“And I sincerely believe with you, that banking establishments are more dangerous than standing armies…
Thomas Jefferson in a letter to John Taylor in 1816
Economist Thomas Piketty, in his bestseller noted that a major cause of economic inequality was executive pay especially in the banking industry. However, there are more ways that bankers facilitate massive upward transfers of wealth on an almost daily basis. Most voters are aware that something is wrong in the banking system but are unaware of how the bankers are doing it-because bankers no longer do what most people think they do. I will lift the lid of the black box of social secrecy in banking as Gillian Tett of the Financial Times (noted in earlier posts) identified it to the Central Bank of France, so the banking system, including all ‘high finance’ terms, becomes understandable, and effective reforms can be implemented.
Prior to the 1970s, bank activity primarily contributed to a country’s economy: for example, commercial banks focused on making loans, and processing payments for goods and services by check and credit card; investment banks helped investors with money and businesses in need of funding find each other through the stock and bond market.
And when that was their primary activity, bankers made normal salaries at say 20:1 worker median pay, and the profits were more fairly shared with workers.
All that is no longer true.
Kept within that black box of the banking system, a change happened decades ago. Today, bankers decry those traditional activities as plain-vanilla banking. The new model of banking, dubbed “financialization” by British economist John Kay, involves a sophisticated form of gambling that produces outsized banker pay-but nothing for the economy. In his book, Other People’s Money: The Real Business Of Finance, Kay estimates that about 90% of what bankers do today involves this financialization i.e., using bank assets (including our deposits) to speculate with each other and the massive Hedge Funds. Only a tiny remainder of time is devoted to traditional banking. In his words:
“Lending to firms and individuals engaged in the production of goods and services-which most people would imagine was the principal business of a bank-amounts to less than 10 percent of that total.”
In a 2017 article in the New York Times aptly entitled, How Bankers Became Our Masters, Rnan Foroohar confirmed what John Kay revealled, that the primary source of bank profits comes from trading not lending and notes, “This doesn’t help growth, but it does fuel the wealth gap”.
The movie, The Big Short, gives a good example of this purely extractive behavior. The bankers bet with the hedge funds that the housing market would continue to rise. This has nothing to do with traditional banking, could never benefit the economy but only bankers if they win, and puts the financial system at risk (but not them) if they lose. Because this kind of activity is often pure gambling, it has been aptly labeled, ‘casino capitalism’.
The bankers’ sky high pay comes from this totally unproductive casino capitalism. Making this fact known is a key to ending income inequality,
I will demystify all of the fearsome terms of high finance such as: credit default swap; collateral debt obligation; derivatives, and such. They are intentionally obfuscated to make it appear that you can’t possibly understand them, but they are, in fact, quite simple to understand.
But first I want to show you how Wall Street covered up the real state of the financial system in 2008 so that it fooled all the major economists, regulators, financial journalists, and analysts into believing the system was rock solid until one minute after Bear Stearns suddenly collapsed in March 2008 like a building under a demolition explosion.
Wall Street continued to fool the same experts as to the cause of the 2008 crash and made certain that none of the reforms, such as Dodd Frank, put any serious control on the bankers’ ability to persist exploiting the system for themselves and their elite customers— as they continue doing today.
These methods are important mechanisms for the upward transfer of wealth. The 2008 crisis provides us with excellent examples of how they work but this aspect is usually ignored. We will look at it because these methods are still in use today.
The evidence is often in the public domain but scattered through the back pages of newspapers and obscure sections of other media. So, although the claims made here seem like a radical conspiracy theory, there is solid evidence to back them up easily available to online searches. However, it takes a knowledge of the new inner workings of the banking system and the laws and regulations that govern it — something that is never disclosed outside of high-end law and accounting firms and among senior bank executives. Once you have this knowledge, you can connect the dots yourself and judge if the claims are true.
How could the above be happening and the public is not aware of it? That’s the important question-one that I will answer as I explain how it’s still being done.
In reading this section keep in mind that when media uses the word ‘bank’, they may be referring to very different types of regulated businesses:
Commercial banks, — our corner store banks and Savings & Loans (thrifts). These entities hold deposits.
Investment banks — the brokers who bring investors and businesses together, and
Bank Holding Companies that are passive but control operating banks that could be commercial or investment banks
There are also shadow banks, huge businesses that do banking activities such as making loans, but are beyond the sunlight of government regulatory oversight:
● Private mortgage lenders, and
● Equity/Hedge funds that do banking functions such as lending
● New Fintech (Financial Technology) businesses that make loans
The indiscriminate use of the word bank makes many media articles completely opaque. I will always specify exactly which type of bank I am referring to. That will clear up a lot of the mystification of the banking system.
I will continue to quote and identify conservative sources to demonstrate that this is an issue that can unite the right and the left. In their book, Fragile by Design, conservative economists Charles W, Calomoris and Stephen H Haber criticize the popularly accepted theories of the 2008 crisis (some 800 books were written about it) that it was bankers risky behavior, regulators’ incompetence or market failure, but rather the design of the system, a result of political decisions.
As evidence, they pointed to the fact that during the 2008 crisis, no Canadian bank failed, and none needed a bailout. This was not by accident but design.
In Canada, only two small regional banks have failed since 1923. To put this into perspective there were no bank failures in Canada during the Great Depression, World War II, the 1979 Energy Crisis, the Dot-com Bubble, the Sept 11th Attacks or the Subprime Mortgage Crisis.
I will frequently show the difference in the Canadian banking system from the U.S. as it has solutions proven effective overtime and, most importantly, does not have the perverse incentives that are presently putting the U.S. banking system at risk. Although there is a caution, the size of the Canadian economy is about the size of California’s, so there is always a question of scale.
Next post: commercial banks no longer keep mortgages on their books. There is a new model of commercial banking within the financialization model called originate and sell.