Let's call it the LIE-BOR
April 17, 2008
Should we just shoot all the bankers?
Bloomberg.com reports that the LIBOR, or London Inter-Bank Offered Rate, is something of a fraud. It seems that banks have been mis-reporting the rates at which they loan to each other to keep the LIBOR down, so they can continue to borrow at cheaper rates:
Banks That Misquote Money-Market Rates to Be Banned (Update1)
Oh, those rascally bankers. They don't miss a trick, do they?
My eldest daughter, the vicious attorney in Zurich, took in the bankers' antics and just shook her lawyerly head in disapproval. Quoth she, " Probably it is almost impossible to be involved in banking without being corrupted. It's too close to labor-free money-making, which has never been good for people."
Oh, dear. To be looked down upon by a lawyer. The horror.
I've been arguing this question in my head for a long time. That is, whether banking really adds value to a society, in an Adam-Smithian sense. I'm pretty much convinced that investment banking does not add value, beyond the basic operation of providing capital access to large-scale enterprise (IPOs, bond issues) and even those functions are regularly misused and abused.
On the other hand, check-writing/debiting functions add speed and convenience to transactions in the economy, and banks do a more accurate and timely job of keeping accounts than some of their math-challenged customers. So there's value in aiding the velocity of money, and in limiting errors. Beyond that, however, it gets murky.
I can hear the banker objecting strenuously to the notion that he performs "labor-free money-making", as he waves his cigar in all directions at the volume of paper shuffled and accounts managed. But the blackjack player could blather on about all the complex mental arithmetic he performs in his quest to beat the house. He's still a gambler, for all that.
The question isn't whether bankers make money without laboring; it's more a question of whether the labor is being expended to a useful end. For myself, I don't see how Big Banking adds much real value or wealth to the world. In fact, it may be detrimental. A great deal of bankers' efforts are aimed at getting people deeper in debt to the bank. Surely this device, while it may boost the bankers' earnings, is no great boon to humanity? "Harrumph! Just think of all the people we've helped to get their dream home!" Well, yes. And just think how many of them are already in foreclosure, and how many more are about to be.
The guy who toils all night in a basement methamphetamine lab is certainly working for a living, and he's even making something tangible. The question is whether it adds real value to society; the meth-fired plasterer gets a lot of wall stuccoed while the booster is burning, but it all comes to a halt when he steps off the fifth-floor scaffolding.
Likewise, Susie Streetwalker works for her money--"She works hard for it, honey". But there aren't too many people willing to argue that prostitution is a big society-improver.
Modern banking, especially investment banking, is not quite what it professes to be. Bankers advertise that they're all about helping you get what you want in life; in fact, they're there to help themselves get what they want in life. Investment bankers talk as though they exist to help clients find profits in the capital markets. In reality, their raison d'etre is to help themselves to profits, often at their clients' expense. Goldman Sachs, remember, admitted selling structured credit entities to their clients as good, safe investments, and then profited by selling those same entities short, by taking out credit-default swaps against them.
It's hard to see how whole phalanxes of bankers add as much value to the nation as a single potato farmer. Bankers do not create wealth so much as just shuffle it around and redistribute it--to themselves as much as possible. When's the last time you saw a 29-year old potato farmer tooling around in a new Maserati? Well then, how about an old Maserati?
Banks have assisted great hordes of people in getting themselves into severe financial binds lately; most will not escape unscathed. Some will spend the rest of their lives repairing the damage to their personal balance sheets, but much of the damage will end up more or less discharged against the population's aggregated liabilities. Those liabilities will be foisted off on future taxpayers, since there appear to be no politicians with the death wish required to hold this generation of taxpayers to account for the largesse they've accorded themselves. And that seems quite reasonable, since they are not inclined to let investment bankers pay for their own risk-management blunders.
"The first thing we do, let's kill all the lawyers", proposes Dick the Butcher in Henry VI. Well fine, if you must, but spare my daughter. And see if you can't save a few rounds for those brigands with the green eyeshades.
Gabriel Gray
This article was first published at www.grahamanalytics.com