It bears repeating that banks are not creators of wealth. They are places where you store the surplus value generated by productive enterprise. In very narrow circumstances that surplus value can be loaned out at a profit, but a financial sector is the icing, not the cake. This should be common sense, but apparently it is wisdom so rare it can only be learned in countries small and remote enough to avoid the deadly medicine of the global financial markets.
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Samizdata quote of the dayOctober 28th, 2011 |
 12 comments to Samizdata quote of the day |
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A lot of nonsense – supply of credit is the only way that profitable ventures can quickly expand or, in some cases, be established at all.
Oh dear. Did you actually read the linked article to see what is and is not being suggested?
The way in which the Icelanders have battled to deal with the aftermath of their banking fiasco is an object lesson for the likes of Greece.
No, I read the quote – and the sentiment is wholly wrong.
Then you are unwise to have commented if you did not follow the link in order to understand what was actually being discussed.
Not “wholly wrong”, but not wholly correct, either. Banks serve a valuable function in an industrial economy, as they are the intermediaries of credit (facilitating the alignment of those having capital with those in need of it). As do all good intermediaries banks contribute to the value chain, and in that sense they do “create wealth”. That said, they are not the primary drivers of wealth creation, merely its facilitators, and in that sense I think Cavanaugh is correct in his essential point that banking has become too large a segment of modern economies. It has become a tail wagging the dog, especially when one considers all the ancillary functions which the banking industry (writ large, to include the investment banking and proprietary trading functions) has taken on, the value of some of which is indeed questionable. (I’m thinking here of things like the second- and third-order derivatives, which don’t seem to serve any useful economic function other than to permit economically valueless speculation and create jobs for the “quants”.)
But on the whole it was a good article, and if Cavanaugh is overly dismissive of the role of banks, well, I can accept a little hyperbole to drive home the larger point.
Banks has become an over-used, term of widely confused meaning.
Even as long ago as that great tome of Westerfields’ Money, Credit and Banking it was important to describe banking, as an activity, or group of activities, rather than some loose term like “Banks.”
It is of course quite an oversite to dismiss the historic role of banking in the era of Financial Capitalism. The aggregation of deferred consumption (savings) together with business profits (surpluses) into a banking system made possible the last great period of dynamism in Western Civilization, which the subsequent aggregation of surpluses in the coffers of major industrial segments (as retained earnings or earned surplus) led to Industrial capitalism, now locked down into the stagnation of Managerial Capitalism. Banking (which was done through Banks) did have a major role in the wealth creation periods of Western Civilization. Today, the determinations of uses of surpluses are no longer within the domain of banking, but of a managerial class (and to some extent a political class of “managers). Thus, it can be said banking des not “create” wealth; but then what does; what can?
“Then you are unwise to have commented if you did not follow the link in order to understand what was actually being discussed.”
The quote says what it says. If you had quoted a different part of the article I may have agreed, but I don’t agree with that particular bit.
That said, it is actually a very interesting article and one I broadly agree with. But that particular passage goes a little off the deep-end, even referencing nonsensical marxist concept of “surplus value”. It’s one thing to argue that financial services needn’t be taxpayer subsidised for a successful economy (more than true), another to argue they’re not /necessary/ for a successful economy (possibly true, at least if you have access to foreign financial services), but completely different and totally wrong to argue that they don’t produce wealth.
The quote also had a link.
The first comment was revealing – “supply credits” not “transfer money from savers to borrowers”.
An honest money lender (which is what a bank should be) supplies real savings (his own or those of other savers – entrusted to him) to borrowers.
If the honest money lender selects the borrowers carefully (i.e. selects people who really will productively invest the savings) he does indeed help produce wealth.
But what is someone who “supplies credits”?
Is such a person someone who thinks (as I was told by a noted academic supporter of “free banking”, who was, in this, no different than the Keynesians) that a cheque (or whatever) is “private money”.
I.E. does not see a cheque as a request to TRANSFER money from one party to another, but as the CREATION OF NEW MONEY.
Ditto other financial instruments – such a loans, which are seen as “new money” (not as the transfer of money from savers to borrowers).
When one hears the term “fractional reserve banking” one naturally thinks that it means that a money lender lends out some (say 90%) of the real savings he is entrusted with and keeps the rest (say 10%) as a reserve – should “depositors” come to collect their “deposits” (I use the scare quotes because money that is intended to be lent out is not really a “deposit” at all – to “deposit” something means to leave it somewhere, not lend it out).
However, this is NOT how modern financial master minds (including some, NOT ALL, “free banking” supporters) think at all.
To them the term “fractional reserve banking” does not mean lending out a fraction (perhaps the vast majority) of real savings and leaving the rest as a reserve.
To them fractional reserve banking means the CREATION OF MONEY.
For example, by “crediting to the account” of a borrower – rather than transferring the money of a saver to a borrower.
In various (very complex ways) such people (basically the entire elite – academic and political as well as financial) think they have discovered the Philosopher’s Stone, or a perpetual motion machine (accept it is a perpetual motion machine that speeds up).
They do not lend out a “fraction” of real savings – they think they can lend out more (vastly more) than real savings. That they can “create money” (by book keeping tricks) and have rates of interest below what the time preference of real savers would indicate.
They can not – not in the end.
The foundation of the modern “finance economy” (with its need for endless bailouts, hidden as well as open, by government Central Banks) is insane.
But it will not be destroyed by the words of a nobody like me.
Empirical reality will strike – and strike hard.
For the end of this insanity will be terrible.
And, yes, the link is to a good article Perry.
For example, Ireland has not “cut government spending” (as the media constantly claims) because, in reality, Irish government has spent vast sums ON THE BANKS.
Iceland (on the other hand) allowed private banks to suffer what should be the fate of any private enterprise that is badly managed – BANKRUPTCY.
Thus Iceland did not cripple itself with spending on the banks.
Although (it should be remembered) that the government wanted to do this.
It took two referendums (the government did not like the result of the first referendum, so ran it again with “changed terms” in agreement with Britain and Holland) to reject the policy of bailoutism.
And the Icelandic people would not have got a chance to reject bailoutism – without a President who, although a leftist, had a ecentric (pro democracy) streak.
In point of fact, Iceland’s banks were neither creators of wealth nor stores of wealth: they were destroyers of wealth on a grand scale.
Banks can create wealth — and I’m not sure that “primary” in Laird’s sense is really a significant qualification — but there’s no reason to blindly assume that’s what they are doing.