Bankers - who needs 'em?
Written by Ben Bennett on May 12, 2014.
The image of the fat cat, greedy, corrupt banker is something with which all readers will be familiar. The vilification of the banking community is something that frequently graces the pages of the popular press. Crashing economies, fixing interest rates and paying themselves fat cat bonuses have all led to a widespread distrust of the financial services industry.
Every time I see a new banking or insurance scandal in the headlines I have to sigh. It makes my job so much more difficult to when financial services is portrayed in such a negative way. Public impression is that the entire financial sector is either completely incompetent, riven with corruption and greed or both – it is in fact neither.
In saying that, I don’t want to be misunderstood or mistaken as an apologist for the faults of the industry; of course I recognise that some of the criticism is valid. In the subprime mortgage crisis for example, appalling initial lending decisions were compounded by unwise activity by the banks on the secondary mortgage market. Last year’s LIBOR interest rate fixing scandal is another example of justifiable opprobrium at what was essentially criminal behaviour.
Stains on the reputation of banking stretch back so far that even the place of its birth, the city of Babylon, is synonymous with corruption. All that said however, there is another side to the story that I believe deserves an equally fair hearing.
The time of development of the earliest forms of banking is indistinguishable from development of civilisation itself. As societies first began to form on the banks of the Tigris, farmers had to produce food for people beyond their immediate kin groups. The need to acquire seed in ever greater quantities was impossible without borrowing money; loans were made at planting season and repaid after harvest with interest paid from the profits on food sales. Banking was born and everyone won; the farmer, the lender and the people that were able to eat.
In the simplest terms, that example explains how banking works and why it has been around ever since. Without it, society simply couldn’t develop. Through every stage of historical development, if people or institutions were not willing to lend money then society would never have moved forward. It has always been that way, from the funding the building of the first printing press and financing the industrial revolution to investing in the development of the computer and the internet. Everything tangible that we value in the world has been made possible by banking and although people may pour scorn on the industry, it is no exaggeration to say that without it life would be boring, brutish and brief.
However, the huge gains that the banking system has unquestionably delivered to mankind come at the cost of the periodic and, most would agree, all too frequent financial crisis. Some economists believe that this is unavoidable because of an inherent contradiction central to the whole financial system. Most savers want stability and consistency, but the historical evidence suggests that growing economies are best served by a banking system that invests in entrepreneurs and risk takers. Get the balance wrong one way and you have a moribund economy, too far in the other direction and you end up with business failures, unpaid loans and a banking crisis.
The system is far from perfect but I recall Churchill when commenting on the nature of government: ‘democracy is the worst form of government, except for all those other forms that have been tried from time to time’ and I think banking should be viewed in the same light.