Financial Bloat

January 18, 2008

Why bankrupt banks may be good for America

There are too many 20-somethings running around Wall Street making tens of millions of dollars every year. They actually think that’s normal, it’s not. In any economy there is a finite amount of money available to be spent without introducing inflation and allocating a disproportionate amount of that money to financial institutions is a great way to create the conditions for inevitable collapse.

Bankers don’t produce anything. There is a legitimate need for some institutions to help connect people will excess capital to those in need of investment, but in that transaction the financial institution is nothing more than a middle man. Other than making connections, bankers add no value to any party and the more money they absorb the less is available for investment. With bloated banks, everybody’s return is harmed except for the only one that adds almost no value to the world.

People sometimes forget that financial institutions are not investing their own money; they either invest other people’s money or conjure more into existence out of nothing. When investment is available they take a cut, when it’s not, they just steal value from the money already in circulation.

Complicated financial engineering schemes designed to divert more money from productive industry and their investors ultimately hurt the economy when the incentive to invest decreases and the cost of borrowing increases. In a healthy economy, when investment is not available the weakest businesses should close their doors. That forces innovation and ensures only worthy entrepreneurs continue to operate while the losers are pushed out of the market. Today when businesses are in need of more capital the banks just create more credit.

Similarly, many individuals no longer see the need to save and invest; when they require funding to increase consumption, they can also rely on credit. This distortion is one reason bankers are forced to expand the money supply indefinitely to continue funding their pyramid scheme. The more easy credit they create the more easy credit the economy requires in order to continue growing. The cycle never ends.

Gauging the health of the economy by examining the health of its banks is the ultimate irony. We need less consumer credit and more efficient and responsible investment to stimulate a healthy economy, and if a few banks collapse in order for that to happen, good riddance.