written 2007 on the verge of the banking crisis
commentary • 03.11.07
I've been complaining about banks for long enough now. These complaints would fall on deaf ears. Eyes would glaze over and a change of subject would ensue as if some fucked up doom-sayer had spoken. And although that description of me might be true enough it doesn't mean the doom-sayer's words are invalid. In fact in the case of the banks he has proved prophetic.
The international banking system is now in crisis which is having serious effect on the world economy. This is being referred to as the “credit crunch” where the preparedness of banks to lend to almost anyone in recent years has come back to bite them and everyone else. A raft of borrowers in the so called sub-prime market has defaulted on loans resulting in huge numbers of bad debts in America. This is wafting its way across the world. Banks themselves have consequently become reluctant to lend to each other which means some are threatened with bankruptcy - The Northern Rock in Britain is one such. In such a situation who do the banks turn to for support? Not the finance community itself but the government and the tax payer. I find this interesting.
My complaint against the banks over the past decade was that the aggressive competitiveness they employed was a disaster. It was also pretentious. It did away with the old, almost civil-service style banking culture where banks were hallowed places set up in prominent locations in cities, towns and villages across the country. They were quiet like libraries, often in beautiful big buildings, names carved in stone as if to reflect the historical importance of their roll in society. Within a few years the relatively benign types who worked in banks had been transformed into aggressive sales people urging you to buy their “products”. Going into a bank now is like walking into a down-market pound-shop. They are like menageries, loud and noisy, drenched in advertising, with squawking kids running around. The great classical buildings have been abandoned and turned into pubs. Many small towns and villages now have no banking services.
Back when this transformation started it felt like a bad move to me. It felt misconstrued and involved a falsification of what banking does. I accepted that investment banking was speculative and even entrepreneurial but high street banks were very much a public service like the Post Office. I said that bankers should keep score rather than play the game themselves. The big changes didn't seem right for these reasons and more but what can you do? They weren't breaking the law and were probably playing by the rules. They were doing what everyone else was doing - making as much money as they could - so what was the problem?
Well, one problem as I saw it was the de-personalising of service. Banks didn't need to know their customers anymore. If you can sell your products to a hundred people you don't know instead of ten you do, then economies of scale mean you can do it cheaply. Even if a few deals go bad that can be accommodated. That you don't know those hundred customers is fine because getting to know people is time-consuming and expensive. You simply lend to anyone who ticks the box and sit back. Most of the loans would go to plan. The ones that defaulted could be written of as an expense.
It turns out that this philosophy was deeply suspect. The sheer number of default loans has caused a problem after all, a big problem. Banks that have been around for decades, centuries in some case, are fighting for survival. Share prices have halved in two years. Even the strongest of them are having to refinance themselves to survive. Heads are truly rolling. And all this from bad lending. The government in Britain has had to wade in with huge sums to save these institutions from themselves. Although this is an outrage there is little choice as the consequence of not doing so would be worse.
In some ways this makes my point: banks are not in a real market like everyone else where if you fail to make the grade you go under. This is the nasty medicine we have all had to swallow in recent times supposedly for the greater good of the economy and ultimately ourselves. Bankers doled out this medicine with great authority. I have been as subject to it as anyone, fully up against market forces with no cushion. Seems banks are different. They have all kinds of cushions, no less the tax-payer who has to bail them out. I am angry at this for more reasons than I can expound.