Monday, 26 September 2011

Blaming the Bankers

Bankers here means Investment Bankers.  No one is blaming the cashiers in High Street banks, I hope.

Daniel at Crooked Timber has written a piece to the effect that bankers are not all that bad, inspired by Joris Luyendijk, an anthropologist who's writing a blog about bankers for the Guardian.  The mainly leftish commentators on those blogs are almost all unpersuaded.  I've been meaning to write a piece myself on a similar theme: here it is.

1) Bankers are Greedy.

Yes, bankers like money.  But that's the basis of capitalism - people would rather have more money than less.  Footballers, musicians, doctors, academics, they all conform.

The real grievance isn't that bankers like money.  It's that they get it.

2) Bankers' wealth has come in the last three years from making the rest of us poor.

This is wrong.  Bankers (other than those working directly for the government) do not have the power to make huge sums of money disappear.  It's rather the opposite: by securitization of loans they made huge sums of money appear, or, if you prefer to count it thus, they made huge sums of money circulate faster.  The effect was to make some people - in particular those who sold property - richer, and to make lots of people who owned property feel richer.  The money ultimately went to pay for imported goods which people enjoyed having, hence the increasing balance of trade deficits in the UK and USA since 1998.  With the massive losses the banks inflicted on themselves through their mortgage-backed bond holdings, this source of money has dried up.

Governments outside the euro zone could, if they chose, restore their people's purchasing power by printing (electronically) more money - Quantitative Easing - to make good the lost circulation.  They don't do it on anything like the scale they'd need to because of frightening analogies with Zimbabwe or the Weimar Republic.  Arguably they shouldn't do it because international trade needs rebalancing before China owns everything.  But this rebalancing would be needed even if there had been no banking crisis.

In short, you can fairly blame the bankers for making us think we had more money than we did.  But not for the fact that we didn't really have it.

3) Bankers are useless

Investment banking activities fall into roughly the following categories.
i) Efficient allocation of capital.  This is necessary, and a lot of banking activity either promotes liquid markets - even short selling of shares - or creates the securities needed for corporates to achieve a desirable capital structure.
ii) Recirculation of money.  This is unnecessary: whatever the velocity of circulation the government is equally able (or unable) to adjust the money supply to give the value it wants to the left-hand-side of the Equation of Exchange.
iii) Tax avoidance.  This is unnecessary: governments could greatly reduce it by implementing flatter tax rules in which income would be taxed at the same rate whether it came as salary, dividends, debt interest, or capital gains.
(One might add to this category other tricks to change the appearance of accounts, such as the swaps Goldman Sachs used to help the Greek government conceal its true debt.)

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