Don’t invest too much in bank-bashing

Banks acted stupidly, but the fashion for denigrating finance is going too far.

As the interlocking financial and political crises in the eurozone and Occupy movement continue to make headlines — and fill comment pages — around the world, more and more people are lining-up to criticise bankers. Credit where credit is due, banks bear responsibility for the global financial meltdown, but they should not shoulder it alone.

To argue that the economy is in turmoil solely because reckless bankers is to prefer morality to reality. What of the failures of industry? What of the absence of investment in productive activity? And of the various governments' abrogation of their roles in encouraging just such investment?

There is a world of difference between bashing bankers and formulating a systematic critique of political economy, let alone proposing a route out of the current global economic crisis. I myself, no economist, have long advocated major strategic investment in productive industry and complained of the lopsided growth of finance (and continue to do so), but complaining about high-finance is not going to make that investment appear out of thin air.

A national economy cannot be sustained on the buying and selling of complex financial instruments, but that is not to say that finance is unnecessary. Finance serves to channel capital around and manage risk, capital that is supposed to provide the means for investment in the productive activity that we all want to see more of. That, in the much of West, profiting from this was allowed to become a surrogate for real economic activity, covering up for a longterm decline in productivity, is something that is still not being sufficiently addressed.

Some curious arguments are beginning to emanate, including from the liberal-left. Quite apart from the rank class snobbery of referring to bankers as 'spivs' (a term only ever directed at working class people who have made money), we are now beginning to see the complete disconnection of politics from economics. Into the void steps morality. This should not be possible from a political movement that counts economists like Marx and Keynes (who didn't at all advocate the same things, incidentally) as its forebears, but the left's abandonment of political economy is now near-total.

Beyond disgust with bankers' bonuses, availability of credit is the main bugbear, but such arguments often end-up in strange territory. The rising popularity of the likes of Max Keiser among some on the liberal-left illustrates a failure to actually understand not only economics, but what the man is saying. It is easy to see how rhetoric about "banksters" and calling JP Morgan "the biggest financial terrorist on Wall Street" strikes a chord, but it is more difficult to understand why no-one appears to have noticed that beneath this kind of populism lies a fundamentally conservative approach to economics: a return to having currencies based on gold supply. Known as the gold standard, any such act that would mean a lot less money would be out there in the economy.

The current spike in gold prices is a result of people worrying that debt cannot be paid-down by issuing more debt. That is true enough, at least in the absence of growth, but it is surprising that people ostensibly concerned about economic inequality think the solution is going to be found in making money even more scarce. Advocating for the gold standard is a valid position, but it's not a left or liberal one by any stretch of the imagination. In fact, it's the ultimate austerity package. Heretofore, restriction of the money supply, known as monetarism, was the preserve of the free-market right. To hear it echoed in the comment sections of liberal newspapers makes for some very strange bedfellows.

Many people's answer to the problem of sub-prime mortgages, the proximate cause of the financial crisis in 2008, appears to be that poor people shouldn't be allowed to own their own homes. The mistake of flooding the economy with cheap credit is clear enough, but this pump-priming was done in order to make-up for a real decline in capital investment in productive industry where consumer spending was supposed to be the key to spurring growth. In addition, the sub-prime problem had such serious consequences because the original lenders had re-sold the mortgages to major banks— this is a (failed) strategy of risk aversion, not one of casino-like gambling.

Even the argument that the daily banking operations of high street banks should be 'ringfenced' from high finance underscore a failure to really get to grips with what finance is, what purpose it serves and how it does it. Moreover, a return to capricious control of lending by local bank managers does not sound like a progressive move to me.

A recent activist move in the US saw thousands of people announce they planned to close their bank current and savings accounts and move to cooperatively run credit unions. On one level this is all well and good: credit unions are worthy ventures. But the move for a mass change was at best empty rhetoric. The problem is multi-faceted. For a start, operating a current account for a customer is often a loss-making venture for the bank, so by closing the accounts the activists were not, as they hoped, punishing the banks, but in fact helping them. Additionally, systemic risk increases because closing savings accounts amounts to a reduction in available capital, thus making them more, not less, dependent on volatile markets. At the same time it also lowers pressure to regulate banks because less of people's money is invested in them in the first place.

If that alone doesn't give the activists pause for thought, perhaps this will: credit unions in the US already have too much money (US$942,481,000,000 as of June 2011). Loan portfolios have shrunk as saving has increased, a trend that will massively increase if the move is significant (it's too early to tell how many people did close their accounts) and without income from loans… well, you can see the problem.

The critique of finance capital is that it has no sense of moral duty, simply chasing profits wherever they are to be found. This is true, but in this finance capital is really an outgrowth of industrial capital. The distinction between finance capital and industrial capital is real, but it is not moral and neither is unnecessary.

All-in-all what we have is a sudden rush of concern about money, but very little understanding of how either it, or indeed the real economy, functions. If anyone wants to propose a truly new model for economic exchange that's well and good, but the onus is on them to explain it and argue for it. In the here and how, too many of us are trying to have it both ways.

Banking does need to be examined very closely, but what is needed right now is economic growth, not denunications of bankers.

Image by Alessandro Demetrio. CC licenced.