Robin Matthews is professor at universities in London and Moscow; consultant with international companies; writes on business, economics; and finance: creative imagination techniques in management.
bank usury
BANK USURY
“quick gains have brought excess and arrogance to you, ......you weep for it...... “(Dante Inferno, xvi.73-75)
Usury in contemporary capitalism has taken a new form: the business model of big banks[1].
Bankers levy usurious charges on public health, welfare, the middle classes, the poor and small to medium size business and redistribute income and wealth to themselves. The deadweight loss of the Great Recession, currently between $60 and $120 trillion[2], is shared between banker’s increased income and default. To borrow a phrase, bank profits are privatized and bank losses are socialized.
Now that the Great recession has spread to sovereign states[3], the danger is that we get competitive devaluations. Then the Great Recession will turn into another Great Depression[4].
Debt is a blessing and a disease. It enables people to transfer income from the future to the present by borrowing and the present to the future by lending[5]. Debt enables wealth to be increased by transferring income from savers who defer consumption to productive investment that creates increased income and wealth in the future.
Banks have an important role. They leverage deposits. Because a high proportion of cash saving remains in the banking system (people borrow from the banks to pay their debts through transfers between their bank accounts), banks can leverage saving deposits, creating funds for current investment and consumption that multiply the original savings.
The world economy is suffering from over leverage of banks: mainly Western banks. This is a new kind of usury, also called financial innovation or the originate and distribute business model of banking.
Bankers earn management fees and bonuses in proportion to the debt that they create. So they have an incentive to create more and more debt. When they create debt on the basis, not on savings or other physical assets, but on the basis of debt itself, this is called securitization and financial innovation: the originate and distribute business model of banking means that they earn management fees for doing so: and this is usury.
Usury is excessive earnings on loans. But new usury is not only excessive earnings per se: but excessive earnings with respect to the bankers own risk. Banks are so big that they are too big to fail (TBTF). So when a financial crisis comes, they have to be bailed out by governments: otherwise bank failure turns into a Great Recession into Great Depression and still might do so.
The knowledge that they will be bailed out by governments creates a kind of moral hazard. Since it is known that banks will always be bailed out, since it is known that they will never really be penalised for creating too much debt, because the knock on effects of their failure would be so disastrous and therefore they can never be allowed to fail, they always have the incentive to create too much debt: to over leverage.
There is another kind of hazard resulting from being too big to fail. Banks blackmail governments into pursuing policies that suit the banks. One of the ironies overlooked today, is that the ratings agencies that governments fear will downgrade government debt are the same ratings agencies that failed to downgrade securities backed by NINJA[6] mortgages and other toxic assets.
If debt is used for productive investment, and if people have total confidence in the future ability of debtors, be they banks, governments or households, then the amount of debt doesn't matter. Any amount can (eventually) be repaid out of future growth of income and wealth.
The problem is; Can the debt can be serviced? Is current income sufficient to cover the interest on debt as well as other commitments? The ability to service debt is a different issue from the problem of the debt itself. It depends on the interest rate on the debt, the term structure of the debt (when it is due to be repaid) and the possibility or rolling it over (paying later than originally agreed; that is, defaulting). All these factors depend on confidence.
What determines confidence in financial markets? That is an interesting question.
Financial markets are casinos. If sufficient speculators are prepared to bet that debtors will be unable to service the debts that they themselves hold, and are able to sell the debt that they hold, knowing that the more debt they sell, the greater the likelihood that their bet that debtors will be unable to service their debt, will turn out to be true, then the cost of the debt will increase and debtors will be more likely not to be able to service their debt[7].
So who will buy the debt in these circumstances when the bet that the value of the debt will fall is likely come true? Puzzling! Yes! But not so puzzling, if people selling the debt can create buyers by offering insurance against the likelihood that the value of the debt will fall. And not so puzzling when we remember that both parties (banks) can earn management fees on both transactions according to the originate and distribute model of banking: and not so puzzling when it is known that governments will bail banks out if it all goes wrong again: and it will. The process is tortuous and unbelievable but it happens and it is called financial innovation.
It's a modern form of usury.
A bigger puzzle is this: Who determines confidence in the ability to service debt or not? The banks! And on what basis do they judge the credibility of governments, companies and households? The basis of the casino[8].
And who wins? The banks! And who loses? Well, the poor, the middle classes, welfare, education, health, defence, small and medium size businesses, and so on.
A still bigger puzzle is that no one really looks at the puzzle for what it is. Why are economies run by casinos? Why do so many people's livelihoods depend on casinos? Why do such casinos continue to be supported time and time again? Why do governments listen to their advice?
Such is the modern form of usury.
[1] The word banks is used synonymously for the financial sector throughout, a rough but accurate approximation because of the interdependence of the global finance.
[2] See Andrew Haldane (2010), http://www.bankofengland.co.uk/publications/speeches/2010/speech433.pdf
[3] The problem of Greece (and Portugal, Iceland, Ireland and possibly Spain and more remotely Italy) is different from that of the USA. Greece really can't service their debt: the USA can.
[4] Great Recession 2007 onwards: Great Depression the 1930’s.
[5] Early in life people can consume more than they earn, by borrowing: later they can pay back by saving more than they earn and providing saving for retirement. This is the life cycle model of saving.
[6] No income, no jobs, no assets.
[7] For this and the following paragraph see Robin Matthews (2009). The Financial Tower of Babel http://robindcmatthews.com/publications.
[8] “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. The measure of success attained by Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield, cannot be claimed as one of the outstanding triumphs of laissez-faire capitalism - which is not surprising, if I am right in thinking that the best brains of Wall Street have been in fact directed towards a different object.” J.M. Keynes, (1936).The General Theory of Employment Interest and Money, London Macmillan, p 159.