Banks and banking, have been a large topic of discussion in recent years. There are some things that are very wrong with banking, but they aren’t what most people normally think about.
Many people blame banks for being reckless, and they were, but many people then associate this with Capitalist greed or some such nonsense. In reality, banks are a necessary element in the economy, but just another element in the infinite spectrum of the economy. There is no real reason why people, or the economy, should be subject to how that particular element is behaving.
However, recent changes in the way banks work, have created a system where the activity of banks can affect us directly, and this had a lot to do with the proliferation of the financial crisis.
I’m talking of course of the Glass Steagall Act, which was repealed as recently as 1999. The Glass Steagall act, also known as the banking act, amongst other things, clearly established a separation between commercial and investment banks in 1933, which was, like I said, repealed in 1999.
To fully understand this we must look at what the differenece is between these two forms of banking.
Commercial banks, would be your typical deposits savings bank, theoretically safe. The investment bank would be the one engaging in more risky investments like derivatives and such.
So it is no surprise really, that when you integrate those two functions into one, combining the regular deposits, with the risky investments, things get muddled up, and the “systematic” risk of collapse increases. Suddenly, when the stock market crashes, the investment arm of your bank gets hit, and indirectly, so do you.
So the integration of these two types of banks, increases the systematic risk of collapse. We could say, that this condition is what creates the “too big to fail” corporations they talk about today.
The second problem with banking is the high level of political influence it has. This goes from getting government to accept policies such as the TARP (troubled-assets relief program) to the legislation applying to banking activities.
In fact, during the crisis in Greece, many people argued against the bail-in, what I explained as a normal bank recapitalization, because people seemed to be losing their deposits.
A closer look however, shows that this was not a normal type of bank recapitalization. In fact, due to LEGISLATION, financial institutions and government entities amongst others, get preferential treatment over regular depositors. This means that the “junior” and “senior” creditors are reversed.
Furthermore, in the 2005 bankruptcy law, derivative liabilities were made the most senior form of debt, more so than the deposits!.
As you can see, the banking system has been perverted, mostly due to the political influence it has.
This kind of power that banks have over governments can be easily explained. The banks help governments build-up debt, they in turn get favorable treatment. They get bailed-out, they operate as a cartel, and they can rob us with impunity as the bail-in example shows.