These days it has become fashionable to criticise banks for the economic woes of the world. In fact, I would go so far as to say that, unless you vigorously join in the chorus, you are almost regarded as an accomplice to their alleged misdemeanours. So bank-bashing is absolutely de rigueur.
Evidence of this is the degrading spectacle of bankers being dragged by the short and curlies in front of Congress and the ominous sight of Obama's ever accusing finger pointing at them, as if threatening, at any moment, to gouge out their eyes. Bankers find themselves, so to speak, between a rock and a hard place. Risky profession, I would say, qualifying, if we were living in Greece, for disability pension at age 50. Not much else you can do in life once they have taken away your courage and your vision.
Now, make no mistake, I don't regard bankers as celestial beings inhabiting lofty places, but, by the same token, I can't depict them as little red angels with horns and goat beards. The present anti-bank campaign rests on an oversimplification of the problem that serves exclusively the pernicious designs of populism.
You only have to look at the historical evolution of interest rates in the US to realise that the roots of the problem lie elsewhere. From about 2002 the Federal Reserve set interest rates at ridiculously low levels. That was done partly to offset the effects of the recession and partly to promote the social policy of the political utopia known as the American Dream, whereby every citizen should own his own house.
Well, low interest rates have two undesirable consequences. Firstly, they encourage individuals and businesses to leverage themselves to unreasonable levels in the erroneous belief that asset values rise in a geometric progression. That is how bubbles are created. Secondly, they provide no incentive for cash rich corporations to maintain their money in the bank, and thus force them on the path of acquisitions. The result of this process is labour rationalisation.
As unemployment rises and private consumption shrinks, property prices also decline. More and more people find that they are in serious financial trouble. The same banks that were told that they should be sympathetic to individuals who, rationally, couldn't even afford a tent, never mind a house, become laden with toxic assets and are forced to foreclose. Unfortunately there are no buyers in the market for those repossessed homes. Some banks go bankrupt, if their business model was based on borrowing short and lending long. If you add to this a government that has embarked on several utopian adventures, run up a huge deficit and is now competing for funds in the credit markets, you have the makings of a daunting economic mess.
In fine, oftentimes dreams are just that – dreams. Sometimes they turn out to be nightmares. Yet, sin always lives next door.
