KHarris on Banking Risk

Hoisted from comments… kharris writes:


Banking is a necessary part of all but the most primitive economies. We need banking. Banking faces a number of risks that must be mitigated – eliminated if possible at a reasonable price – to assure the rest of the economy functions well.

We should not find it odd that bankers insist on letting the market work when the market is to their advantage, and call for help of various kinds when that is to their advantage. Anybody in their right mind would do the same.

However, we do see the odd circumstance that bankers and financiers of various kinds earn better than, well, better than anybody excepting Ms Rowling and some oil execs. This is an industry that is given access to the discount window, surveyed regularly to find out what kind of securities it would like to by from the Treasury, allowed by buy insurance for its depositors from the Federal government, rather than from markets, shored up through monetary policy, and so on.

Now, if this were lending in the old fashioned sense that the saver offers funds to the borrower directly, absorbing much of the risk and providing funds for growth in return for the opportunity to growth rich, it would be one matter. Largely, however, the people who receive those big bank bonuses do so by putting other peoples money at risk. When they succeed, they grow rich beyond the dreams of ancient kings. When they fail, they lose nothing but their job, and can usually find another one that pays straight salary beyond the dreams of landed aristocrats.

It makes sense to take care of banks, but why do we take care of bankers? Why do we not tax bankers’ incomes in a way that reflects their special position? Tax away that part of their income that represents the effects of the coddling that banks receive, the results of monetary and regulatory changes. Then, the only way for a banker to really prosper would be to do a good job.


This one was by kharris.