How dependent is the world really on the financial (most specifically the banking) system?I´ve been wondering on, how much does the world really need the financial (most specifically the banking system)? I mean, I know they hold lots of -money- which is in a way a comodity in itself, yet,i´ve wondered: are banks themselves truly that necesary for our societies to run? And furtherly, how important are... | |
Banks and the financial system have always been critical to civilizations.
1. They've financed trade since before the Roman empire. Just the reduction in trade resulting from losing the banking system would be devastating.
2. Another essential role of banks is the maturity transformation
http://seekingalpha.com/article/196202-t...
http://rajivsethi.blogspot.com/2009/11/w...
http://en.wikipedia.org/wiki/Financial_i...
3. Then there is the role of credit in fostering investment. If people had to wait until they had saved up enough to buy house, very few houses would ever get built or bought - it is hard to save enough to pay for house while still paying rent for where you live.
Similarly for a company that wants to invest in a factory. If you have to have a great deal of accumulated profits before you can investment, then the investment rate would be much lower.
Thus, lack of the credit market would dramatically slow the rate of growth, both of the economy, and of people's standard of living.
On the question of bank locality, knowledge is important. You can't be effective as a financial institution unless you can asses the risks accurately. If you overestimate the risks, interest rates are higher, lending is reduced, and everyone loses; if you underestimate the risks, interest rates are too low, the bank loses money and goes bankrupt.
When it comes to very large loans for large international projects, knowledge can only be acquired by intensive analysis by a specialist. Locality is not big advantage. But when it comes to smaller loans: mortgages, car loans, seed loans for farmers, etc. local knowledge is a big advantage - the additional cost for acquiring the additional knowledge for a particular loan is much lower for a local bank than for a bank that has to learn all about the local real estate market. Similarly there are banks that specialize in trade, banks that specialize in farm loans, etc. because specialization gives them competitive advantage in the form of cheaper knowledge.
Last and perhaps least, the financial sector can be a big money-maker. New York, London, Tokyo, etc. all owe much of their wealth as cities to their financial sectors.
And in the U.S., the financial sector accounts for a hefty chunk of corporate profits and hence taxes paid by corporations:
http://bearishnews.com/post/3500
(Not that this is good for society or the economy. We were better off when bank profits where much lower.)
There are alternatives to the financial system the U.S. and the world has chosen. For example, an Islamic banking system would reduce growth but could still be viable. And one can argue that the banking system we now have is a terrible burden on society rather than being a boon:
http://newdeal20.org/2009/10/12/how-the-servant-became-a-predator-finances-five-fatal-flaws-5330/
http://telegraph.co.uk/finance/comment/rogerbootle/6316529/Does-banking-contribute-to-the-good-of-society.html
http://newyorker.com/reporting/2010/11/29/101129fa_fact_cassidy
But to eliminate banking altogether would be to eliminate civilization.
http://fsa.gov.uk/pubs/speeches/at_17mar10.pdf
Yes the world is dependent on banks -- they are critically important for us to have any kind of modern standard of living. It's not that they HOLD money -- they actually do not hold much money. They take deposits and lend them right out. Banks would be fairly useless if all they did was hold money.
Banks are important because they are the source of money-creation, and the source of lending to businesses and people who want to buy something for which they don't have enough cash. (Money-creation and lending are two side of the same coin. Money is created when a bank issues a loan.)
Everything you enjoy that sets you apart from your stone age ancestors -- electricity, cell phone, ipod, computer, the Internet, etc -- those thing are all made possible by bank lending, somewhere along the way. Bank money is an important part of the "capital" in the capitalist system.
Even in the modern world, countries that have few banks (like, say, Somalia or Afghanistan) are very poor. Banks promote wealth; the absence of banks promote poverty.
