Monday, October 06, 2008

What are banks for?

This is an interesting and complicated question, so I will start with some hoary chestnuts - the old sayings we have had over the years about banking.

1. So you want a loan? You have assets? OK, we'll lend you money against those assets. You don't have assets? Oh, dear, no deal.

2. You owe us $20 billion. You can't pay. You're important. We'll work something out. Oh, sorry, I misunderstood, you owe us $20 thousand. You can't pay? You're not important, we'll take your property. Thank you very much.

3. We're Jewish, you're not. We're foreclosing tomorrow. (a hoary chestnut much quoted in America's Midwest,and not my opinion)

4. Yes, we'll look after your savings. . . .

5. When times are good we're going to charge you extortionate interest rates. When times are bad we'll increase those interest rates. Well, the times are bad for us. . . .

6. Yes, we know the Central Bank just cut their interest rates, but that's for loaning us money, not you. So we are going to raise the interest rate on that loan we have with you. Just because we need a (dividend/bonus/helping hand/condo in Sarasota)

7. You're a small business about to go under? Well, why should we help you? We are a big business going under and we really need to walk away with one of the bonuses we are accustomed to. Oh, you have employees about to be made redundant? Tough luck is all we can say, after all, we are suffering just like everyone else.

And so it could go on. Banks - do we really need them?

Now, the truth is we do need banks. But don't you think we need banks that are properly regulated? Banks that fear that they can be audited and found out for the ultimate sin of kiting*? Our politicians are currently making all sorts of whimpering sounds that could be construed as excuses. Their complicity needs to be exposed. The central banks - where were they? On vacation, presumably. Ministers of finance? Hell, most of them were bankers yesterday so they cannot be trusted.

The mattress seems like a good place after all.

*Kiting - not an expression you hear very often because those who do it don't advertise. Banks are apparently quite good at kiting - which simply put means you borrow money and use the funds to establish credit against which you borrow more money. Banks borrow money from central banks, the same central banks that are now bailing them out! By any definition in the book, that's kiting.