The role and function of banks has changed over the years as the financial industry grew on the basis of a virtual house of cards.
Those of us who believed in the free market system are now thinking again.
Our earlier faith was built on a number of core doctrines:
1) The state should play a minimalist role in the economy.
At most, the state should create a stable political and legal context for capitalism to thrive, but leaving the magic of the market to ensure economic growth.
2) Free markets create competition that drives prices down and efficiencies up.
By allowing individual entrepreneurs maximum freedom to pursue their own self-interest, the common good of society is automatically served.
3) An independent and free market banking system is the best guarantee for a stable financial system.
This faith was fundamentally reinforced with the fall of the Berlin Wall. The Cold War was basically a fight between capitalism and communism, and in 1989 the fight was over.
To some we have reached “the end of history”; the final triumph of market economies over centrally planned ones.
We took a somewhat gleeful look at post-socialist countries frantically trying to move toward neo-liberal structural adjustments via aggressive privatisation of state assets.
The cracks began to show earlier rather than later. Counter-evidence became hard to ignore.
How does one explain the sustained and state controlled growth of China? Can one ignore that Cuba – under sanctions for 50-odd years — has a relatively low GDP, but outperforms on health and education (as measured via the Human Development Index)?
How is it that billions of dollars in development aid, built on a “one-size-of development-fits-all” yielded very low returns?
Were the privatisation efforts in Russia really successful, leading to greater gains for ordinary people instead of enriching a few?
Can a free market really determine price if environmental externalities are not factored in?
Can one trust a system that in the short term creates increasing wealth for the top 10% of the world, but slowly leads to such gross national and global inequalities that social stabilities are under threat?
History will tell us fifty years from now that the blind faith in capitalism was fundamentally disrupted by the very core institutions of the global financial system: the banks.
The English word “bank” as in “I bank on you to support me” basically means “trust”. “As safe as a bank,” we used to say.
The trouble started when banks became more than deposit-taking institutions, keeping our money safe and making a modest, but secure, profit from the difference in interest rate they paid us and charged those who borrow from them.
By basically controlling their debt book, keeping a close eye on the difference between its assets and its lending, banks grew over years into stable, trusted and conservative institutions.
But then the fancy stuff started to creep in: hedge funds, currency trading, derivatives, and such complex investment instruments that no one really knew the risk or actually cared.
Profits soared, bonuses went into the tens of millions, and spectacular short-term gains were achieved.
Slowly but surely the financial industry grew on the basis of a virtual house of cards.
Your and my deposits were used for strange things. What is printed on your bank statement is only virtual.
By not keeping normal banking clear from speculative banking, millions of people’s pensions and savings were put at risk.
The mirror image of 1989 was 2008 and onward. The triumph lasted a mere 19 years.
And to whom did the free market system turn for assistance? To the state, who should keep their hands off the market.
The “state” here means the taxpayer. So here we have an industry that is too large to fail (a gun against the head of all outside of the banks) using taxpayers money to survive, and then declaring huge bonuses based on their success the year thereafter. Only a few were ashamed enough not to take this blood money.
It is too soon to tell, but the Libor scandal — rigging of the inter-bank interest rate at Barclays — might be the tipping point in the public’s antithetical sentiment against the banks.
And the politicians, always keenly riding the wave of public sentiments, will move in with more and more rigorous and onerous regulation.
“We cannot trust self-regulation any more. The greedy banks must be protected against themselves. We will have to do it for them. Otherwise they might take us all down”.
From a local perspective, the point of the matter is this: In SA it was easy to keep the communists, proponents of a “developmental state”, and nationalisation of key assets at bay.
Seen in the light of global irresponsible actions, those crazy voices start to sound quite rational.