

[The Spaniard]

What you advocate is in the communist manifesto.

I can't help that. Not read it, myself.

Maximally free market while telling me what I'll use as money at gunpoint, righto.

As Traktion says, maybe there's room for both systems in parallel.

The publicly issued currency mandatory for paying taxes, otherwise please yourself?

It's.

Not

Your

Choice.

What does the pronoun "It" refer to? What exactly is not my choice?

[Stars]

I was thinking wealth in monetary terms. How can everything be worth more than the total available with which to purchase it?

If everyone must only use x as money, then the purchasing power of x will rise to allow the transactions

Then of course it can be hoarded

The real transactions are wealth for wealth; wood for coal, coal for paper and paper for potatoes. In a way the money is really irrelevant to them (only an enabling tool). There is always enough wealth to swap for itself.