Sunday, September 11, 2011

The Great Bank Robbery

Now we understand better what has happened over the last two decades. There has been an enormous bank robbery and the most surprising thing is that there is little discussion about it. We all know that banks have caused the mess we are in, they have been bailed out and now they are even benefiting from the crisis.

According to figures quoted by Nassim Nicholas Taleb ( the author of the best seller ' The Black Swan'), the robbery would amount up to 5 trillion dollars, so more than the amount that the Obama administration will have to cut in the federal budget. There is a clear explanation: banks have taken excessive risks with leveraging, which result in excessive profits and their losses are transferred to shareholders, tax payers and also retirees (for their pension funds). For many years, exposures were hidden and part of the profits continued to be given to investment managers as a remuneration of risk. This is a typical case of 'moral hazard'.

This massive robbery, as we can figure out, is not money invested in public goods such as infrastructure, schools or healthcare but transfers from the productive sector to the banks, which in fact, as Taleb rightly points out, represent a tax on workers and small businesses. The key point here is that a low interest monetary policy favors directly the banking sector as it reduces the rate of return from savings and   transfers the inflation risk to millions of  savers. So, in rescuing the banks, the State is just subsidizing profits to bank mangers and investors. This could explain why banks reimbursed the loans just after one year.

The scandal is the impunity of investment managers, whose remuneration is proportional to the level of risk. It is clear that this is a violation of elementary ethical rules. We should not be naive to believe that a well functioning market would have produced better outcomes and therefore there is no need for regulation and sound corporate responsibility.

The meaning of ethics among bankers and financiers is quite limited: concretely, it is about doing all kinds of financial investment, excluding  tobacco companies or corporations involved in former apartheid in South Africa, but obviously not hedge funds. Banks should do their normal business under strict supervision rules, ensuring that funds are invested in the productive sector and bonuses redirected to promote solidarity with the poor. The world would, indeed, look much different.

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