Sunday, August 30, 2009

Socially useless, privately useful.

Earlier this week, Lord Turner described much of our banking sector's activities as "socially useless". Well, if much of banking provides no value to society, why do bankers bother? The reason is simple, industry insiders are using these "socially useless" activities to rip off shareholders and savers.

Whatever bankers might say, running a bank is a straightforward business. A bank makes loans, and receives interest. It also provides non-lending services, such as money transfers, exchange rate sales, for which it receives fees. So long as a bank lends to firms and individuals who can pay back the loans, then the cash just rolls in.

Once the cash floods into the bank, it needs to be distributed. Some of it needs to go on running costs. Of course, the government needs their cut; a modest amount of tax needs to be paid. The rest goes to either the staff, the shareholders, or to depositors.

For the jokers who run banks, the question is simple; how do we get to keep as much of the residual profits without passing it on as interest payments to depositors or alienating the shareholders?

The answer is to generate a huge quantity of useless financial transactions which can be passed off as risk management techniques. These transactions, which are typically described as derivatives, generates huge bonuses for the staff and neatly redistributes income away from shareholders and depositors.

So, Lord Turner is right when he says that much of banking is socially useless. However, for bank staff, it is privately very useful. It keeps the profits of banking in the pockets of bankers at the expense of the rest of us.


  1. But wasn't the supposed social utility of the banks the reason why we had to bail them out ?

  2. Actually banks run the private sector by selective provision of finance. So they are kind of important....
    Every time this control has been handed to government the result has been poverty. You can have a profit motive as the basis for the investment in industry, or you can have government decisions which have shown to be hopelessly biased towards short term political advantage.
    If this argument is about enforcing existing laws and accountability, i.e. should banks make a loss, should savers make a loss, then of course they should. That they don't is a failure of government.
    Get rid of private banks and say hello to soviet central government.

  3. That's a fair summary. I'd ignore what Anon says.

    The more fundamental point is, this whole 'risk management' and 'collateralised debt oblgations' shenanigans was only possible on the back of a credit/property price bubble.

    If you tweak the tax system to keep property prices low and stable, then there wouldn't be a credit bubble in the first place. i.e. there are loads of property speculators*, estate agents, solicitors and so on who made a short term fortune while the bubble was being inflated and people were selling each other the same houses for ever more inflated values.

    That had no "social utility" either as not a single new house was built as a result. But whose fault is it that no houses were built? We can blame that on the NIMBYs, to be honest.

    * That includes me, of course. I'll put my hand up to that.

  4. Let's not forget the 'I' word, Mark.

    Without mass uncontrolled immigration there wouldn't be a housing crisis.

  5. Yes but how do we get the banks to be socially useful again.


  7. Confidence, perseverance, courage, all three in place, then the world is not impossible to do things.

  8. @ EK, sure, mass immigration must have played some part, but let's not forget:

    1. Those who lose out most are those on the waiting list for social housing.

    2. To some extent, immigrants depress property prices because they make an area less desirable.

    3. A lot of foreigners came here to work in construction and they are now leaving again.

  9. A rare thing. I agree with Mr Wadsworth.

  10. On the ground planted vegetables, it is unlikely that long grass; the hearts of the good, it is unlikely that health evil.

    Sur le terrain planté de légumes, il est peu probable que l'herbe longue, le cœur du bien, il est peu probable que le mal de la santé.

    Auf dem Boden gepflanzt Gemüse, ist es unwahrscheinlich, dass die hohen Gras, die Herzen der gut ist, ist es unwahrscheinlich, dass die Gesundheit das Böse.

  11. To Mark.

    The population has risen significantly in Britain despite a mass exodus of indigenous people. I do find it anomalous that house prices should have continued to rise despite this - especially as those emigrees have mainly moved to countries operating proper points systems. I conclude from this that - as we operate no effective points system here - the population in this country is being downgraded, de skilled, undercut. Where has the financial impetus for property rises come from ? I posit that this was the effect of loose credit. This is why I think the resurgence in the boom is temporary.

    I moved from London five years ago thinking that my area was going downhill (it was) owing to uncontrolled mass immigration. And yet the house rose in price by another £150k during the 'boom' (ouch !) It ain't necessarily so that there is a depressive effect on the market.

    Many of the foreign builders had been involved in building commercial properties and domestic renovation/improvement projects. Not necessarily new build housing projects. The govt is well below its targets on this.

    I do admit that this is all a bit of a mystery to me.

  12. But are you ready to have goverment seize 'the commanding heights of the economy', comrade Alice?

    It's quite a dilemma. Even if you don't buy the free market argument, seeing how cozy politicians and bankers have been in the last few years does not inspire confidence in a more socially useful public banking system.

    I know you've been arguing for more power to the shareholders in the past, but they can be bought just as much as bankers and politicians can. Just a matter of attracting short term speculators rather than long term investors. Or am I missing something here?

    No matter how I look at it, I just can't see a way of turning private greed into public virtue as long as the private greed is universal. Some significant portion of society has to have the common good in mind, to keep it from unraveling. Go ahead, tell me I'm wrong.

  13. Bring back Captain Mainwaring.

    British banks were the model of probity and social responsibility once, Anon.

    How do we devolve power skewed in favour of personal ambition to the good of the banking institution itself ?

    In preserving the bank and its integrity social responsibilities are met. The commanding ethos did not need to be discussed at any level, it was a given as it was part of our national character.

    On so many things can't the clock be wound back a bit ? If not, why not ?

  14. Bring back Captain Mainwaring.

    British banks were the model of probity and social responsibility once, Anon.

    How do we devolve power which is now skewed in favour of personal ambition, and short-term profit, to the long-term good of the banking institution itself ?

    In preserving the bank and its integrity social responsibilities follow. In the old days the commanding ethos did not need to be communicated at any level, it was a given as it was part of our national character. Slightly bumptious, patronising paternalism had some benefits whatever the feministas say.

    On so many things why can't the clock be wound back a bit ? Bring back some of those ideas that actually worked.

  15. credit party's on again?

  16. Ek

    The government claim that 3 Million houses need to be built has always been a complete lie, propaganda designed to keep the bubble going.