A joke – Three guys walk into a bakery; an investment banker, a government employee, and a tea partier. The lady behind the counter puts out a dozen cookies. The investment banker pockets 11 and tells the tea partier the damn government worker is trying to steal his cookie.
There was a time when bank managers were seen as the most upstanding member of the community (I think of Captain Waring in Dad’s Army). The bank manager may have been very strict about not giving you a loan to buy a new car, but you knew he was going to be fair. You certainly didn’t expect your bank manager to borrow from an international money market and use the loan to buy into some crazy sub-prime mortgage bundles from Florida.
But, times change. The last two to three decades have seen a real change in the way banking has operated. In the UK, building societies were replaced by PLCs intent on maximising growth and profit. Traditional banking models evolved into more risky models where prudence was given less importance and risk-taking was encouraged. This evolution in banking and finance took place against a backdrop of financial deregulation and widening income inequality. The (largely uncontested idea) was that if firms could make excess profit they could deserve to keep the proceeds. There was a certain logic to allowing free market forces to dictate profits, wages, bonuses and banking activity. Why should government try to regulate an industry they didn’t really understand?
The credit crisis of 2008 exposed these new positions and attitudes as being highly risky and misguided. It led to catastrophic losses in the financial sector, which threatened to undermine our financial and economic system.
Usually in a free market, if a firm goes bankrupt because of misguided investment decisions, that’s it – tough luck. But, in the case of the banking system, banks were seen as too important to fail. Therefore, throughout the Western World, taxpayers were forced to bailout banks to prevent them going out of business. The logic of the free market was turned on its head. In the good times financers benefitted from huge bonuses, but when things went bad they were bailed out. Heads you win, tails someone else loses.
Yet, there was still a logic to bailing out the banks, it may have seem unjust, but it was arguably much better than the alternative of allowing a real collapse in the financial sector.
Yet, if your industry does get bailed out by the taxpayer, you can’t blame the taxpayer if they start to question:
- Why aren’t you lending more?
- Why is there such inequality in income and bonus?
- When will there be proper regulation to prevent a repeat of 2008 crisis?
- Why does Wall Street always seem to gets its own way when it has contributed to so many economic problems?
The Bank of England recently warned about bank bonuses at a time of mass unemployment.
Banking and Other Crisis
Bankers have become an easy target. Primarily because the financial crisis of 2008 has precipitated a much more serious economic downturn, which has led to higher unemployment and falling incomes. Though bankers and financiers need to accept a large share of blame for initial crisis, they can’t entirely be blamed for the more general failure to tackle unemployment and the government push for austerity. in the face of a double-dip recession.
Yet, some crisis are directly related to the financial crisis.
Take Ireland. Banks lose exorbitant sums. The government offer unconditional bailout to banking sector. But, government debt rises too quickly and the Irish government need their own bailout. (A bailout to pay for a banking bailout). The result is that Ireland have embarked on a series of painful austerity measures, leading to a decline in living standards.
When I was an A Level economics student I wanted to be an investment banker. If things had worked out slightly differently I would have been a banker too. Perhaps this gives me greater sympathy to their position. But, you can criticise the way an industry operates without making it personal.
How Bankers Can Help People
There is no necessity to have this conflict of interests between bankers and people. A good functioning banking system is integral to a successful working economy. As someone said, ‘we need to make banking boring again’. Get back to the traditional models of saving and mortgages and there is no reason why the banking sector can’t be helpful.
1 thought on “Bankers vs People”
I went through the whole article, its really very interesting esp. that joke. That joke covers the entire theme of your blog bankers vs people.
thank you for such valuable information.