Casino Banking - Why the protesters are wrong

“Capitalism, also called free market economy, or free enterprise economy:  economic system, dominant in the Western world since the breakup of feudalism, in which most of the means of production are privately owned and production is guided and income distributed largely through the operation of markets.

Although the continuous development of capitalism as a system dates only from the 16th century, antecedents of capitalist institutions existed in the ancient world, and flourishing pockets of capitalism were present during the later European Middle Ages.”

                                                              *          *          *

There are of course many definitions of capitalism, but the above, extracted from the on-line Encyclopaedia Britannica, is as good as any.  Basically, what it says is that from time immemorial, this world has been largely capitalist, with a minority of people getting rich on the back of the (relatively) poor majority’s efforts.  It also suggests by its longevity that, for all its faults, the system actually works and is the best option for the human race.  Should this really be a surprise?  What alternatives are there (or perhaps more correctly have there been)?

Well….Communism obviously.  Nope.  It failed, but not until after nearly a century of imposing poverty on vast swathes of the human race in the old USSR and elsewhere.  Nowadays, there are still a few outposts that operate a form of Communism – Cuba, China and Venezuela spring immediately to mind – but even here it is not pure Communism, but rather a curious hybrid of Communist ideals financed by increasingly capitalistic mechanisms.   Without its oil revenues, Chavez’s Venezuela would be even more bankrupt than it already is (for all its wealth there is widespread poverty).  Cuba, since Fidel stepped out of the limelight, is relaxing its authoritarian ways and welcoming investment from outside, albeit on a limited basis right now, but is still an incredibly poor country.  China is probably more capitalist than Communist now, despite having a one-party system, and the second biggest economy in the world, the largest holder of US and Euro-denominated Government debt in the world (to the extent that the US Treasury Secretary and various European Finance Ministers and Presidents are cultivating strong ties with China that even 10 years ago would not have been countenanced, never mind encouraged).  As a system, Communism always looked good on paper, but the reality was always totally different – probably as a result of simple human nature.  Fact is, there will always be the Haves and the Have Not’s.   This has been true throughout history, and I have no doubt always will be true.  Look at these Communist societies: was there ever a poor First Secretary in the USSR (and I’m not talking about their origins which were often peasant poor, but how they lived and ended their lives)?   Castro and his brother and successor came from a comfortably well-off, middle class family and were professionally qualified lawyers.  Mao may have started off a penniless peasant but ended up running the biggest (by population) Communist society of the lot, and had no money worries to speak of – nor have his descendants, I’m sure.  So Communism is probably the biggest con trick ever, and was always going to fall apart when people started seeing through all the dogma and realize that there was no equality at all, no matter what their Beloved Leader or whoever may insist to the contrary.

Then there is Barter.  Basically, I’ve got a lot of this, and need some of what you have – care to do a swap?  Now there is a system that has lasted for thousands of years and still exists to this day (as any school kid trying to complete a Panini World Cup sticker collection will tell you), but as a means of supporting a global economy it can never ever work – because it can never ever achieve the scale needed to support a global system.  Besides which, how do you price it?  There are dozens of bankrupt, poverty ridden and drought stricken countries in Africa and elsewhere that do not have enough food and water to support their starving populations.  What can they possibly offer in exchange for these necessities from their more fortunate neighbours in a barter system?  Nothing.  They would have to rely on the same charitable handouts they do now, except that nations would be giving over tons of food or gallons of water rather than hard cash – and would they actually do that, if it left room for possible shortages in their own countries?  No – because, cynic that I am, I believe that human nature says look after yourself first and everybody else second.  Is that a selfish attitude to take?  Certainly – but it’s also the one that most people take, including those who are prolific in their charitable donations.  Face facts: if you are faced with the choice of giving your last fiver to Oxfam or providing a pressing medical need for your son, who gets the money?  Barter can only work when there is a clear and unambiguous exchange value – say a Wayne Rooney sticker for a Christiano Ronaldo.  But when relative values are to be applied, it gets much much harder – how do you assess the exchange rate of say a ton of feathers?  If you are a manufacturer of down mattresses then I’m sure you’d be happy to pay something for it, but to an African farmer it’s worthless.   So no, barter is fine in a limited sense but as a global financial system it is useless – which is why it metamorphosed into capitalism in the first place, probably.

                                                          
                                                                *          *          *

The point is that the world is different now.  Barter worked when it was mainly carried out between tribes or families in a small space – a single valley perhaps, or on the shores of a small lake.  You didn’t have to move things far to do the trade for a start – into your next door neighbour’s garden perhaps.  But as “society” spread and expanded and distances became greater (and hence communication slower and harder) the system started to change, as tribes grouped themselves together and started to form “countries” then the system started changing too – it had to.   Because one thing about countries and their populations is that they tend to have distinct characteristics – take the USA and Canada, for instance.  Next door to each other, share a border thousands of miles long, and populated largely by emigrants from the same parts of the world (primarily Europe).  And yet they are completely different.  The accents, whilst similar, are distinct from each other.  Their systems of government differ.  Their values certainly differ.  If someone were to kidnap you and take you there, unconscious or in a closed, windowless plane all the way, you would know which country you were in straight away.   So because they differ, and their values differ, their needs differ to, and so the barter system begins to break down.

Over thousands of years, as mankind spread across the world, from valley to valley then from country to country, changing all the time, new ways of life emerged, and new economic systems to support them.  And barter became capitalism, via feudalism.  That’s how it has remained.  Communism offered an alternative to this, and in a world where travel between countries was slow and relatively rare, and communication equally primitive, it was to many an attractive alternative, because people were often unaware of conditions in the next county let alone another country or the other side of the world.   The rise of the popular press and the advent of radio and tv and film started to change all that, and give even the poorest people a window on the world.  And advances in travel – better and more efficient road and rail networks,  faster and bigger ships, and in the last 100 years the extraordinarily rapid development of an air transport infrastructure and telecommunications network (especially since World War 2) have changed the game in a way that Marx and Lenin could never have imagined.  

Inevitably, Communism ended, and people in countries that had been locked into a decidedly unfair system for decades found themselves having to adjust to another equally unfair system – but one that at least held out the opportunity of making shed loads of money if you worked hard (or just got lucky).  Ask Abramovich or any other oligarch whether they would prefer to be living in early 21^st Century capitalist Russia or late 20^th Century Communist Russia and I am sure they would all vote for the present over the past.  As would most ordinary Russian citizens.  Not only Russians either: living in Warsaw for 10 years now as Poland has moved, reasonably successfully and smoothly, from a communist economy to a capitalist society I have seen much change.  There are of course still poor areas and inequality, even within the city itself never mind the whole country, but by and large everyone is much happier and better off than they were 10 years ago, or in the bad old days.  There is a sense of optimism throughout the country (the only EU state that did not dip into recession over the past couple of years of financial crises) that is shared by people in other countries like Slovakia, Romania, Bulgaria, the Czech Republic, Latvia and so on, sharing the same journey.

So clearly, as we approach a global population of 7 billion (sometime this week according to the UN) the world is a different place.  In my opinion the biggest change in the last century – perhaps in the entire history of the human race – is the explosion in telecommunications and the internet.  That, even more than safe, fast and frequent air travel, has enabled a truly global market to develop and with it a global economy.  Markets in money, in stocks and shares, in commodities like oil and gold and precious metals, in basic foodstuffs like grain and rice and vegetable oils, in cars and consumer goods, in clothes and entertainments like music and movies and books, are now linked as never before.  There is no longer a single place to go and buy any goods now: you can literally go onto the web and buy your new 3D tv at the best price including shipping costs from anywhere in the world, often easier than finding it in your local high street or shopping mall.

                                                                 *          *          *

So to support this interlinked global market, banking services have had to change too.   The high street bank no longer supports a limited number of customers with a limited number of services, mainly around providing cheque clearing and savings facilities, as they did a generation ago.  Nowadays even the smallest retail bank is expected to be able to provide global investment opportunities to a more discerning customer base.  Fail to do that and the bank itself fails.  Capitalism, right?  Survival of the fittest and (yes) most profitable.

So banks have grown, by a combination of merger and acquisition so that only the biggest and strongest can offer the truly global reach needed to service this new economy.  Not only do they service individual customers like you and me, but also the more (I hesitate to use the word) intelligent investor – the professional investors like pension funds, whose requirements are not so different from what I look for in my bank, but on a much bigger scale.  So to do this properly, they have to invest their own capital to drive the markets, and because it is a global market the sums are huge, beyond the comprehension of most ordinary people. 

They also grease the wheels of governments too.   All governments raise additional money from this market, because by themselves tax revenues will never be sufficient to finance all the work and policies that governments the world over need to follow to provide for their citizens.   So what is nowadays disparagingly referred to as “casino banking” developed.  In my day, relatively recently, it was highly respected and called investment banking, and any school or college leaver who wanted to work for a bank wanted it to be an investment bank.  Much more glamorous and yes, better rewarded.  All the major high street banks developed their investment arms, spending huge amounts of capital to do so, but against that generally made a significant return.  The investment banks are as important to the retail banks as they are to the rest of the investment community, because without them retail banking costs would be higher.  To take a simple example: the excess funds in any bank branch are placed in the overnight lending market to earn a bit of interest, some of which is passed back to you and I as interest on our funds in our deposit account, a bit more used to reduce the rate of interest that would be charged should our current account be overdrawn, and a chunk more taken as profit.  This market is controlled by the local central bank and is solely the preserve of banks – which is why it’s called the interbank market.  Without it, the supply of money to you and I as interest or personal loans or  mortgages very quickly dries up, and you’ve taken the first step on the road to recession.  It is critical to the global economy , and the most basic form of investment (or if you prefer casino) banking.

Goverments take similar measures on a massive scale, billions of dollars or pounds or euros a day.  As I said above, tax revenues never match government expenditure on things like education, or health care, or unemployment benefit or defence.  So they too use the casino banks to cover the shortfall.  This has been true for years, and after World War 2 most of Europe was highly indebted to the US, who as the world’s richest nation, had pretty much funded the war in one way or another.  This is still the case today, when you think about it.   Some countries are better at playing this system than others, of course: the US are past master and practically invented the system by introducing the Treasury bond market (a blueprint pretty much copied throughout the world as a means of raising additional government finance).  The Germans too have maintained a strong economy through judicious use of the market, as have the UK, France and to lesser extent Italy.  The Scandinavians too have been and continue to be consistently successful users.  But elsewhere, many nations, particularly in Central and South America, have tried to follow suit and for a variety of reasons not made such a good fist of things and ended up defaulting (i.e. going bust – think Mexico, Argentina, Brazil….).  Greece is in that state now – not because it has particularly extended itself – its outstanding debt is less than compatriots like Italy, Spain and Portugal – but because it is bloody useless at collecting its taxes.  Greek friends tell me of rich areas in Athens where only 6 taxable swimming pools out of a total in existence of several thousand in back gardens have been properly declared, and an island in the Cyclades where 80% of the population is registered blind……tax avoidance is an art form and a way of life.

                                                                           *          *          *

The point of all the foregoing is that capitalism, as a system, is not intrinsically wrong, and that in reality there is no real alternative to it at present.   The protesters currently camped in London’s St.Paul’s Cathedral churchyard, or marching from Brooklyn to Wall Street, or demonstrating outside the Greek Parliament have all basically got it wrong, if they are only complaining about “greedy bankers” or “inefficient government”, or the “capitalist system destroying all our lives” – as seem to be the most common and strident complaints.   So has any government, including the US and Britain, who seem intent on blaming the entire global financial crisis on a relatively small number of people (the banks) and legislating them out of existence.  These governments are also grossly hypocritical, given the frequency with which they go cap in hand to those same bankers to bail them out when they get their departmental sums wrong.

I am not saying that all investment bankers are as pure as the driven snow – having spent my entire working life, over 40 years, in the industry in one form or another, I know that is most definitely not the case.  But tarring them all with the same brush is manifestly unfair and just plain wrong.  They can be excessively well paid but when the pressure the average trader works under on any given day is taken into account, then to my way of thinking if they are successful then they deserve it.  Like all salesmen they are mostly working on commission, with targets set by the week, the month, the quarter and by the year.  If those targets aren’t met, there are no commiserations, and rarely a better luck next time – there is usually the P45 and the dole queue awaiting. It can be a brutal world and the price of failure is high: so why should the rewards not be equally high for the successful?  If a guy has spent a year sitting in front of a bank of computer screens, 12 hours or more a day, absorbing the volatility in the market then investing on his intuitive reading of the signs (I do hate the term “betting” for this activity) and at the end of the year has been largely successful and has generated several million pounds (or billions) in profit for his employer, then to reward him with a pat on the back and a five grand bonus – as some would have us believe is right and proper – is frankly more obscene than giving him a pat on the back and a five hundred grand bonus.  Doing that does not necessarily mean the guy is going to take bigger risks to achieve better results, and in any case any bank paying out that kind of money on that kind of profitability will be regulated by the government or whatever agencies manage the industry in their place of business, and hence should have systems in place to prevent that happening.

I accept it doesn’t always work that way.  Back in the 90s Nick Leeson traded incompetently and was poorly supervised and as a result the old and venerable British Bank Baring Brothers no longer exists.  I happen to know well the bloke who hired Leeson for Barings, as a clerk, and he was as surprised as anyone else when Leeson not only got a break on the Singapore trading desk but proceeded to screw up to the extent he did.  My mate’s opinion of Leeson was that he was a nice enough bloke, but  nothing special, and that it was entirely the bank’s fault that he was inadequately trained and supervised – in effect, they brought the mess on the themselves.  In the last couple of years there have been similar instances at Societe Generale and UBS, where multi-billion dollar losses have been sustained by inadequately trained and poorly supervised dealers, who in both cases have been pilloried in the press and saddled with the entire blame – rather unfairly, in my opinion.  I’ve been caught up in a case where a company, in my case a small private bank, was broken as a result of poor trading activity: the result was that 40-odd people found themselves out of work one Tuesday lunchtime.  There was nothing illegal about it, nothing even really incompetent, the guy in question had misread a couple of prices, and been unable to foresee a far bigger crisis brewing in one small sector of the market (as had pretty much everyone else in the business) but it was enough to close the door.  There were no hard feelings, then or now: it was accepted by everyone in the industry (not just in our company) that sometimes these things happened.  This was 20 odd years ago now and it hardly merited a headline: were it to happen now there would probably be an outcry and a public enquiry, and our unlucky trader in the dock in both the real and the figurative sense.

Again, none of this makes capitalism wrong or the banking industry as it stands wrong.  It is the way of the world, I’m afraid, survival of the fittest.  Humans are greedy and competitive.  Humans want to succeed and are prepared to take risks to do so.  Banks are in the business of making money, not only for themselves and their shareholders but also for their customers – that’s you and I folks! – and for their respective national governments in corporation and other investment taxes.  In the absence of a viable alternative economic system capable of supporting the global market and the world we live in, capitalism is right – what you see is what you get. 

The undoubtedly sincere but perhaps ill-educated and misguided individuals marching against capitalism and corporate greed and casino banking should consider this and at least present us with an alternative way of life that does not involve trying to turn the clock back five hundred years or so to a feudal society – which is the only way you’re going to bring a full stop to all they consider wrong and evil in modern business.   The chances are that the majority of these protestors are unemployed, for a variety of possibly genuine reaons, and hence are being supported largely through the efforts of the very people they are protesting against.    If they are unable to present an alternative society that does not involve ingesting interesting hebs in vast quantities and keeping your own goats and growing your own food (vegetarian diet mantatory of course) , then they should really be quiet and shuffle off back to where they came from, because to use a football cliché, at the end of the day nothing is going to change as a result of their antics.