Bankers,Have,Conscience,The,ev business, insurance Do Bankers Have a Conscience?

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The events over these past two years have set me thinking.  Just consider what we have seen since the summer of 2007. Starting as an almost imperceptible murmur of thunder beyond the horizon, we have been subjected to a violent tempest which has swept the globe. The worst financial crisis since the Great Depression! And the storm is not yet over. The churning maelstrom that still surrounds the financial system is going to take a whole while longer before it settles down and a reasonable sense of tranquility returns. As events progressed through 2008 into 2009, many of the surviving icons of the financial world began to revert to their old form of massive profits, ridiculously huge staff bonuses, and a nauseating sense of self importance. All of this thanks to the graciousness of various governments who had squandered vast amounts of taxpayers’ money to keep the “system” afloat. And this to the determent of the real economy.Just watching some of the goings on, such as the announcement of massive bonuses to staff or the pronouncement of Goldman Sachs’ boss that his organization was “doing God’s work” prompted the question; “Do bankers have a conscience?”Just consider the facts. Banks are supposed to be financial intermediaries. This means that they take in deposits from those folk who happen to have surplus funds and they then lend this to those folk who are short of funds, be it temporary, like a firm who needs money to cover cyclical fluctuations such as paying weekly wages while they wait for creditor payments. Banks also lend long term such as for mortgages. Either way, before it lends, a bank is supposed to consider the risk that it faces in making the loan. Can the borrower reasonably be expected to be able to meet the loan conditions and repay the loan? Pretty basic stuff.There is nothing wrong with the theory. Along the way the bank should be able to profit from its activities. A caveat here though; basic economic theory does not see a bank precisely as one sees a firm.   Banks are financial facilitators while firms are there to make a profit. Naturally this is all nonsense. Banks are “firms” like any other and are permitted to make a profit, albeit a “reasonable” one.However, looking back at the events of the past two years, the functioning of many banks was (and still is) absolutely not anywhere near how it was supposed to be. Banks had “evolved” (degenerated is probably a better word to use), and in the process had created in-house casinos, the sole function of which was to make money by taking dangerous risks. This new type of business had very little to do with the real economy.  For the uninitiated, in the terminology of economics, the “real economy” refers to activities that produce commodities. Commodities are goods and services for household consumption. This is in contrast to the financial sector that does not produce commodities. The financial sector’s role had been to assist the real economy through financial intermediation (the redirection and allocation of money from lender to borrowers).  But this had all changed.As part of this transformation banks turned their traditional view of risk on its head. Traditionally banks were risk averse – riskier loans carried a higher interest rate. Often loans were not made because the risk of the borrower’s possible default was just too high. Under the new “casino” management style, banks started to see risk as an opportunity to make money and not something to be avoided. And with this came all sorts of “new” products, like derivatives and securitization, supposedly to diversify the risks. Risk became virtually commoditized. Risk became something that one could buy and sell. Banks ceased to try to avoid risk; on the contrary they wanted to acquire more risk. The products that the banks created to do this had nothing to do with helping to facilitate trade, commerce or industry – the production of goods and services. These new bank “products” were synthetic. They had nothing whatsoever to do with taking on the risk of entrepreneurship in the real economy.The banks however did not see what they were doing as gambling.  On the contrary they saw these risks as being sufficiently diversified so that “nothing really bad” could happen.Of course this last view was nonsense and should never have been entertained by a prudent banker. It could, and as we know, did go wrong – horribly wrong! As conditions worsened a reflex reaction kicked in. As the financial positions of the banks bets turned sour banks took on even bigger financial risks to try to bail themselves out. Of course this tactic can never work as you simply dig a bigger hole for yourself, society and the economy;   “Gambling on Resurrection” as Dr. Catherine Cowley of London University has so aptly called it. These “new” products are not linked to the real economy. They are aimed at producing profits for the financial sector itself, to the detriment of the real economy. So, do banks do bankers have a conscience? In light of huge bonuses for staff of questionable talents; turning a blind eye to the financial requirements of the real economy; and seeing themselves as fulfilling some higher purpose the answer has to be a definite “No”. No doubt there are exceptions, but these bankers seem to be well hidden. It will be interesting to see how banks will try to wriggle out of this one.