Defending Bankers: They Do Provide Social Benefits

Over the last 2 years, it has been in popular press that directors of retail and investment banks are paid too much given the value they actually add to the economy, and given bonuses for what exactly? After all, they are not working in A&E, driving lorries or serving a public duty as a working class hero, the type you see in Strongbow adverts.

This pretty much sums it up………………

As seen on the news Jan 2011, Bob Diamond, CEO of Barclays has seemingly defended himself against the nation for his £8million bonus pay. CEO’s across the sector are being pleaded to give their pay to the government or to a charity. Bankers seem to have become public enemy no1.

But banks do play a very useful role, you just have to look a little deeper and really think before you can see it. The general public’s view is largely of ignorance because there is no physical end product, all they seem to do is play with fake numbers…..

What Do They Actually Do?

Bankers run businesses which foremost duty is to take the wealth of the nation(Adam Smith haha, not funny right), all idle capital that people have for a rainy day, and put it to it’s most productive use possible for today. Let’s see what this does. Remember, I have made each example so that without the bank, the event would not have taken place, just to emphasise my point:

Faster Innovation and Progress

  1. The entrepreneur with an idea, Dragons Den style: You know the drill, a person comes along with a great idea for a new gadget but doesn’t have the cash. With the funding, the product can be made, marketed and released with the  possibly of keeping millions entertained or saving time around the house, given what it is. The public are happy, the entrepreneur has a prosperous life and, yes, the financier gets his money back :).
  2. Allowing Pioneering Ventures: Let’s use GlaxoSmithKline, a drugs company. They need to raise £1.8 billion to fund the research into a drug they believe will beat lung cancer. With a team of experts, the practicality of the venture can be assessed aswell as the risk as only the best ventures shall be funded. Only banks can finance such a huge project and say they do, the scientists put it all together and a monumental point is history has been achieved. You can say it was the scientists who actually did this, but withou t the bank this wouldn’t have taken place. ‘My money has helped find the cure to cancer!’. Pretty cool huh?

Keeping Employment

It has been proven that long term unemployment leads to physical and mental health problems and is a primary cause of depression, suicide and family break ups. The banking system alleviates this by…

  1. Enabling start up businesses without necessarily new ideas to create a source of employment where it may be needed.
  2. Keeping firms in business in the midst of an unexpected event. Let’s say we have a clothing manufacturer which ships clothes every 6 months. For this they have ordered 100 tonnes of wool for 1 month in advance, but never mind the invoice, they are shipping 110 tonnes in a week and the payment shall cover it. But oh no! Something has happened which means they won’t get paid, maybe their ship has sunk or the buyer has gone bankrupt. They are legally bound by the wool invoice but have no money, bankruptcy pending. Bank will see that the firm will be able to pay back easily in the long term, but need cash now, and finance the firm. No closure, 100’s of jobs intact, which wouldn’t have been.

Alleviating World Poverty

Banks fund and underwrite government bonds. First though, they look at governments, and see where their priorities are before deciding to buy their bonds. With a good third world leader the funding will allow dramatic structural change all around. This itself allows homeless people to have shelter if a housing project, send children to school or college if funding on education, provide clean water to those in poverty if infrastructure.

These days with social policy key, a government looking to find a civil war will NOT get help! These factors alleviate poverty and it has been proven that an adequate financial system and even a stockmarket has benefited LDC’s in the past. The economy must have a trust in it’s currency first.

Facilitating Trade in a Monetary Economy

With the debiting deposit system, people do not need to send bundles of cash in envelopes to one another, instead only needing to take a few details, with the bank doing the rest as the intermediary.

For Instance: An employer can easily pay their staff by regular withdrawals, instead of great time and transport costs needed to pay them any other way. A person can sign up to a tennis club and not face the thinking of paying every month directly. They can pay whilst still on holiday, or during very bad weather, for instance, which disrupts the plans of a nation.

An Audit and Security Guard: These credits and debits are safe and recorded, in case of a legal dispute for instance, the bank acts as the witness and the proof. They are safe as the bank acts as a security guard to a persons wealth. This gives a huge web allowing trade to take place in the quickest and easiest way possible.

Some Questions Remain To Be Answered..

Frequently Asked Questions

How Does Speculation Add Social Value?

Trading floors smooth out earnings in a downturn and can be the operation the bank relies upon to stay afloat, when funding opportunities fall and defaults write off much of the balance sheet. But the firms and states are already funded for their means and it is only their securities which are traded, apparently adding no direct value socially when this becomes profitable.

This video outlines the perceived lack of value added by trading. ‘What are we actually doing with our lives, moving all this money around?’ is a notable quote later on. It is 47 mins long but a recommended watch. You have to look deep to see ebenfits but they are there:

Speculation Stabilises Wealth

First off, successful speculation on securities helps preserve the total wealth of the economy to a stable value, which is good. Without the buying low and selling high which is rewarded an economies wealth would rise artifically high and low, causing massive instability in the system. Sure, there are asset bubbles here and there, but those who ride them often get punished heavily, those who provide stability get rewarded. The concept of mean reversion.

Why is stable national wealth good? Well, it provides certainty, and this provides confidence. A business knows roughly what it will receive if it goes public, it knows the fair value of other firms, you can be more confident of the price of property in advance. Certainty on valuation makes the financial system work. Also there is less tendency for artificial growth through the wealth effect which sees a massive build up in private sector debt during the upside and a possibility of Fisher’s debt deflation on the downside.

Indirect Benefits on a Sector

Even though the financing has already taken place when securities are traded, the pooling of capital to securities in a given sector still gives benefits. Take retail in Macedonia for example, now say we pool lots of capital into their shares thus increasing the value.

Although the benefits to those firms which shares are traded is hard to see, other retail firms will now get more capital if they decide to go public becuase share values in this sector are higher all around, thus allowing a similar expansion in Macedonian retail to if it were funded directly. Fund management can bring large social benefits if directed intelligently.

When The Stockmarket Goes Up, Pay Rises Even Though Nothing More Has Been Done

This was put to me by my own brother talking in the pub. As much of the pay in the industry is in stock, it is true. But consider:

With a stockmarket rise, it is an indication of the economy doing well with rising asset prices all around, often record profitability in most sectors and high employment.

Everyone Benefits, So Why Can’t Bankers?

The general public benefits with rising house prices and share holdings rising in value. With consumers buying more than ever, Chief executives in almost every industry, be it oil, retail, information technology, construction will be earning record pay on top of their salary themselves due to the added profitability. The small business has never known so good, even the child with their lemonade stand can now buy themselves a new iPod! Pretty much everyone, big or small, green or yellow, benefits in some way with economic momentum.

The Stockmarket is the Banker’s Brainchild

One of their roles are to issue shares to the public after sinking an investment into a firm to expand through an Initial Public Offering or an Offer For Sale, thus creating and expanding the public stockmarket.

Those shares often do well when the business is doing well, resulting from the banks careful inspection of the firm and being the underwriters for whom the buyer of stock should rely.  Now tell me, why can’t the financiers of a booming economy also benefit who are actually the creators of the stockmarket as it is today!

So when you next hear somebody compaining about the use of banks in the economy and draining the economy with their revenues, you can use this article to spot the fallaciousness in their argument.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: