The Daily Bell
Issue 405 • Wednesday, September 09, 2009
HSBC chairman Stephen Green says banks owe debt to society
One of Britain's top bankers has thrown his weight behind claims that much of what investment banks do is "socially useless". In a speech at the Banking in the Process of Change Conference in Frankfurt on Tuesday, Stephen Green, chairman of HSBC, called for a cultural overhaul among banks, including an end to "excessive" bonuses, to ensure markets are more socially responsible and less obsessed with short-term profits. Arguing that the "so-called Washington consensus - with its theoretical underpinning in the 'efficient market hypothesis' - will not survive the present crisis", he said: "At their worst, financial markets can be engines of destructive excess. In recent years, banks have chased short-term profits by introducing complex products of no real use to humanity." He added: "Some parts of our industry had become overblown, and that certain products and services failed the tests of usefulness, suitability and transparency."
Mr. Green's observation that "capitalism generally, and banking specifically, needs to reaffirm its commitment to contributing to social and economic development" echoes the comments from Lord Turner, chairman of the Financial Services Authority. Lord Turner said the financial crisis had exposed much of banking as "socially useless" for all bar high-earning investment bankers. - Telegraph
Dominant Social Theme: Bankers better straighten up.
Free-Market Analysis: If one just read mainstream articles about banks, even those that appear in the Telegraph, one might come away very confused. According to those who run banks, write about banks and regulate banks, these institutions are the most fascinating, powerful and flexible entities on earth. They come in assorted flavors, with the most attractive being, perhaps, investment and commercial banks, and they inspire an almost obsessive amount of passion - both positive and negative - from those inside and outside the industry.
Now Stephen Green, a banker himself, has put forward the brief that excessive banking greed must be reined in for the greater good of humanity. Funny, we thought the point of a free-market was to allow the invisible hand to make decisions about such things. There is something downright weird about such pronouncements. Is Green coming out, then, and admitting that the market has failed? Strange to hear it from a banker.
Apparently, Green believes that a market-driven lust for short-term profits has short-changed the greater society. Additionally, he seems to believe that the efficient market hypothesis is fallacious and on it's way out. "Financial markets can be engines of destructive excess," according to Green. Ah! Obviously this line of reasoning leads us the madness of crowds and to corollary point of view that since markets are irrational, a good bit of regulation is necessary to keep them in line.
Worthy minds can argue about these issues endlessly - and many have. Our own humble opinion - and our minds are not so much worthy as small - is that the market does work. If it does not, that's only because it has already been distorted by various kinds of fiddling that don't allow it to function. And we would argue that banks have not been allowed to function as banks for decades, even centuries - and that they have distorted the larger financial market as well.
What really is a bank? It is a warehouse, nothing more. It is a place to store gold and silver. Only gradually did owners of banks begin to lend out money beyond what was stored in the vaults, and then only cautiously. That was called free-banking, and we think it worked until ... a crowd of jewelers got together and convinced a British King that they could more efficiently fund his war 500 years ago if he allowed them to pretend the money they issued was blessed by the Crown. Thus began the first central bank. Its mission was twofold, to give the king more money for war and to enrich those who funded the initiative to begin with.
As you can see, there is nothing much about a social compact in all of this (unless a war is considered one). But these days central banks, and banking in general, are positioned as a community service, an entrepreneur's friend, a giver of donations to great community causes, a stabilizer of the currency, a dedicated fighter against joblessness, a dedicated guardian of the solvency of money, etc., etc.
There is almost nothing that a bank can't do, and a banker won't be encouraged to try, so long as it is to be totted up as a social good. Even when banks do rotten things, these are said to be mistakes that need to be reined in. The industry itself is good-hearted but only gets carried away from time to time.
While we understand the temptation to glorify places where money resides, we are not so enamored with banks as some. As we wrote above, they began as warehouses, and when they began morphing into modern day banks it was only because some king wanted to fight a war and some jewelers figured out how to fund it.
The rest of the stuff in our opinion is window dressing. But those who want to protect their franchises are not loath to pile it on. Banks, especially central banks, are very powerful now. Banking has surely got to be the most powerful industry on earth, and its acolytes like Stephen Green want to make sure they keep it that way. So they invent all sorts of high-minded missions for banks. Banks, says Green, are such powerful creatures that they must be handled with care. They must be cosseted, lectured and regulated all at once. Sitting at the beating heart of humanity, banks are ineffably precious and in need of loving pruning.
But we could make the argument, and we have, that there is nothing wrong with the efficient market theory and that the reason banks get into trouble is because they have been allowed to print endless amounts of money. Banks don't need regulating. They simply need to surrender their rights to a money monopoly, at least central banks do anyway.
Absent the ability to print as much money as they want, banks would not need the kind of regulating that Green thinks they do. Banks would not be the engines of destructive excess. Banks would function in the real world, be amenable to the discipline of the marketplace and salaries would be within the norm of ordinary paychecks.
But in reality, banks salaries do reflect the position of the banking industry. Work in it, and your salary at the top end is driven by the industry's monopoly on fiat currency. Say ... if you worked in a place that could print all the money it wanted, your salary would be commensurately high as well. If you worked in a place that could print all the money it wanted, you would juice the economy until it boomed so hard that it seemed "irrational." You would then call claim the efficient market theory was out of date, when really the market was efficient as hell - it was just reflecting the irrationality of so much money printing. But you wouldn't want anyone to know that, would you?
Green and the rest of the bankers at the top of the heap can't admit that a bank's monopoly fiat logically justifies the rest of what has gone wrong. These are logical outcomes of central banking - overblown salaries, fantastic money surges and a boom/bust economy - the most pernicious, sly and ludicrous invention of the past half-millennium.
Conclusion: Bankers like Green will do ANYTHING but face the reality that if they gave up the central banking franchise, they wouldn't have to do anything else. Gone would be the necessity to harangue bankers over social responsibility. Gone would be the dramatic booms and busts driven by fiat money. Gone would be the need for a thousand inefficient regulators. Gone would be the need, even, to demean the efficient market theory. It would be a quieter world. And bankers would cease bemoaning their own irresponsibility while slyly pocketing their sky-high bonuses. It all seems, shall we say, a tad hypocritical? ...
"I weep for you," the Walrus said:
"I deeply sympathize."
With sobs and tears he sorted out
Those of the largest size,
Holding his pocket-handkerchief
Before his streaming eyes.
"O Oysters," said the Carpenter,
"You've had a pleasant run!
Shall we be trotting home again?"
But answer came there none--
And this was scarcely odd, because
They'd eaten every one.
- Lewis Carrol