Misunderstanding Banking Is Bankrupting The Entire Society

By admin on June 26, 2012

Much has been written since the JP Morgan trading fiasco and the big Congressional hearing last week – some of it enlightening, but most of it confusing some of the basic elements about banking and money in general. I was reading this piece yesterday on Bloomberg about the responsibilities and the “job” of banks. It got me thinking about how badly people confuse the role of banks in our system. So I thought I’d chime in.

Banks are, at their core, profit seeking establishments that serve as the lifeblood of a complex payments system in the monetary system. Banks make a profit by having liabilities that are less expensive than their assets (well, it’s more complex than that, but let’s keep things simple here). They compete for deposits and business by offering various products and services. In the USA banks are almost exclusively owned by private shareholders (as in, not the government or public sector). Like most other private profit seeking entities the goal of a bank is not just to service the smooth facilitation of this payments system, but to to make money for its owners. Most of the time, these two functions do not conflict, but at times the risks banks take can indeed jeopardize the functioning of the system. Despite all the bad press that banks receive the progress surrounding their various services have actually had a positive impact on the world (for the most part). Bank accounts, credit cards, debit cards, investment services, business hedging services , etc are all elements that make the institution of money more useful and more convenient. Seeing as money is a tool and a social construct it makes sense that banks have evolved products and services to help facilitate the ease of its usage (all in the name of competition and profit generation, of course).

But we have to ask ourselves the question again. What is Wall Street’s job? Wall Street’s job is simple. It is to increase earnings for their shareholders. It is not to provide jobs for the private sector. It is not to make sure the US economy is running smoothly. It is not to make sure you feel good about your day to day life. It is to generate a profit for its owners. This is the essence of private banking. To generate a profit. But banks play a unique role in our capitalist system. I’ve explained before that banks are not the engine of capitalism. They are simply the oil in the machine. As the oil in our machine, banks must be functioning smoothly in order for the machine as a whole to be functioning smoothly. So when big banks do bad things that threaten their well-being parts of the system begin to malfunction. And sometimes when these mistakes are big enough the contagion leads to the entire machine malfunctioning and requiring a major repair (hello 2008!).

But make no mistake, your local bank is not your best friend or a public purpose serving charity. For instance, when a bank extends a mortgage (a word literally meaning “death security pledge” from the latin root “mortuus” for death and germanic “security pledge”) they are not doing you some charitable service to help you buy your home. They are rating your credit risk and evaluating you as a potential profit engine for their shareholders. That might not be the most pleasant way to think about it, but it is what it is. A bank is not a charity. It does not really care if your mortgage results in jobs or happiness for you. Of course, it would be great if this did because that might result in more future business, but the bank does not need these things from you in order to generate a profit. It really just wants to manage its risks in a way that helps to generate a profit for their shareholders without excessive risk. Obviously, the debtor finds the mortgage advantageous, but don’t confuse this service for charity work. It’s just good old fashioned profit seeking and offering a service where one is needed (in this case, the debtor being able to obtain money they could not otherwise currently obtain).

The business of private banking is largely about risk management. A good bank manages risk by understanding how the various business components threaten the stability of the overall bank and align with this goal of generating a profit. And as we ripped down the regulations structuring the amount of risk these institutions can and cannot take (in addition to making the risk taking business more complex) we realized that banks just weren’t very good risk managers. This is not surprising to anyone who has been around markets for a while. Investors and people in general are irrational, inefficient and poorly suited to manage the risks associated with complex dynamical systems. So, for some reason, we all seem shocked when these profit seeking entities take excessive risks and prove to be poor risk managers. And since we would never blame ourselves (the home buyers for instance) we blame the banking institutions. And we write silly things about how they’re not doing their “job” or how they’re all out to screw the whole world. It’s just not that black and white.

From a social perspective, this is all an extraordinarily interesting discussion. Money is a social construct and a simple tool that helps us achieve certain ends within our society. But money is something that is to be earned within our society (or utilized by the government in a democratic manner that is in-line with our goals as a society). So there’s an interesting reality at work within the banking system. Banks, as loan originators, act as a way to obtain access to money for someone who has not yet earned money. And in return, they are charged a fee for “borrowing” this money that is technically not yet theirs. If there was no interest fee attached to loans the demand for this money would obviously be through the roof and it would render it worthless. Likewise, if banks make credit standards too lax, fail to properly asses risks and make credit plentiful they can create an imbalance within the system (by lending to people who can’t service their debt) that threatens the viability of the monetary system through the risk of excessive debt, defaults and inevitable de-leveraging (as we’re seeing now). In this world of “what have you done for me lately” and “get rich quick” (or more often, appear rich quick!) you have a messy concoction of borrowers who want their McMansion YESTERDAY and lenders who are willing to give you the money to obtain that McMansion TODAY so they can generate a bigger profit TOMORROW.

To me, none of this is a conflict though and does not mean the system, at its core is corrupted or failing. Banks are private profit seeking entities who play an important role in our society, but are not public servants and should not be public servants (a government managed loan system would almost certainly be a disaster waiting to happen). Obtaining money is a privilege, not a right. And a private profit seeking banking system serves to regulate the ability to obtain money before one has necessarily earned it (though there are certainly instances, such as some forms of government spending, where money is rightly distributed by political choice). But because banks deal in distributing the social construct that binds our society together we have a responsibility to oversee that money so as to bring the interests of these profit seekers in-line with the interests of society as a whole. So to me, it is not the capitalist profit motive that is evil here. Nor is it the greedy consumption driven actions of the borrowers that is evil. These are crucial elements of a healthy functioning monetary system.

I think we need to recognize that money is a social construct that is to be protected by the society that creates it. But we must also understand that, while private profit seeking banks are a superior alternative to a government managed loan system, these banks will inevitably be poor risk managers at points during the business cycle. There is plenty of blame to go around for the current debacle that is the US economy. Home owners were greedy in the run-up and the profit seeking banks were quick to turn that extra demand into higher earnings per share. This production/consumption component is a healthy functioning part of the capitalist machine. But when it involves the very oil that greases the engine we must understand that this is a component of the economy that requires great oversight and better regulation. I fear we still do not have this despite the recent changes. And the result is that this boom/bust cycle is likely to continue causing people to believe the very essence of capitalism is corrupted when in fact, it is the users and their misunderstandings who have abused the system. In failing to properly oversee the institution of money we have allowed it to fail us.

In sum, it is the misunderstanding of the essence of money that is evil here, not the system itself. We have misunderstood the essence of money as a tool and a social construct and how it relates to modern banking. And in doing so, we have allowed both borrowers and lenders to abuse that social construct. And with 8% unemployment and a floundering economy it is not just the banking system that appears bankrupt, but our society as a whole. Better oversight of the institution of money might not be able to fix our current problems, but it can certainly ensure that future generations don’t have to suffer through these same events.

Please follow Clusterstock on Twitter and Facebook.

Join the conversation about this story »

Clusterstock

0 Comments

Mshardy

February 14, 2012 at 4:35 am

OMG, would pple get a life! why pple wasting their life worried about this ladies crap…its annoying pple in my timeline going out their lway to negitivly specualte if this baby poped out a kid, or not, she a mom now, yay! & she still gonna get her money & do music…noone knows for sure but pple shud spend their time tryna get her paper, not making speculations that no1 cares about… (pregnant women exercise as for her shows, as for magazine its called photoshop!)

Reply
Fr33zyxauthentic

February 14, 2012 at 6:21 am

i knew it she gave birth way to fast !

Reply
Fuckyou

February 14, 2012 at 7:25 am

Wth didn’t have a miscarriage ? And if so, duh she was working hard. The illuminati calls this bullshit knowledge?

Reply
- :P
  
  February 14, 2012 at 6:25 pm
  
  She did have a miscarriage. Jay-z even said it himself in a shitty and uncreative rap he made called, “Ivy Blue”
  
  Reply
  - Nw0624
    
    February 20, 2012 at 8:46 pm
    
    It was titled “Glory”
    
    Reply
starshooter

February 14, 2012 at 8:03 am

If the pregnancy was for money, why did the couple release the baby photos privately, instead of on the cover of People magazine like most attention desperate celebrities do? The fact that Bey didn’t pose nude with her pregnant body doesn’t mean she wasn’t pregnant. Beyonce has not EVER done nude photography, the closest was a shoot done as a promo for House of Dereon that featured her topless, but only her back was showing, covered in elaborate henna art. Other than short bottoms Beyonce has NEVER been known to show a lot of her body at one time, why would pregnancy be the time to start?? Anyone with half a brain can see that the baby looks just like her, not to mention how much bigger Beyonce is after the baby than she was before hand. She kept her pregnancy a secret because she had a miscarriage once before, and had she lost this baby early in the pregnancy she would have been publicly humiliated. Keeping it a secret was the best decision for her AND the child. The only reason she even admitted it publicly was because she couldn’t hide it anymore. Not to mention the shows she did before she announced her pregnancy you can see in her costuming that she was bigger in the midsection, its almost painfully obvious once you look for it. This is all a silly ass joke.

Reply
guest

February 14, 2012 at 9:10 am

im from houston texas… aka beyonce HOMETOWN… my cousins mother is kelly roland best friend… im sorry but ..she REALLY WAS PREGGGOO… lol like folks need to chill.. she doesnt do nude photos.. i agree with the below comment..

Reply
- Shaqty122654
  
  February 15, 2012 at 1:35 am
  
  Sure bitch, and I’m Jay Z’s mistress!
  
  Reply
  - Tammy
    
    February 15, 2012 at 3:52 pm
    
    lmao! right
    
    Reply
Nikki Richard

February 14, 2012 at 7:51 pm

People who are saying this is for money are dumb as hell because her and hov are rich. They have each others money. They don’t need a new baby for that.

Reply
JuicyNiquey

February 14, 2012 at 8:01 pm

i gotta say, as much as she loves being a woman, being curvy, being sexually enticing… it’s kind of amazing that she didn’t do at least one “tasteful” pregnancy pic. especially with people speaking ill of her and her “pregnancy.” i don’t buy that she doesn’t do nude photos. this is the chick that wears next to nothing in photoshoots and videos, spreads her legs on stage as she twirls around stripper poles… this whole pregnancy has been suspect from the very beginning. and with the whole c-section, i thought women were supposed to refrain from strenuous activity for six weeks — not 3 1/2.

Reply
Lay-Lay

February 14, 2012 at 8:56 pm

Why do I care? Why do any of us care? I thought we had our own lives to live…. For some woman it’s embarrassing that they can’t do what they were created for (getting pregnant and having children) or maybe she hasn’t come to terms with it emotionally yet. Either way I really don’t care. Let them do what they want. I don’t buy those magazines and feed into that stuff, just like I don’t feed into this stuff. Ridiculous.

Reply
Cj

February 14, 2012 at 11:41 pm

Oh shit wtf, she just had or didn’t but said she did have Satan’s baby!

Reply
billiejean

February 15, 2012 at 7:35 pm

When I look at the baby I see a resemblance to Beyonce’s mother. My personal thoughs are that Beyonce’s mother is the surrogate but I need to see pictures of her during Beyonce’s “pregnancy”.

Reply
Cmpt2012

February 16, 2012 at 5:51 am

She does have a sister Solange who has real babies and is MIA! Really believe she didnt have a baby having had three c-sections myself and unable to do anything really for at least six weeks and stay at home with baby she had that baby to fast for a c-section! Its someone in her family baby

Reply
Solis861

February 16, 2012 at 8:52 am

I like how you mention it takes a sick mind to go as far as she did .. Because it proves how sick is your mind and low of a life u have to go into all the trouble to make this video ..
Maybe this baby will be a fucked up kid/adult but it’s gonna be because of people like you!!

Reply
- THE TRUTH !
  
  February 18, 2012 at 7:55 pm
  
  YOO SUCK MY DICK IITE ! BEYONCES A FAKE BITCH ! YOU SUCK MAD DICK SOLIS TO MUCH DICK THAT YOUR BLIND
  
  Reply
beyonce is fake ass hell

February 17, 2012 at 12:09 am

Beyonce fake her pregnancy to all those beyonce fans. so shutthe fuck up and dill with the shit. Beyonce is fake uugh

Reply
- Lisa
  
  March 11, 2012 at 11:01 pm
  
  3rd grade education! LOL
  
  Reply
Nicole

February 20, 2012 at 2:24 am

Honestly their was one celebrity idk if it was Julia Roberts but i saw it on Opera it was for a new movie this was a couple years back and she was 5 months pregnant but you could never tell her stomach was FLAT and i mean FLAT, as if she never had a baby so whether Beyonce really was pregnant or not its possible she was, also she’s a very private person you never hear of her and Jay-Z like that unless they tell us.

Reply
Guest

February 23, 2012 at 8:17 am

Just like brandy faked her marrige years back beyonce could be
Be doing the same

Reply
Lisa

March 11, 2012 at 10:59 pm

what i dont get is WHO CARES!!! if she had a surrogate, it’s still the mother and father’s DNA, the surrogate only carries the child so it really makes no difference. They should be afforded the luxury of having that privacy. What about this makes her evil and wicked? I think the hatefull words that you spew is where the real evil lives? How do you accuse someone of being evil by BEING evil? You’re a walking paradox. What you are doing is MUCH more evil than her lying about a pregnancy. What demon do you work for?? How do you see yourself as good and she as bad??

Reply