The 19th century French political theorist and economist Frederic Bastiat once warned that “when plunder becomes a way of life for a group of men living together in society, they create for themselves in the course of time a legal system that authorizes it and a moral code that glorifies it.”
For Bastiat, the sole purpose of government was to protect the right of an individual to life, liberty, and property. As such, it is both dangerous and morally wrong for a government to interfere in an individual’s other personal matters. From this, Bastiat concluded that the law cannot defend life, liberty, and property if it promotes “legal or legalised plunder,” which he defined as using government force and laws to take something from one individual and give it to others.
This, unfortunately, is precisely what is happening in the world we live in today. Our governments and central banks are now interfering in virtually every facet of the economic sphere with one main goal: to ensure that money and the “property” it buys flows upwards from one group of people (i.e. us) to another (i.e. the too-big-to-fail banks).
It matters not one iota that those same banks have spent much of the post-crisis period lurching, unpunished, from one major scandal to another. Instead of correcting their ways, they continue to double down on their criminally fraudulent practices.
By far the best example to date of the bankers’ hubris was the 2012 Libor Scandal, arguably the biggest financial scandal of modern times in which as many as 16 international banks, including Barclays, RBS, UBS and Lloyds TSB, are alleged to have rigged global inter-bank interest rates so as to profit from trades, or to give the impression that they were more credit worthy than they were.
Aided and abetted by our own national governments and central banks, a cartel of the world’s largest banks was given free reign to set global interests for their exclusive benefit. Its main victims were the hundreds of millions of savers and fixed-income pensioners around the world who for a period of years missed out on hundreds of billions, if not trillions, of dollars of unpaid interest. Put simply, the most prudent were unknowingly made to subsidize the most profligate and reckless.
As Simon Lambert, of thisismoney.co.uk, argues, the people of the U.K. have ploughed billions into propping up the financial system, watched scandal after scandal unfold, and lamented the continuing unwillingness of banks to support customers and businesses:
“In any sane system, a deadly combination of overstretching through reckless business behaviour and regularly duping customers should be enough to usher in widespread change.”
With governments and regulators failing so disastrously in their duty to protect the public from financial fraud, increasing numbers of consumers are voting with their feet by divesting from “too big to fail” institutions and moving to smaller, more locally based ones. However, even that avenue is being closed off, as governments and regulators do all they can to restrict competition in the sector.
In the U.S., for example, the Federal Deposit Insurance Company decided, in 2008, to stop issuing deposit insurance to new bank charters, also known as De Novo banks. According to a report by Seeking Alpha, it is estimated that between 2008 and 2009 alone over 100 investor groups in various phases of De Novo application were either asked to withdraw new bank applications or were rejected outright, leaving many with hundreds of thousands in sunk costs.
In the U.K., the hurdles faced by anyone wanting to take on the banks are aguably even greater. Indeed, only one brand-new high street bank has been granted a license in the last one hundred years. As is illustrated in the book Bank of Dave and the accompanying Channel 4 documentary (the first episode of which is posted below), opening a new bank in the U.K. these days is an almost Herculean task.
The Bank of Dave charts the valiant efforts of self-made Lancashire millionaire Dave Fishwick to set up a small local bank, with the noble aim of paying savers five per cent interest and lending money to credit-starved small businesses and households. Despite personally guaranteeing all his savers’ cash, Fishwick was headed off by the UK Financial Services Authority at virtually every turn.
However, Fishwick, an inveterate entrepreneur, would not be deterred by the official brush offs and in September 2011 he founded Burnley Savings and Loans Ltd, under the slogan “Bank on Dave”. Feeling that High Street Banks treat people as credit scores and not as individuals, Fishwick decided to return to basics. As such, Burnley Savings and Loans Ltd do not credit score, choosing a more personal approach to underwriting, dealing with customers on a case by case basis.
The Bank of Dave is a timely reminder of how even the smallest of banks, with the right set of policies and practices, can put some of the world’s largest financial institutions to shame. As Fishwick himself pointed out, by turning a tidy profit of just over 9,000 pounds in its first six months of business, “Bank on Dave” had massively outperformed the Royal Bank of Scotland, which during the same period announced a 2 billion-pound loss.
Clearly there is a strong case to be made for going back to sound prudential financial practices. By filling the vast lending voids left behind by the too-big-to-fail frankenbanks, small banks functioning as local utilities could reenergise local businesses and the communities they support.
Big vs Small Banking: An Age-Old Debate
The philosophical debate about the pros and cons of big vs. small banking is hardly a new one. In the case of the U.S. it can be traced as far back as the War of Independence and the foundation of the Republic.
The debate crystallized around two of the nation’s leading founding fathers, Alexander Hamilton and Thomas Jefferson. Hamilton, who served as the nation’s first ever Treasury Secretary, believed that a strong banking sector was needed to resist competition from European banks as well as stabilize and improve the nation’s credit. To that end, he lobbied congress to charter the National Bank, which would loan much-needed funds to government.
The act was fiercely opposed by Jefferson and his supporters who feared that a national bank would give excessive power to the North-Eastern provinces, where most of the nation’s big-money institutions were concentrated, at the expense of the argrarian economies of the South. Jefferson also worried that borrowing from a centralized bank would create long-term debt and monopolies, as well as incline people to “dangerous” speculation, as opposed to productive labor (sound familiar?).
Instead of granting monopoly powers to a private bank, Jefferson argued that the country’s money could be created directly by the government (and not by the North-Eastern monied interests) and that banks should be kept small so as to better serve local communities.
In the end, however, it was Hamilton who won the day, and congress granted the National Bank a charter in 1791. It wasn’t, however, until 1913 and the creation of the Federal Reserve Bank that the United States had a permanent, privately-owned central bank. Since then, the U.S. banking sector has followed a distinctly Hamiltonian design. As the U.S. journalist and author George Will notes, “Americans are fond of quoting Jefferson but we live in Hamilton’s country.”
However, since the deregulation of the sector in the 80s and 90s, the power of big finance has reached heights that even Hamilton could barely have imagined. A raft of new regulations implemented by the Reagan and Clinton administrations allowed banks to operate across state boundaries while the repeal of the Glass Steagall Act, in 1999, washed away the fine line between commercial and investment banks.
Similar such policies were taken up almost simultaneously by Thatcher’s government in the U.K. and then somewhat later by other Western European countries such as Germany, France and Spain.
The resultant concentration in the sector coupled with advances in information technology and the creation of ever-more complex financial products has allowed the financial sector to grow to unprecedented dimensions. The sector now accounts for around 12 percent of UK growth domestic product (GDP) and close to 30 percent of U.S. net corporate profits.
But how much real tangible value has the sector’s growth actually created for the human inhabitants of planet earth? Well, to get an idea just take a look around you! As the financial sector has grown, other industries have shrunk; the middle classes of Europe and the U.S. are fast becoming an endangered species; unemployment has risen to Great Depression levels in many countries; inflation is up across the board for basic essentials, from food (donkey burgers, anyone?) and education to energy and transport; and the systemic risks posed by global financial and economic instability are arguably even greater than they were prior to the crisis.
All the while, central bank and government policies have helped put in place a system of financial apartheid that affords the richest, most privileged and powerful financial actors – the too-big-to-fail banks and hedge funds – unparalleled access to unlimited, virtually free money (at anywhere between 0.25 percent in the U.S. and 0.75 percent in the eurozone), while the middle and lower classes must rely on the generosity (ha!) of the big banks, at best, or payday loan establishments, at worst, to make ends meet.
The result is all too predictible: an ever widening income gap, as the lower and middle classes are starved of credit while the super rich effortlessly expand their portfolios. Just take the example of George Soros, the hedge fund manager who notoriously “broke the Bank of England” during the 1992 Black Wednesday crisis: according to the Wall Street Journal, Soros’ recent “bets” against the Japanese yen has “earned” him a cool 1 billion dollars since November – not bad for three and a half months’ work. Assuming Soros puts in a roughly 60 hour weekly shift – the least you’d expect from a workaholic octogenarian – his earnings equate to over one million dollars an hour!
Is it any wonder that the state of the Western economy appears to be in terminal decline when financial engineers like Soros, who produce nothing of value for society, earn more in one hour than most civil or mechanical engineers – people who actually do create real, tangible things – earn in 10 years? The priorities of the system could not be clearer. By rewarding speculation over savings and investment, by cutting taxes on the wealthy while raising them on the middle class, by favoring quick short-term financial fixes (i.e. ploughing ever-greater sums of money into the stock and bond markets) over steady, long-term industrial policies, our governments and central banks are complicit in arguably the largest wealth transfer of modern history.
The question is what are we going to do about it?