The original sin was ignoring the purpose of our banks
Sir, John Plender titling the “Originative sin: the future of banking” January 5, has the late John Kenneth Galbraith opining that “finance and innovation were fundamentally incompatible”. What Plender implies is wrong. If anything can be labelled as the original sin it is not the financial innovations but the fact that for some decades now there has been little or no discussion of what is the purpose of our financial system and most especially that of our banks. Of course we expect the banks to be safe mattresses for our savings but that is far from all they are supposed to do and clearly, any financial innovation, should be evaluated with a reference to its purpose.
Just the same Galbraith, in “Money: Whence it came, where it went” (1975), addresses the function of banks in the creation of wealth by speculating on the fact that one of the basic fundamentals of the accelerated growth experienced in the western and south-western parts of the United States during the past century was the existence of an aggressive banking sector working in a relatively unregulated environment. Galbraith mentions that banks opened and closed doors and bankruptcies were frequent, but as a consequence of agile and flexible credit policies, even the banks that failed left a wake of development in their passing. May I ask… what wake of development has the financial sector left lately?
We left the regulation of our banks in the hands of a regulator who only had the safe-mattress purpose on their agenda and that is why the saddest part of this current crisis is the little sustainable development the last boom-bust cycle has produced. All the recent bank regulations created in Basel were oriented towards the goal of avoiding individual banks to fail while completely ignoring the much larger risks that banks would fail to do what we truly expect them to do.
Just the same Galbraith, in “Money: Whence it came, where it went” (1975), addresses the function of banks in the creation of wealth by speculating on the fact that one of the basic fundamentals of the accelerated growth experienced in the western and south-western parts of the United States during the past century was the existence of an aggressive banking sector working in a relatively unregulated environment. Galbraith mentions that banks opened and closed doors and bankruptcies were frequent, but as a consequence of agile and flexible credit policies, even the banks that failed left a wake of development in their passing. May I ask… what wake of development has the financial sector left lately?
We left the regulation of our banks in the hands of a regulator who only had the safe-mattress purpose on their agenda and that is why the saddest part of this current crisis is the little sustainable development the last boom-bust cycle has produced. All the recent bank regulations created in Basel were oriented towards the goal of avoiding individual banks to fail while completely ignoring the much larger risks that banks would fail to do what we truly expect them to do.
“Be careful, when looking for ways of avoiding a bank crisis, you could be inadvertently slowing development. I’ve been sitting here for most of these five days without being able to detect a single formula or word indicating that growth and credits are also a function of bank regulations”
Posts
