12 ms·
How Big Banks Became Our Masters
- mainframer 9y agoI'm seeing a lot of percentages and no source data here.
- snomad 9y agoThis article doesn't even answer its own question of "how". For those interested in the topic, I highly recommend Connie Bruick's Predators' Ball and Liar's Poker by Michael Lewis. > Adam Smith, the father of modern capitalism I hope we can stop conflating free markets for capitalism. Capitalism is to free markets what communism is to socialism. Adam Smith was very much focused on free markets, not capitalism. The author of the article, makes it clear later with > Adam Smith, who believed that for markets to work, all players must have equal access to information, transparent prices and a shared moral framework
- blfr 9y agoAlso, if we're gonna nitpick, neither the free market nor capitalism were created by Adam Smith.
- jrs235 9y agoAlso, Adam Smith's theories assume rational actors. Humans aren't rational, they are emotional and rationalizing.
- bmmayer1 9y agoWhere in Adam Smith does he assume rational actors?
- jrs235 9y agoSmith’s basic position and teaching posits that though it is not commonly thought in such terms, humans act rationally and thus typically act in their own self-interest. Decisions are generally made based on financial prudence and intrinsic satisfaction. These assumptions are key to economic analysis and commercial success.[1] [1] http://www.investopedia.com/terms/s/self-interest.asp http://www.investopedia.com/terms/s/self-interest.asp
- smokeyj 9y agoDo you have an example of someone not acting in their (voluntary) self interest?
- wpietri 9y agoThe whole field of behavioral economics [1] examines this question. It sees human rationality as sharply bounded [2] with an enormous set of cognitive biases. [3] The field is seen as a direct challenge to the notion of humans as rational actors. If you want examples, they are legion. Addicts, for example, clearly don't act in their own rational self interest. Whether it's substances (e.g., alcohol and other drugs) or experiences (like gambling and gaming), whole industries are built around exploiting people's inability to act in their self interest. Another example is advertising. In economic theory, advertising and PR are about informing people, giving them new facts. But when you look at actual advertising, it's about giving them new feelings, about manipulating their decidedly non-rational behavior. And there are plenty more. If you look the kinds of things consumer protection agencies get up to, you'll find plenty of examples. [1] https://en.wikipedia.org/wiki/Behavioral_economics https://en.wikipedia.org/wiki/Behavioral_economics [2] https://en.wikipedia.org/wiki/Bounded_rationality https://en.wikipedia.org/wiki/Bounded_rationality [3] https://en.wikipedia.org/wiki/Cognitive_bias https://en.wikipedia.org/wiki/Cognitive_bias [4] e.g., https://hbr.org/2009/07/the-end-of-rational-economics https://hbr.org/2009/07/the-end-of-rational-economics
- smokeyj 9y agoMy point is humans have self-interest, and that humans act rationally to satisfy that self-interest. Not that the self-interest is "rational". An alcoholic who buys liquor is acting rationally according to his interest of getting drunk. Being an alcoholic may not be rational (to us). But I'd rather operate in an economic framework that doesn't judge the rationality of my interest, but that I have self interest and act rationally.
- bsbechtel 9y agoEveryone is rational by their own definition, which differs from person to person. Rationality is just a function of the value an individual places on various factors affecting a decision.
- johndevor 9y ago> Capitalism is to free markets what communism is to socialism Would you explain this a bit more?
- jrs235 9y agoI believe OP is trying to say that capitalism and communism pertain to who owns [the] property while free markets and socialism pertain to who/how/what gets produced.
- chewz 9y agoSocialism is about class solidarity and more equal redistribution of capital gains mostly via democratic process. Communism (or bolshevism and maoism) on the other hand is about exclusive small cadre party pretending to represent entire working class and seeking total control over society using all means including terror. Free market is about leveling play field and equal access to marketplace for all actors big or small. Capitalism on the other hand is about maximizing control over markets and maximizing rent seeking.
- vslira 9y agoThe problem is that none of your definitions reflect how these terms are read in some academic circles. Which is not saying that you're wrong, I'm just pointing out that probably each person/group has a different view on what "Capitalism", "Socialism", "Communism", "Fascism" etc mean.
- _jal 9y ago> The problem is that none of your definitions reflect how these terms are read in some academic circles That can't be helped. There are people who regard anything more collectivist than a volunteer fire department as communism. All you can do is define your terms and try to argue only with intellectually honest people.
- smokeyj 9y agoDefining government is always a fun one. The cognitive dissonance alone makes it worth it.
- JackFr 9y agoCapitalism often means different things to different people and it's often to an authors rhetorical benefit to leave it so. When people say capitalism they typically mean one or more of the following: * Free markets * Free trade * Private ownership of the factors of production * A form of economic organization characterized by tradable claims of ownership, & ownership separate from management. * A form of economic organization where the primary driver of the firm is profit. * A counterpoint to socialism. * A counterpoint to centrally planned/managed economies. By never being clear about what one means, and just saying 'capitalism' a skilled rhetorician can convince you one thing is good (or bad) and then lump others in as part and parcel. As you point out profit seeking businesses do not like free markets.
- dvdhnt 9y ago> Capitalism often means different things to different people and it's often to an authors rhetorical benefit to leave it so. Sure, some, but if every author accepted this as immutable, we can never progress. The issue is that when you have two separate ideals, each with their own qualities, allowing them to become synonymous provides a defense for the lesser ideal in the name of the better. So, it makes it easy for bankers and capitalists to defend their actions in the name of a free market!
- SaltyBackendGuy 9y agoThe real problem is that we don't have a free market. Businesses strategies are too often to lobby for favorable legislation to sink their competition rather than make a better product and let the market decide.
- smallnamespace 9y agoYou can view the political arena as a sort of market as well -- there's horse trading, money, people lobby and and trade for access. Except one part of society (corporations) use this market to the hilt, while the rest of society largely abstains or is unable to participate in this market.
- 9y ago
- triplesec 9y agoFor a really insightful approach to how we got here, read Prof David Graeber's book Debt: the First 5000 Years
- KGIII 9y agoI wonder how long the modern idea of debt has existed? Mainly, that idea of owing someone something, (often) at a later date? The concept of zero isn't even 5000 years old. Negative numbers were still being debated in the 1700s, though I think the first known use was in China's number rod system in 200 BCE. Conceptually, less than nothing is a funny thing and not really well grounded in the physical world. It does make me curious. I'll have to look for the book. I find the history of mathematics to be fascinating, though debt may have originally been more culture and less math.
- triplesec 9y agoThe book should satisfy your curiosity. It's based on anthropological research, but intelligently and coherently argued, and is not just description.
- KGIII 9y agoThanks for the recommendation. I wrote the title down and will see if the bookstore has it. If not, they'll order it for me. They are handy like that.
- ashark 9y agoA TL;DR of the book (still read it!) is that debt was (at least typically, and as best we can tell) around before money, and that early communities operated on debt internally and mostly used barter or money-like things when dealing with dangerous, untrustworthy "others", which turns the usual "first we bartered, that sucked so we invented money, then debt" narrative around. Something really resembling money, it claims, didn't come around until rulers invented it to better fund their armies ("OK, soldiers who will be operating in areas where you don't have social ties, here are five coins. All you civilians, including the ones we just conquered? You're each gonna need one of those coins to pay your taxes next year, or I'll take all your shit. Boom, now the coins have value.") The book advances the idea that barter is most common as a temporary measure among people who are used to using money but, for a time, cannot (during prolonged disasters, in prisons), not as a major feature of the economies of early or primitive societies. It also ties the collision of debt-and-money with social-debt societies to the development of slavery, and covers a bunch of other interesting territory. Again, do read it. As for negative numbers, you can express "owes" without them so I doubt it was a problem. After all, you don't "owe" someone negative one thousand dollars—you just owe them positive one thousand dollars. You hand them a negative-one-thousand dollar bill, they're not gonna be happy. Being able to write negative balances or work formally with negative numbers isn't strictly necessary to work with debt.
- specialist 9y agoDon't conflate corporatism (Freedom Markets™) with capitalism.
- Pigo 9y agoI can't help but wonder how much of this would have been fixed by letting them fail. This is way out of my ballpark, but it still bothers me a lot that they don't face the same consequences I do for making mistakes.
- turk184 9y agoExactly right. There has to be real consequences or else you get what we have right now which are these entities that are so powerful they can shift accountability away from themselves and thereby socialize all their losses while profiting to the tune of hundreds of billions of dollars.
- laurent123456 9y agoIceland let its banks fail and protected the taxpayers, and a few years later the economy recovered just fine. It's at a much smaller scale than the US or EU economy though, but still.
- Tyrek 9y agoIt's entirely unfair to use 'but still' as any sort of argument here. Iceland is not a large chunk of the world economy, nor does it have a premier position as the world's economic nexus to protect. It's well documented that cause/effect differs as your economy scales (just look at how behavior changes between a small startup vs a unicorn). While there might be some valid arguments for letting the banks fall, 'someone else did it and it worked' is not one of them.
- nugget 9y agoHumans and their systems are very resilient. Personally I would have let a lot of the weaker US financial institutions fail after Lehman. It would have been much more painful in the short term, but I bet we'd be in a healthier recovery period now. Granted I understand why the Fed did what they did. The European equivalent is letting Portugal, Greece, Italy, and Spain go bankrupt, which could cause serious, irreversible structural problems...on that one, I'm not sure what I would have done.
- turk184 9y agoI'm surprised the NY Times even published that rebuke of the money masters. Huh!
- rb808 9y agoI'm not even sure what this means - in what ways are they our masters?
- wu-ikkyu 9y agoMaster: a man who has people working for him, especially servants or slaves. If you work for money, then by extension you work for the bank, because that is where money is apparated. The bank is the one who decides how much money is to be created, and who gets it first.
- eternalban 9y agoIt amazes me that NY Times gets away with this sort of patronizing articles with their presumed (educated) readership. "Mainstreet vs Wallstreet". <expletive deleted>
- southphillyman 9y agoThe sad thing about this is that it seems like we haven't learned from the past. One of the hottest things in my local community right now is flipping houses. You have people levereged to the hilt with hard money loans, flippers teaching classes (and providing hard money loans), and home prices at or exceeding 2008 levels.
- alextheparrot 9y agoNo no no, you aren’t understanding, let me aid you in doing so. The people in 2008 just timed the market poorly. This time around, we’ll see all the tell-tale signs of a housing crash and get out right before it does so, all cash. Then, when all the stocks (Because, of course, banks will lose out on the highly leveraged positions of our non-fortuitous peers) have tanked, we’ll simply buy them at rock bottom prices, riding a wave of financial security into the nursing home.
- PythonicAlpha 9y agoI hope, I just missed the irony-tags.
- fellellor 9y agoI hate those. If anything they just dilute the message.
- bousaid 9y ago(his /s tags missing lol) Ah yes, the classic “buy the dip” strategy.
- throw2016 9y agoBanks were supposed to be stable and boring. The quest for 'financial innovation' in the heady 80s accompanied by rocketing bonuses and compensation has led to highly unstable economies with risk and reward mixed up with government intervention, too big to fail, regulatory capture and lobbying and now basically stand isolated. During the asian financial crisis the IMF and WB were gung ho about free markets, austerity and enforcing failure without exception but as soon as it hit western economies the whole field of economics changed with words like 'too big to fail' and 'systemic risk' entering the economic vocabulary. How does one explain oil being at $40 and $140 with supply and demand and free markets. There is a lot more going on that is often hidden behind jargon that obfuscates than informs.
- jandrese 9y agoIsn't oil a commodity with a variable supply but relatively fixed demand? Big price swings are what you would expect in a situation like that. One can argue that some suppliers act "irrationally" when they artificially restrict their output to drive up prices (OPEC), but this is what you would expect to see in that situation.
- PythonicAlpha 9y agoThe problem is, that we let banks become so big and important for our economies, that they can make the rules, if we want it or not. The rules that Obama made, where hardly enough to prevent the biggest problems, of the system. But even those are abolished by the new president, since they might limit the possible profits, rich people can make. And so we live on in the land of unlimited profits for the 0,1% and the unlimited losses for society.
- sandstrom 9y agoA great book on this subject is The Bankers New Clothes. It explains the history of banking, why banks are useful and also why many banks today are dysfunctional and harmful.
- chibg10 9y agoI'm not sure how the author can assert with a straight face that Dodd-Frank is essentially sacred, a lack of community banks is hurting the economy, and that it's all the big banks' fault. A loan to your your local mom-and-pop shop is a much riskier investment than a bond to a large corporation. DFA discourages risk-taking with the new capital requirement rules. Thus, community banks are fighting over a small pool of profitable loan opportunities and their numbers shrink. On the other side, small businesses have a harder time getting loans. Regulatory compliance overhead from DFA hits community banks harder than big banks as well, so they're consolidating and leaving fewer true community banks. None of this is has much to do with the actions of big banks. It's the natural consequence of DFA. If you don't like the status quo, you need to change DFA. Not necessarily to pre-2007 rules, but some small changes could provide a big boost to community banks.
- specialist 9y agoRegulatory capture, weaponization. eg how Big Ag subverted "organic" to drive out small players.
- breatheoften 9y agoEmbracing technology could be a better solution. Government should fund open technology development as necessary to ease the burden of financial regulatory compliance. Technology could and should make it possible for smaller banks to comply with federal regulations with the same efficiency as big banks -- at the same time, federal regulations should be allowed to become as complex as necessary to surface and discourage fraud and systemically risky behavior.
- pjkundert 9y agoA timely, relevant (and unusually accessible) suggestion on how to save the local banks being killed by 20,000+ pages of Dodd-Frank regulations: https://www.youtube.com/watch?v=ZUXd3LJZ3hg https://www.youtube.com/watch?v=ZUXd3LJZ3hg
- dalbasal 9y agoThis doesn’t really speak much to the “master” thing, but over the last few generations we have “financialized” (like securitised, but bigger) huge parts of the economy, and a lot of stuff that wasn’t really part of the economy in the past. For example, health services are largely financialized via insurance. IE, you don’t directly buy health services, you buy insurance which buys health services. You don’t buy a house, you get a mortgage. You don’t support your parents (or colleagues) in their old age, you pay into pension or superannuation schemes. Education via student loans. Monthly expenses via credit card debt. Large ticket items via dealer finance. Public services via national debt…….Companies via private equity. Everything has a financial layer between payment and consumption. Underlying a lot of this is a relatively simple fact that if debt is available, consumers (from 18 year olds to Finance Ministers) will take it. If loans are available for certain products, more of those products will be consumed. Another (possibly evil) driver is that governments have chosen financialization as instruments for promoting stuff they want to promote. Need more corn? Crop insurance subsidies. Educate the masses? Subsidise student loans. Promote home ownership? Implicitly guarantee retail banks’ losses. Medical care for all? Tax free(subsidy) insurance. Flood problems? Flood insurance. Poverty? Microfinance. So, banks got big. This has all sorts of weird effects. One of the biggest problems in my opinion is the inflationary effect of this process. Real estate prices in many places are simply the amount that a bank is willing to lend buyers. If banks increase the amount a buyer can loan, house prices increase proportionally. IMO, the American healthcare saga is not really about ideology or competence or any of the stuff they talk about. The problem is that after 2-3 generations of wide scale subsidised financialization, prices & costs are so high. My final thought is that part of the problem is the prominence of finance people in pubic decision making. They know finance. They believe in it. They use it to solve problems. They don’t see baks getting bigger as a problem. It’s kind of like the lawyer problem, who also have a lot of presence in politics. That means the legal field gets bigger all the time.
- clairity 9y agoone of the things that irks me about (consumer) banks is that they've somehow convinced consumers that they should pay for banking services, instead of the receiving returns for loaning the banks money (which is what a checking or savings account is). some of this is due to a lack of financial literacy on the part of consumers (financiers know that loans should come with an interest rate, not a charge for the privilege of loaning the money in the first place, but consumers on the whole apparently don't). but there is also a regulatory mechanism exploited by consumer banks: FDIC insurance. without insurance, people are understandably reluctant to loan money to banks since they don't know if they'll get the money back. so the government (again, understandably) steps in and guarantees with tax dollars that you'll get that money back, even if the bankers are crooks. but of course, that means the government must try to tease out the crooks with a stringent set of tests and regulations around who they'll insure. and just like that, you have an anti-competitive choke point where incumbent banks use the regulations to guard against future competitors by keeping the regulatory barrier high. (this is just another example of the financialization via insurance that you elucidate) also, use cash. it's transaction-cost free, anonymous and universally accepted.
- jokoon 9y agoFree markets are all good until the government fail to regulate them. Decentralization from state and political influence is good, until nobody is in control anymore. Then it's chaos. To be frank I think that US banks might be influenced by foreign powers just like it happened for the last election. I think that finance will damage sovereignty in the long run. It really looks like common citizens don't really have a say on how finance work in terms of politics.
- acty1 9y agoEnter Bitcoin. They will not be our masters much longer now that they will lose their monopoly on trust.
- nilanp 9y ago1. The problem with financial services is customers are greedy - not banks 2. The challenge in building any business - is that they always start by trying to solve a problem - but power always corrupts 1. If google’s aim was to truly organise the worlds information or xxx would it behave like thsi 2. We say capitalism is good as through the pursuit of capital appreciation - these kinds of problems aggressively get solved but we reward financially - the creation of monopolies 3. This then leads to all kinds of things: styling of innovation; but also pronounces the accumulation of capital 4. The solution is whether you can construct a company in another way 5. I think its now clear that you strive to be too greedy - that power / money will eventually corrupt 1. Google search results 2. Uber vs lyft 3. Microsoft 6. But this process takes years Building financial services in a way that doesn't corrupt is as hard / harder than building a serach engine / browser / car sharing company that will last for 1000s of years rather than decards