Banking is supposed to Boring

There really isn’t much to being a banker.  It’s boring and not too difficult.  Basically, you take in deposits and safekeep them for a saver.  You keep a portion to cover any possible withdrawals.  The rest you lend out to some one at a reasonable rate of interest.   That rate needs to cover the rate you pay to your saver, your meager costs, and whatever potential risk may exist in the loan.  You watch the loan repay and you give the saver the occasional blanket or toaster for keeping their holiday fund, their pension fund, and their rainy day fund safely in your bank.  It isn’t a very glamorous business model, but it’s a very necessary one.  People’s savings turn into loans for businesses and that’s what makes an economy expand and create jobs.

The key is to be boring and to do this in perpetuity so as to gain the public trust.  Life as a banker is pretty good.  You get to wear boring blue Brooks Brothers suits and you play golf with your local Fed officer for the ABA league.  Your loans go to your friends that own businesses in your town.  These are also the same folks you play golf with at the club on your off days.  You give those same small business owners their home loans and any loans they may need to send their children off to university.  You know which one of your customers has a good business going, whose business is dicey, and who is about to go under.  You know who is keeping up their house or improving it.  You know what everything is worth because it surrounds you, so you know how much to lend on it and at what rate of risk.  Sounds simple, yes?  It really is simple. I know because I’ve done it and I’ve studied banking for about the last 30 years.  It’s a nice simple business.

Well, that was before we let bankers go wild and try to act like something other than banks.  Now, I have no trouble with bankers offering different levels of interest rates or some various different banking products.  That means I’m okay that we don’t have Glass Stegall back at its full strength but basic bankers need to stick to basic banking because banks have what’s called a fiduciary responsibility.  That means every one trusts banks with their money.  Bankers are not supposed to be casino operators.  They’re not supposed to have flashy carpeting, flashing, dinging machines, and their assets and liabilities shouldn’t resemble ponzi schemes.  Nice community and regional banking is a good and simple thing.  If you don’t want to take my word for it, then perhaps ex Fed Chair and rescuer of the country from the depths of inflation, Paul Volcker can convince you.  Too bad he isn’t convincing the Obama administration because they really need to be convinced.

This is from today’s New York Times.

Well, not lately. The aging Mr. Volcker (he is 82) has some advice, deeply felt. He has been offering it in speeches and Congressional testimony, and repeating it to those around the president, most of them young enough to be his children.

He wants the nation’s banks to be prohibited from owning and trading risky securities, the very practice that got the biggest ones into deep trouble in 2008. And the administration is saying no, it will not separate commercial banking from investment operations.

…

Mr. Volcker’s proposal would roll back the nation’s commercial banks to an earlier era, when they were restricted to commercial banking and prohibited from engaging in risky Wall Street activities.

The Obama team, in contrast, would let the giants survive, but would regulate them extensively, so they could not get themselves and the nation into trouble again. While the administration’s proposal languishes, giants like Goldman Sachs have re-engaged in old trading practices, once again earning big profits and planning big bonuses.

Mr. Volcker argues that regulation by itself will not work. Sooner or later, the giants, in pursuit of profits, will get into trouble. The administration should accept this and shield commercial banking from Wall Street’s wild ways.

“The banks are there to serve the public,” Mr. Volcker said, “and that is what they should concentrate on. These other activities create conflicts of interest. They create risks, and if you try to control the risks with supervision, that just creates friction and difficulties” and ultimately fails.

The only viable solution, in the Volcker view, is to break up the giants. JPMorgan Chase would have to give up the trading operations acquired from Bear Stearns. Bank of America and Merrill Lynch would go back to being separate companies. Goldman Sachs could no longer be a bank holding company. It’s a tall order, and to achieve it Congress would have to enact a modern-day version of the 1933 Glass-Steagall Act, which mandated separation.

Glass-Steagall was watered down over the years and finally revoked in 1999. In the Volcker resurrection, commercial banks would take deposits, manage the nation’s payments system, make standard loans and even trade securities for their customers — just not for themselves. The government, in return, would rescue banks that fail.

Nobel Prize winning economist Joseph Stiglitz agrees with Volcker. Even Ex Fed Chair Allan Greenspan–while not in favor of bringing back any version of Glass-Steagall–believes large banks should be broken up.  So, why isn’t this administration listening?

Interestingly enough, the same kinds of calls are going on in the U.K which is another country hard hit by the excessive speculation in financial markets.  A governor of the Bank of England, Mervyn King, has also called for breaking up big banks and separating investment banking from plain old vanilla banking.   This is from the FT.

The Bank governor wants to see the utility aspects of banking – payment systems and deposit taking – hived off from more speculative ventures such as proprietary trading. “There are those who claim that such proposals are impractical. It is hard to see why,” he said.

Although he said that ideas to force banks to hold debt that automatically turns into equity in a crisis were “worth a try”, he played down their likely effect. ”The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion”.

These old time bankers want to put the boring back in banking because of the public interest.  There is an aspect to banking that cannot be removed from public welfare.  The first, of course is the fiduciary responsibility.  Banks hold peoples dreams’ in the form of funds and that’s a big responsibility.  They lend to future entrepreneurs and they borrow from savers with dreams of retiring, vacationing, or funding their children’s futures.  Holding savings and making Loans are the  lifeblood of a market economy.  If banks don’t lend to small businesses but choose to do risky but less effortless paper arbitrage, it stops money from flying through the economy.  Synthetic financial deals do nothing in the real economy.  No jobs are created. No widgets are manufactured.  If there’s a bubble, it bursts and takes saver’s money with it.  But the bankers, they get to churn up fees and bonus schemes in the meanwhile.  They also, through securitization, have no real incentive to do anything but pass trash.  They do not do due diligence because they don’t have to live with their bad decisions.  They may even cheat on the paperwork and it is very hard to inspect in quality or catch after the fact finagling.  No oversight regulations will be tough enough to ensure that bubbles will not be created and trash will not be passed.  It’s better just to put the boring back into banking.

Why, oh, why don’t we have a real democratic administration and congress that is intent on protecting such an important part of the economy?  Why are they so interested in perpetuating Casino Banking?

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