Emperors of Banking Have No Clothes

The Emperors of Banking Have No Clothes

Illustration by Oscar Bolton Green

In Hans Christian Andersen’s famous tale “The Emperor’s New Clothes,” two tailors offer to provide the emperor with beautiful and very special clothes. They claim the clothes will be invisible to people who are stupid or unfit for their jobs. The emperor orders a full set. When he sends his ministers to monitor the tailors, the ministers don’t see anything, but out of fear of being considered incompetent, none of them admits this and instead they extol the splendors of the invisible clothes. The emperor finds his new attire invisible, yet not wanting to appear stupid, praises the nonexistent items. When he tours his capital wearing the “clothes,” onlookers also admire them, even though they don’t see anything. Only when a child shouts: “The emperor has no clothes!” does everyone admit that the emperor is, in fact, naked.

Banks have a similar mystique.

There is a pervasive myth that banks are different -- special, somehow -- from all other companies and industries in the economy. Anyone who questions this is at risk of being declared incompetent.

In fact, many claims made by leading bankers and banking experts, including academics, have as much substance as the emperor’s new clothes. But most people don’t challenge these claims, even as the claims affect policy. The specialists’ confidence is too intimidating. Even people who know better fail to speak up. The public is taken in.

“Costly” Regulation

Some bankers may admit to mistakes leading to the financial crisis that began in 2007, but they portray the crisis as a fluke or as an accident that is highly unlikely to recur in our lifetimes. It would be costly and wasteful, they claim, to tighten regulation to forestall an event that might happen once in 100 years. Tighter regulation, we are warned, would interfere with what banks do to support the economy, and this would have serious, unintended consequences.

Take bank borrowing. Excessive borrowing was identified as a major factor in the financial crisis. Bankers sometimes admit this. Nevertheless, the banking industry fights aggressively against tighter restrictions on bank borrowing. The constant refrain is that too much tightening would harm economic growth.

This is a typical bugbear, suggesting that we must choose between economic growth and financial stability. After all, who would be in favor of a regulation that reduces growth and therefore might have negative effects for all? In fact, the history of financial crises and instability, including the recent crisis, has shown that the greatest damage to bank lending and growth occurs when banks become distressed from having borrowed too much and lost on their investments.

Why would restrictions on bank borrowing have any effect on bank lending whatsoever? One argument was given in 2010 by the British Bankers’ Association, which claimed that new regulations would require U.K. banks to “hold an extra 600 billion pounds of capital that might otherwise have been deployed as loans to businesses or households.” To anyone who doesn’t know what the regulation is about, this argument may sound plausible. In fact, it is nonsensical and false.

The nonsense is due to the misuse of the word “capital.” In the language of banking, this word refers to the money the bank has received from its shareholders or owners. This is to be distinguished from the money it has borrowed. Banks use both borrowed and unborrowed money to make their loans and other investments. Unborrowed money is the money that a bank has obtained from its owners if it is a private bank, or from its shareholders if it is a corporation, along with any profits it has retained.

READ ENTIRE ARTICLE HERE: http://www.bloomberg.com/news/2013-02-03/emperors-of-banking-have-no-clothes.html

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commented 2013-02-06 16:36:55 -0500 · Flag
Delroi writes:

The mark of an irretrievably decadent and illiterate society is when institutional turpitude and base theft is not ignored, but worse, celebrated and admired.

Emperor caligula would blush at his comparative inambition to the carcinogenic crew and indolent, lumpen electoriat that runs and resides in the west.
commented 2013-02-06 16:36:22 -0500 · Flag
JcD writes:

I watched interview on cnbc & honestly could not contain myself
Tiny Tim Geithner writing book
to be titled 50 shades of pay
commented 2013-02-06 16:35:56 -0500 · Flag
J.R. writes:

Didn’t y’all hear? The Dear Leader has redefined the meaning of Bull in relation to markets. It now means Bull****.
commented 2013-02-06 16:35:15 -0500 · Flag
Beauforde writes:

Eurotopia has a general unemployment level at STRATOSPHERIC levels and the (European…not immigrant) population is rapidly shrinking and aging…and youth unemployment is at over 55% in countries like Spain and Ireland and Portugal and Greece…and Italy and France are soon to follow down the craper…and they still delude themselves that the Euro is worth 1.35 to the Greenback and that the danger is past and that its all smooth sailing, where I see cataclysmic financial and demographic disaster looming…and Obamatopia is not far behind on the Disaster-Scale, as The Chosen One pushes his Grand Agenda to make the U.S. of A. into a sclerotic, enfeebled, and Orwellian Euro-style Social Democracy…
The International
commented 2013-02-06 16:34:24 -0500 · Flag
JcD writes:

Dick Bernstein xML 12yr perma bear jumped in w both feet today calling for the greatest bull market of our lifetime. Will the last bear standing turn off the lights.
commented 2013-02-06 16:33:46 -0500 · Flag
Ed K. writes:

Greedy and Ignorant…. Its scarier every day. A few manipulators get the masses to run over the next cliff. How long will the Super Bowl type distractions last?
commented 2013-02-06 16:32:16 -0500 · Flag
JcD writes:

Be scared when all others are greedy
commented 2013-02-06 16:31:22 -0500 · Flag
Delroi writes:

limitless digital fiat currency creation by central banks and wall street career risk (all these financial/historical incompetents have to do >>something