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The classical defining property of banks is that they borrow money (short-term) from depositors and then try to use it (lend it long-term) to make money for themselves. But they also borrow money from the government, and nowadays those deposits are insured by the government anyway, so one way or another the money banks play with ultimately comes from the government. They spray this money around (making loans, buying bonds, funding deals and issuances, etc.) to various actors in the economy, in the hopes that when the dust settles they’ll end up with more than they started, net of their funding cost, and then pay themselves a sizable chunk as bonus. The fact that this arrangement makes banks the government’s counterparties is what lends credence to the claim that banks are just an unacknowledged part of the government – after all, once a bank has borrowed billions from the government, the government can’t really afford to let them fail, and can’t credibly promise not to bail them out. In other words, the government implicitly holds the tail risk on whatever risky hi-jinx banks get into (and banks are nothing if not good at figuring out ways of squeezing more risk to play with out of the same capital). Privatized gains, socialized losses.
But through their activities, what banks really end up doing is, they figure out Who Should Get To Use Money. If they make a loan or facility to corporation ABC at such and such spread, but XYZ at a higher spread or not at all, this is a judgment that ABC is more business-worthy – i.e., more supported by the market. In other words the bank has decided (rightly or wrongly, but wrong decisions are punished) that people would, at the margin, rather have what ABC is selling than what XYZ is selling, and/or that ABC is better-managed and more viable than XYZ, thus ABC should get more/easier money. Notice that someone has to figure this out. And I’m not sure who it should be, if not banks.
Let’s say you didn’t think it should be banks, because banks are evil and risky. Instead, you tried to set up or change regulations to allow for some other institution(s) to do it (whether part of the government or not), and you didn’t call them “banks” you called them knabs, and you changed the rules around so that it is knabs (and not banks) who end up figuring out where money should go.
Well, they’d end up doing pretty much what banks do. Wouldn’t they? Analysts and spreadsheets, and risk-taking and competition for brainpower, thus corporate structures and obscene payscales.
Or maybe not, you say. Maybe the knabs would have different, better criteria for allocating money than the evil, selfish banks do. While you can’t (or, at least, shouldn’t) just print the money and send everyone an equal cut, or spray it in bundles from helicopters with those athletic-event T-shirt-launchers, maybe the answer is socialism. In a stereotypical socialist system, I guess Who Should Get Money would be figured out by a highly elite council of commissars – brilliant, selfless, philosopher-kings who sat around in a tastefully-drab room and deduced via their brilliance, insight, education, correct ideologies, and compassion that for the coming year-quintile, X billion goes to the tractor factories, Y billion goes to statues of the Great Leader, Z billion goes to the subway system, (W billion secretly goes to their nomenklatura friends & family), etc.
I admit that’s a possible resolution. But it doesn’t sound preferable to me.
Or, one might consider some of the full-on libertarian (and/or Moldbuggian) alternatives, by contrast. Yes there would be ‘knabs’ but you wouldn’t have to set them up at all, they would all just arise naturally as private funds (no deposit insurance, no government bailouts) bidding on everything privately. Meanwhile the banking sector itself would be characterized by ‘free banking’ and private money. And you ban fractional-reserve banking and maturity mismatches (i.e. the defining quality of depository banks) as instances of fraud. My mind is open to all this, but at present in terms of real-world test cases, proofs of concept, and feasibility, on the scale of the modern financial world, most of these still lie in the realm of science fiction.
So the function of banks, perhaps, is to replace the socialist council of commissars with something feasible that is meaningfully connected to market forces and distributed knowledge. Instead of making up money allocation out of thin air, arrogance, and dogma, banks at least try to make their decisions according to something resembling rational criteria, i.e., what will make them money. Not because they’re saints or geniuses (though possibly some are, at least the latter), but because they participate directly in the rewards. The commissars might decide to fund an overall factory regardless of whether any of the peasants actually wanted overalls, it won’t affect whether they have a fancy dacha and use of the car either way; a corporate bank PM, having at least some incentive, might think twice before (or at least charge more for) making a loan to Overalls, Inc. under the same circumstances. The commissars will make decisions based on preconceived, politicized, top-down and ideological notions of ‘fairness’, ‘egalitarianism’, ‘five-year plans’, ‘what the Great Leader wants’, or whatever other non-economic criteria, whereas banks will at least try to do some half-baked or (more often) misleadingly-precise calculations to convince themselves that the market will reward putting money here or there.
It can’t be denied that the banks have more connection to and dependence on true market forces than do the commissars. So what is the problem, and why is it so hard to convince oneself that banks are free market actors? Perhaps it really does boil down to leverage. Maybe we believe that under a certain leverage, banks would have a harder time getting in trouble, and banks who did get in trouble presumably wouldn’t have gotten that big in the first place, meaning the government would be better able to resist bailing them out. Thus any given instance of ‘socializing the losses’ would be less likely. So yes, banks are ‘part of the government’, but under normal circumstances, only slightly so. It’s just that the more levered and risky banks are, the more ‘part of the government’ they become.
As usual in any conversation about socialism, we only confuse ourselves if we try to think of political economics in a binary way rather than a continuum. There is a continuum between free market and socialism, and (similarly) between ‘private’ and ‘part of the government’, and maybe increasing leverage in this situation may be what helps get you closer to the latter. This both suggests a diagnosis of our recent problems and a possible direction for a solution. Unless you think you can think of a better way to figure out Who Should Get Money. But if so, I’ve probably already read your sci-fi novel.
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