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Nonsense on bankers

Alice Thompson is a bit of an economic dunce, isn’t she?

“Their private polling shows that the public loathe bankers more than politicians, so the Conservatives are desperate to disassociate themselves from the City. Voters are furious that the gap between the yachts and have-nots has grown rather than diminished in the past few months. While City high-flyers are once again buying £10,000 stocking fillers, eBay crashed last weekend under the weight of people trying to sell goods to get extra cash for Christmas. The more distance the Tories can put between themselves and the City the better. Even Boris Johnson, always a reliable guide to the prevailing political wind, has dumped his “monstrous” pinstriped friends. Instead, the Tories are courting the CBI and business, emphasising tax cuts for companies and promising to be “unashamedly pro-enterprise”. The message is clear: real businesses matter; the City doesn’t.”

Let’s unpack this. I read the entire, dreadful piece and it occured to me that Ms Thompson is wedded to the notion that if an activity – such as hedge fund arbitrage – cannot be immediately explained in terms of some physical good or easily understood service – like laundry – then it must be suspect in some way. She does not necessarily endorse all of the anti-market sentiment expressed by others she quotes in her article, but the overall tone is unmistakable. It is also a reminder that there is much hostility to banking, finance and the market on parts of what I might call the Right as among the Left, crude though such terms are in terms of political mapping.

Of course, it is true that the size of the financial services industry has been arguably swelled beyond what is healthy by decades of ultra-low interest rates, which have caused an increasingly manic hunt for yield, leading to the whole alphabet soup of acronym products associated with the credit crunch. But that is not the point that Ms Thompson is making. She seems to be saying that banking per se, when set against other kinds of economic activity, is wrong or morally dubious, and that we’d be better off without it. But whether “we” (who?) would be “better off” with a different mix of economic activities is something of a subjective judgement, not something that can be modelled according to some sort of utilitarian calculus. For instance, should banking make up 5%, 10%, or 20% of an economy’s gross domestic product? How much is too big or too small? Surely, in a proper market without artificial barriers to entry and without the distortions of central bank rates, regulations and the like, the size of banking as a sector will vary depending on the shifting sands of consumer preferences. That is all.

I am not suggesting that Ms Thompson take in all these points in a brief column for a newspaper, even if she had a clue about economics. But frankly, when I read yet another version of the centuries-old slur against speculators and “middlemen”, even if dressed up in the slightly “gosh how awful” tones of a rightwing female columnist, I think it is necessary to kick the offending author in a sensitive part of the anatomy. If Britain loses its edge in financial services due to a rash of bad legislation, heavy taxes and the rest, this nation is in trouble. The exodus is already well under way.

28 comments to Nonsense on bankers

  • She’s correct when she says that people hate bankers. Thing is, most people would have no reason to hate someone who has no direct involvement in their lives. For example, AFAIK, in most of the West you cannot get your salary if you don’t have a bank account. You also cannot save effectively without using the services of the financial sector. Etc, etc. All of this is the result of government interference in all money matters. And, if that was not the case, it could have the added effect of people in the financial sector not getting as rich as fast as some of them do, which would also neutralize much of the hostility towards them. So the argument should not be whether this or that financial instrument or business practice is good or bad for the economy, but rather why should we care about it in the first place. The answer is that we are forced by the government to be part of this game, whether we like it or not.

  • If as you say “The Exodus Is Well Under Way”, then it will take years if not decades for the poor buggers to trust this Island ever again.

    We _need their money_ and we _need them to buy yachts from HERE_ and _NOT_ from Monaco or Russia or Dubai. Small businesses that polish yacht-furniture _need_ to employ useful and clever people on low (but rising) wages in the UK and not from Poland or Latvia or Brazil. For the clever people there who want to polish rich bankers’ yachts, it’s your lookout, guys: make sure you don’t end up with a govt like this one – it’s YOUR CALL!

    I decided about 10 years ago that poor little Alice Thompson does not really know anything much. She’s a typical private-school-educated-dilletante-lady-jounalist-type writer. Even if she didn’t go to a private school, she writes like someone from 20 years ago who did.

  • Have you read any Karl Denninger on the bankers, Johnathan?

  • There’s nothing in that article that suggests the hysterics in this blog post.

  • RRS

    By these kinds of expressions, and many others that display fear (and loathing?) from ignorance, one is reminded of the comparison Hayek made of financial activities to those ancient days when blacksmiths were required to keep their forge and working outside the confines of the village because the general populace regarded the fabrications as being mysteriously generated – further fearful of dread connections by reason of the intense and lowing fires.

    Perhaps there is hope?

  • Johnathan pearce

    Joshua, she approvingly refers to a lot
    of anti banker sentiment and the flavour is unmistakable. I saw nothing to suggest otherwise. At no point
    did she point out in what was a comment
    piece as to how foolish such sentiments
    are.

    Sorry, she gets no free pass.

  • Laird

    Part of the problem is the lack of general understanding of what function financial intermediaries serve, and how they benefit a large modern economy. (Indeed, much of our modern economy would be impossible without them, which is why this sector arose in the first place.) People fear and mistrust wizards, who have inexplicable powers and do mysterious things. “Bankers” are today’s wizards.

    Yet another part of the problem (as exemplified by Alisa’s comment above) is the conflation of several types of financial intermediation activities into the single word “banker”. A commercial lender, a hedge fund manager, a residential mortgage lender, a portfolio manager, a credit card company, the manager of your local bank branch: they’re all lumped together under that one term, which necessarily implies that there are one and the same thing. But the truth is that they are all completely different.

    It would help if we (and the broader press) would start differentiating between types of financial activities. We don’t lump automobile dealers and dry cleaners into a single general term like “commerce”, do we? So why do so with financial services? People don’t “loathe” the teller at their local bank branch. Perhaps they do “loathe” bond traders and hedge fund managers (in the abstract, of course, since they probably don’t actually know any), but the latter aren’t actually “bankers” and both serve important and useful functions in providing liquidity and effeciency in the market. Yes, there were excesses (inevitable in an even moderately free economy), but as usual the market has squeezed them out (for now). We need to be careful not to throw out the baby with the bathwater.

  • Laird, what you seem to be saying is that the general public lacks sufficient knowledge in economics and finance, and this needs to be corrected. I agree that it is certainly desirable and would go a long way towards solving many problems. But on the other hand, you have to understand that too many people will never have the time and the willingness to educate themselves on money matters beyond their immediate needs. It really is the same as every other area of life: most of us don’t bother to understand anything about medicine unless we either find it interesting (and consequently plan to make a living of it), or we get sick. I shouldn’t really care about the difference between a podiatrist and a pediatrician unless I have problems with my feet or I become a parent. Simply put, people should be able to be paid for their work in whatever manner they choose, and they also should be able to save their earnings under the mattress without the fear that the government will devalue these earnings. Then, when someone wants to go beyond basic saving and make their money work for them in whatever way, they will obviously get interested in the subject and educate themselves about it. It also reminds me of a point Brian made in that long post on the CRU snafu: if not for the government meddling, none of us would feel obliged to bother ourselves with climate science, unless we found it interesting for some reason. To quote a friend of mine, “it’s just weather, people”. We really shouldn’t have to understand everything about everything, if not for fear that our betters are trying to con us in every possible area of life.

  • “She seems to be saying…”

    Nothing in particular, which is why articles like hers are dangerous. She approaches her subject, which is by no means limited to banking, but refrains from grasping it. Partial obscurity is a traditional and effective propaganda technique for those who wish to hide from rational scrutiny. And how many voters have time for more than a brief glimpse down the winding path?

    The more light that can be cast upon these people-roaches and their crooked innuendos the better.

  • Laird

    You (and everyone else) are certainly free to decline to educate yourself on matters economic; I have no problem with that. To each his own. The problem I do have is that most people are woefully ignorant about finance and economics but don’t know it, which I attribute primarily to the media (composed, as it is, primarily of economic ignoramuses). People generally don’t second-guess physicians because they understand that they lack the specialized medical knowledge necessary to do so intelligently. However, most people seem to think that, because they have a few $20’s in their wallet and can keep their checkbook more or less in balance, they understand finance and are entitled to express an opinion on it (or, more precisely, that their uninformed opinion is entitled to respect). And that’s utter nonsense.

  • Laird: obviously, but for the most part it is not their fault. Heck, there are even people who studied economics who have no better understanding of it than an average Joe – att least not of real economics. It seems to be somewhat different with finance, thankfully. People (both “regular” and “educated”) think that they understand money matters beyond their own wallet because they were purposely led to believe that. Over a very long period of time information was either withheld from them or they were fed false information. When I tell well-educated middle-aged people about fractional reserve, they think I’m pulling their leg. They also think that FDR ended the Great Depression, and so on. Who’s fault is it? Ultimately the governments’.

  • John B

    She is a person who sees a problem but mis-identifies. If banking were not protected by all sorts of corporatist and state protections and friendly Keynesian feelies with Whitehall it would never have got to this mess we are at.
    Human nature is human nature and the chance to make a slow or fast buck is what propels financial activity, not charity.
    Which is why, of course, the Austrian approach is cool because one deals with that as a reality instead of trying to pretend that we are all angels.
    The low (Keynesian) interest rates have, yes, skewed reality right out of the ground, as well.
    All the manipulations facilitated by the state.
    In fact I also have this feeling that many bankers and Whitehall guys are the same people.
    But, whatever, it does not matter.
    Take away the artificial protections and tariffs and whatever else, and reality would prevail. And one would no doubt find that a lot of current yacht owners will find they “over-stretched”.
    Tough.

  • noone

    Of interest:
    UK jails schizophrenic for maintaining right to silence
    http://www.theregister.co.uk/2009/11/24/ripa_jfl/

  • Gabriel

    Of course, it is true that the size of the financial services industry has been arguably swelled beyond what is healthy by decades of ultra-low interest rates

    Arguably?

    Just as you cannot support an economy on people who work in bars spending their money in bars, you cannot base an economy on people borrowing money to buy T.V.s and if the British economy is ever to return to health it’s abundantly clear that the banking sector will have to shrink. Nor should anyone mounr this. Let’s be clear, bankers nowadays are not free market heros, they are participants in a government supported cartel racket that has come firmly unstuck.

    Of course it would be better if instead of bailing out bankers and then hating them, the British public would let them go bust and then move on. However, the correct repsonse is not to run to the defence of city boys, for they have not only been involved in profoundly immoral activity over the past 20 years, but have acted in an utterly stupid manner. If they couldn’t see that throwing around 110% mortgages, parcelling them up and labelling them AAA and then blowing the resluting cash on champagne and cocaine was an unsustainable activity then they can go f**k themselves.

    As an aside, even without central banks propping up fractional reserve fraud, usury would still be a pretty mucky, if social indispensible, activity. Sort of like with prostitutes and though I think the activities of both should not be circumscribed by law, I won’t be inviting any over for tea any time soon.

  • Johnathan Pearce

    Just as you cannot support an economy on people who work in bars spending their money in bars, you cannot base an economy on people borrowing money to buy T.V.s and if the British economy is ever to return to health it’s abundantly clear that the banking sector will have to shrink. Nor should anyone mounr this. Let’s be clear, bankers nowadays are not free market heros, they are participants in a government supported cartel racket that has come firmly unstuck.

    Well of course. The reason why I used the word “arguably” was because I do not know – and I suspect you do not either – know exactly whether the banking sector, relative to other parts of the UK is “too big”. In the increasingly global division of labour that we have, London’s financial centre, remember, is not just serving the UK hinterland: it is serving much of the planet. One of the great benefits of London is its time-zone – intersecting the Asian, European and North American working days.

    As an aside, even without central banks propping up fractional reserve fraud, usury would still be a pretty mucky, if social indispensible, activity. Sort of like with prostitutes and though I think the activities of both should not be circumscribed by law, I won’t be inviting any over for tea any time soon.

    “Ursury” – charging a rate for borrowing money – is hardly wicked, Gabriel.

    If you understand the idea that capital is foregone consumption, and that there is a time-preference for money to be used now versus money to be used tomorrow or next week, then this will result in interest rates, which are prices for such preferences. Simple, really. Even under sharia law, BTW, scholars have had to devise alternative pricing methods to ensure that lenders of money get rewarded for carrying the risk of defaults, etc, and for making it worthwhile to lend that money. They do this to get around “usury” rules, but this shows what distortions are caused by those who regard banking as a sordid activity, as you plainly do.

  • Well of course. The reason why I used the word “arguably” was because I do not know – and I suspect you do not either – know exactly whether the banking sector, relative to other parts of the UK is “too big”.

    That’s the interesting question (duh). Personally I suspect that without governments’ intervention the whole industry would look very different, not necessarily in size, but rather in substance.

  • M

    We _need their money_ and we _need them to buy yachts from HERE_ and _NOT_ from Monaco or Russia or Dubai.

    If the recent bailouts tell us anything, they actually need ‘our’ money.

  • Gabriel

    “Ursury” – charging a rate for borrowing money – is hardly wicked, Gabriel.

    Wicked? No. Sordid? darn tooting. Like I said, I have no desire to ban lending at interest: I don’t think it’s possible and I don’t think it would be desirable

  • Gabriel

    … if it was. I’m just uncomfortable with the tendency of some on the Right to leap unquestioningly to the defence of bankers when prompted by the idiot demagoguery of the Left. Usurers are like bailiffs, we can’t do without them, but they earn their bread, in large part, by trading on the misery of others. Except in the case of bailiffs you can replace “bread” with “Ferarris”. Sure, the countless people whose lives are ruined by debt in every generation from the beginning to the end of time aren’t blameless, but, in the main, they aren’t wicked either. Bankers shouldn’t be torn to death by mobs, but they shouldn’t be eulogised as cultural heroes either, because they’re not. Nor, in my experience are they libertarians either, except in the sense that they don’t like they’re bonuses being taxed.

    I’m much more concerned, however, with the widespread belief that we *have* to bail out banks when they screw up and the profound distortions this has and is continuing to introduce into our economy. I’m sure that in some situations irrational anti-banker feeling can have bad effects, but in the situation we live in now irrational pro-banker feeling seems to be a rather bigger problem. So, I’m willing to let exponenents of the former off, even if they are rather inapt in expressing it.

  • but they earn their bread, in large part, by trading on the misery of others

    Where’s the misery in lending someone money to start their own business? I actually see it as quite the opposite: sharing in opportunity of growth and increased happiness.

  • Gabriel

    Where’s the misery in lending someone money to start their own business? I actually see it as quite the opposite: sharing in opportunity of growth and increased happiness.

    Apparently, you’ve never met someone driven to contemplate suicide by debt. Lucky you. And note, that sort of situation is not some accidental quirk of banking in some situations, it is an ineradicable structural feature of compund interest. Interestingly, one of the nobler things about Israeli society ,in my opinion, is the high degree (compared to here) to which people take seriously the maxim ‘never a lender or a borrower be’.

    I’ll make one more point. Even without the ludicrous sleights of hand in recent decades, all remotely sophisticated banking operations require a fair degree of fancy financial footwork in order to work. Accrodingly, there’s always a danger that if they get cocky and forget what they’re doing they’ll come unstuck. A usurer who knows that he is, broadly speaking, the moral equivalent of a slum landlord is much less liable to screw everything up. Of course, the social-liberals who now make up the banking profession have renounced the teachings of Moses and Aristotle and convinced themselves that what they do is good and “socially responsible”, especially if they have a Fair Trade cafeteria and drive a Prius. Which just goes to show that you can forget the the wisdom of the past all you want, but it’s liable to come back and punch you in the face.

  • Apparently, you’ve never met someone driven to contemplate suicide by debt.

    I’ve also heard people driven to their grave by alcohol abuse and even overeating – blame alcohol/food industry who obviously “trade in misery”? What about free will Gabriel? No one is forced to go into debt.

    Even without the ludicrous sleights of hand in recent decades, all remotely sophisticated banking operations require a fair degree of fancy financial footwork in order to work.

    Please see my first comment on this thread and further exchange with Laird.

  • Nuke Gray

    Have you heard the joke about the terrorist who hijacked a plane full of bankers on their way to a convention, and threatened to release them unharmed, one banker per minute, unless all his demands were met?
    You haven’t? Well, there was once a terrorist who…..

  • Johnathan Pearce

    Alisa has answered one of Gabriel’s points. But in fairness to Gabriel, he mixes what I think are some rather daft points with some perfectly good ones, so I’ll respond to a few of them:

    “I’m just uncomfortable with the tendency of some on the Right to leap unquestioningly to the defence of bankers when prompted by the idiot demagoguery of the Left.”

    Well, as you have been reading us for quite a bit now, you will obviously note that we certainly do not give an unquestioning defence of business or banking, especially in sectors that have often quite eagerly received billions of dollars/pounds in taxpayers’ money. The whole thrust of the free market take on the credit crunch is that banks must be allowed to fail, that interest rates should reflect the genuine balance of supply and demand for savings, etc. I think that far too many in the banking industry do not fully understand just how statist and distorted a business they are in.

    Even without the ludicrous sleights of hand in recent decades, all remotely sophisticated banking operations require a fair degree of fancy financial footwork in order to work.

    I don’t really see the point you are making. Sure, strip away the distortions of regulation, tax, fiat money and so on, and banking, like other things, will still be quite a complex business in some ways. So what?

    As for your point about people becoming mired in heavy debts, well yes, that happens, but as Alisa pointed out, a lot of borrowing activity is part of a healthy commercial system, enabling businesses to use the collateral they have to secure them loans for beneficial expansion, etc. An obvious example is the case of a small business with lumpy income flows who needs cash for weekly or monthly bills. A 365-day rolling credit line is one of the things that enable such a firm to keep running.

    As you would no doubt agree, a system that is based on honest money and with the removal of tax-funded bailouts would kill a good deal of the bad features of today’s modern banking. It will not entirely remove it, but then that is human nature for you.

    As for the crack about “slum landlords”, such a person who lets out property which poor people can afford might make the denizens of Hampstead or Chelsea wrinkle their noses, but consider that the alternative to a slum is often nothing at all.

  • Gabriel

    Alisa has answered one of Gabriel’s points. But in fairness to Gabriel, he mixes what I think are some rather daft points with some perfectly good ones

    As is my wont.

    As for the crack about “slum landlords”, such a person who lets out property which poor people can afford might make the denizens of Hampstead or Chelsea wrinkle their noses, but consider that the alternative to a slum is often nothing at all.

    I live in neither Chelsea nor Hampstead and I have no intention of abolishing either slums or slum landlords. I only note, again, that even in a society freed from the ludicrous state-induced distortions of recent years, there will be many (including many socially necessary) trades that are wholly mucky businesses. I suggest further that the maintenance of cultural taboos surrounding these activities serves a useful function in mitigating their potential ill effects. Usury is one of these activities and I submit that there are good reasons why the activity has been so widely and stridently deplored and that we dispense with this moral attitude at our peril. Finally, in a society where we do have all the state-induced distortions in the moneylending business, the sort of moral attitude I am describing is more necessary than perhaps it has ever been.

  • Laird

    “wholly mucky businesses”

    In your opinion. In mine, there are no “mucky” businesses where the economic transaction is wholly voluntary. I have no problem with usury, or prostitution, or gambling, or providing affordable housing, or whatever else you have some irrational aversion to.

    Keep your smarmy moral superiority. Just take care that you don’t drown when it rains.

  • Johnathan Pearce

    Laird beat me to the punch. Gabriel appears to be trying to say that lending money is somehow “mucky” but also admits it is a necessary, even vital, activity. Well if you use the word “mucky”, it implies clear moral disapproval on your part, unless you are being a bit sloppy in your use of language. (And you strike me as a guy who is usually very precise on such things, yes?).

    Finally, in a society where we do have all the state-induced distortions in the moneylending business, the sort of moral attitude I am describing is more necessary than perhaps it has ever been.

    You need to be clearer what you mean. Do you, for example, mean that in the absence of a welfare state, that certain moral social and cultural taboos against personal debt and living for today should exist? If so, you might have a point, so long as we understand the context, why a person is in debt, etc. But does this mean a generalised disdain for lending money? Well no.