
How Big Banks Became Our Masters - eevilspock
https://www.nytimes.com/2017/09/27/opinion/how-big-banks-became-our-masters.html
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dalbasal
This doesn’t really speak much to the “master” thing, but over the last few
generations we have “financialized” (like securitised, but bigger) huge parts
of the economy, and a lot of stuff that wasn’t really part of the economy in
the past.

For example, health services are largely financialized via insurance. IE, you
don’t directly buy health services, you buy insurance which buys health
services. You don’t buy a house, you get a mortgage. You don’t support your
parents (or colleagues) in their old age, you pay into pension or
superannuation schemes. Education via student loans. Monthly expenses via
credit card debt. Large ticket items via dealer finance. Public services via
national debt…….Companies via private equity. Everything has a financial layer
between payment and consumption.

Underlying a lot of this is a relatively simple fact that if debt is
available, consumers (from 18 year olds to Finance Ministers) will take it. If
loans are available for certain products, more of those products will be
consumed.

Another (possibly evil) driver is that governments have chosen
financialization as instruments for promoting stuff they want to promote. Need
more corn? Crop insurance subsidies. Educate the masses? Subsidise student
loans. Promote home ownership? Implicitly guarantee retail banks’ losses.
Medical care for all? Tax free(subsidy) insurance. Flood problems? Flood
insurance. Poverty? Microfinance.

So, banks got big. This has all sorts of weird effects.

One of the biggest problems in my opinion is the inflationary effect of this
process. Real estate prices in many places are simply the amount that a bank
is willing to lend buyers. If banks increase the amount a buyer can loan,
house prices increase proportionally. IMO, the American healthcare saga is not
really about ideology or competence or any of the stuff they talk about. The
problem is that after 2-3 generations of wide scale subsidised
financialization, prices & costs are so high.

My final thought is that part of the problem is the prominence of finance
people in pubic decision making. They know finance. They believe in it. They
use it to solve problems. They don’t see baks getting bigger as a problem.
It’s kind of like the lawyer problem, who also have a lot of presence in
politics. That means the legal field gets bigger all the time.

~~~
vtange
Wow this is really well written.

Sometimes I feel like this "extra layer"/middleman-adding is not only just to
enable government interventions but is just fluff added so we could create
jobs for those whose skills don't go beyond the typical white-collar worker. I
might be wrong, but the image of extraneous University administrators and
"not-enough" skilled labor kinda paints this picture.

~~~
dalbasal
Thanks. Always surprising how nice a friendly word is.

That's (in a somewhat roundabout way) is similar to one of David Graeber's
arguments, you might like his book.

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snomad
This article doesn't even answer its own question of "how".

For those interested in the topic, I highly recommend Connie Bruick's
Predators' Ball and Liar's Poker by Michael Lewis.

> Adam Smith, the father of modern capitalism

I hope we can stop conflating free markets for capitalism. Capitalism is to
free markets what communism is to socialism. Adam Smith was very much focused
on free markets, not capitalism. The author of the article, makes it clear
later with

> Adam Smith, who believed that for markets to work, all players must have
> equal access to information, transparent prices and a shared moral framework

~~~
triplesec
For a really insightful approach to how we got here, read Prof David Graeber's
book Debt: the First 5000 Years

~~~
KGIII
I wonder how long the modern idea of debt has existed? Mainly, that idea of
owing someone something, (often) at a later date?

The concept of zero isn't even 5000 years old. Negative numbers were still
being debated in the 1700s, though I think the first known use was in China's
number rod system in 200 BCE. Conceptually, less than nothing is a funny thing
and not really well grounded in the physical world.

It does make me curious. I'll have to look for the book. I find the history of
mathematics to be fascinating, though debt may have originally been more
culture and less math.

~~~
ashark
A TL;DR of the book (still read it!) is that debt was (at least typically, and
as best we can tell) around before money, and that early communities operated
on debt internally and mostly used barter or money-like things when dealing
with dangerous, untrustworthy "others", which turns the usual "first we
bartered, that sucked so we invented money, then debt" narrative around.
Something _really_ resembling money, it claims, didn't come around until
rulers invented it to better fund their armies ("OK, soldiers who will be
operating in areas where you don't have social ties, here are five coins. All
you civilians, including the ones we just conquered? You're each gonna need
one of those coins to pay your taxes next year, or I'll take all your shit.
Boom, now the coins have value.") The book advances the idea that barter is
most common as a temporary measure among people who are used to using money
but, for a time, cannot (during prolonged disasters, in prisons), _not_ as a
major feature of the economies of early or primitive societies. It also ties
the collision of debt-and-money with social-debt societies to the development
of slavery, and covers a bunch of other interesting territory. Again, do read
it.

As for negative numbers, you can express "owes" without them so I doubt it was
a problem. After all, you don't "owe" someone negative one thousand
dollars—you just owe them positive one thousand dollars. You hand them a
negative-one-thousand dollar bill, they're not gonna be happy. Being able to
write negative balances or work formally with negative numbers isn't strictly
necessary to work with debt.

~~~
chewz
This seems repeating Ibn Khaldun's theories from XIV century.

In subsistence economies surplus is used primarily for fostering social
relations and creating social obligations which one can call upon when times
get though. And in subsistence economy sooner or later they will.

As more added value is created socioeconomic relations get more complicated
and they become based on money.

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Pigo
I can't help but wonder how much of this would have been fixed by letting them
fail. This is way out of my ballpark, but it still bothers me a lot that they
don't face the same consequences I do for making mistakes.

~~~
laurent123456
Iceland let its banks fail and protected the taxpayers, and a few years later
the economy recovered just fine. It's at a much smaller scale than the US or
EU economy though, but still.

~~~
Tyrek
It's entirely unfair to use 'but still' as any sort of argument here. Iceland
is not a large chunk of the world economy, nor does it have a premier position
as the world's economic nexus to protect. It's well documented that
cause/effect differs as your economy scales (just look at how behavior changes
between a small startup vs a unicorn). While there might be some valid
arguments for letting the banks fall, 'someone else did it and it worked' is
not one of them.

~~~
jessaustin
It's unfair to compare the differing results of different national policies?
What other option do we have? Should we just swallow the whole bill of goods
that Hank Paulson drops on our desk, the same way that Bush the Lesser did?

You probably don't think we should look to e.g. Portugal to see alternatives
to the drug war, either. It's a funny sort of exceptionalism, to imagine that
we can only learn from similar-sized nations. Would that be Brazil and
Indonesia?

~~~
jpttsn
Of course scale should be taken into account; it’s a sad state that this would
count as exceptionalism.

Iceland and Portugal should be lessons for entities or similar size, like
individual states of cities in the US.

~~~
marcosdumay
Scale should certainly be taken into account. Still, differences in scale are
no excuse to completely invalidate the data points without a good reason why
it should matter this much.

The examples we have of countries letting their banks fail recovered¹. The
onus is on anybody disagreeing to show how the US differences are relevant.
Just pointing at them and screaming does not make it.

1 - AFAIK, all of them. What is interesting because it includes Brazil at the
late 90's (the one single time Brazil grew in recent history).

~~~
jpttsn
Differences in scale are a great reason to throw data out.

Past experience gives us lessons for similar cases. The onus is on anybody
using a model to ensure the use case is similar to the training data.

The US and Iceland are _nations_ but it’s unreasonable to get hung up on that
similarity of category. The _nation_ is not a label for grouping economies
that are comparable.

I don’t like bailouts either, for the record. My gripe is only with the scale
question.

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southphillyman
The sad thing about this is that it seems like we haven't learned from the
past. One of the hottest things in my local community right now is flipping
houses. You have people levereged to the hilt with hard money loans, flippers
teaching classes (and providing hard money loans), and home prices at or
exceeding 2008 levels.

~~~
alextheparrot
No no no, you aren’t understanding, let me aid you in doing so.

The people in 2008 just timed the market poorly. This time around, we’ll see
all the tell-tale signs of a housing crash and get out right before it does
so, all cash. Then, when all the stocks (Because, of course, banks will lose
out on the highly leveraged positions of our non-fortuitous peers) have
tanked, we’ll simply buy them at rock bottom prices, riding a wave of
financial security into the nursing home.

~~~
PythonicAlpha
I hope, I just missed the irony-tags.

~~~
fellellor
I hate those. If anything they just dilute the message.

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throw2016
Banks were supposed to be stable and boring. The quest for 'financial
innovation' in the heady 80s accompanied by rocketing bonuses and compensation
has led to highly unstable economies with risk and reward mixed up with
government intervention, too big to fail, regulatory capture and lobbying and
now basically stand isolated.

During the asian financial crisis the IMF and WB were gung ho about free
markets, austerity and enforcing failure without exception but as soon as it
hit western economies the whole field of economics changed with words like
'too big to fail' and 'systemic risk' entering the economic vocabulary.

How does one explain oil being at $40 and $140 with supply and demand and free
markets. There is a lot more going on that is often hidden behind jargon that
obfuscates than informs.

~~~
jandrese
Isn't oil a commodity with a variable supply but relatively fixed demand? Big
price swings are what you would expect in a situation like that.

One can argue that some suppliers act "irrationally" when they artificially
restrict their output to drive up prices (OPEC), but this is what you would
expect to see in that situation.

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chibg10
I'm not sure how the author can assert with a straight face that Dodd-Frank is
essentially sacred, a lack of community banks is hurting the economy, and that
it's all the big banks' fault.

A loan to your your local mom-and-pop shop is a much riskier investment than a
bond to a large corporation. DFA discourages risk-taking with the new capital
requirement rules. Thus, community banks are fighting over a small pool of
profitable loan opportunities and their numbers shrink. On the other side,
small businesses have a harder time getting loans.

Regulatory compliance overhead from DFA hits community banks harder than big
banks as well, so they're consolidating and leaving fewer true community
banks.

None of this is has much to do with the actions of big banks. It's the natural
consequence of DFA. If you don't like the status quo, you need to change DFA.
Not necessarily to pre-2007 rules, but some small changes could provide a big
boost to community banks.

~~~
breatheoften
Embracing technology could be a better solution. Government should fund open
technology development as necessary to ease the burden of financial regulatory
compliance. Technology could and should make it possible for smaller banks to
comply with federal regulations with the same efficiency as big banks -- at
the same time, federal regulations should be allowed to become as complex as
necessary to surface and discourage fraud and systemically risky behavior.

------
jokoon
Free markets are all good until the government fail to regulate them.
Decentralization from state and political influence is good, until nobody is
in control anymore. Then it's chaos.

To be frank I think that US banks might be influenced by foreign powers just
like it happened for the last election.

I think that finance will damage sovereignty in the long run. It really looks
like common citizens don't really have a say on how finance work in terms of
politics.

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PythonicAlpha
The problem is, that we let banks become so big and important for our
economies, that they can make the rules, if we want it or not.

The rules that Obama made, where hardly enough to prevent the biggest
problems, of the system. But even those are abolished by the new president,
since they might limit the possible profits, rich people can make.

And so we live on in the land of unlimited profits for the 0,1% and the
unlimited losses for society.

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nilanp
1\. The problem with financial services is customers are greedy - not banks
2\. The challenge in building any business - is that they always start by
trying to solve a problem - but power always corrupts 1\. If google’s aim was
to truly organise the worlds information or xxx would it behave like thsi 2\.
We say capitalism is good as through the pursuit of capital appreciation -
these kinds of problems aggressively get solved but we reward financially -
the creation of monopolies 3\. This then leads to all kinds of things: styling
of innovation; but also pronounces the accumulation of capital 4\. The
solution is whether you can construct a company in another way 5\. I think its
now clear that you strive to be too greedy - that power / money will
eventually corrupt 1\. Google search results 2\. Uber vs lyft 3\. Microsoft
6\. But this process takes years

Building financial services in a way that doesn't corrupt is as hard / harder
than building a serach engine / browser / car sharing company that will last
for 1000s of years rather than decards

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pjkundert
A timely, relevant (and unusually accessible) suggestion on how to save the
local banks being killed by 20,000+ pages of Dodd-Frank regulations:

[https://www.youtube.com/watch?v=ZUXd3LJZ3hg](https://www.youtube.com/watch?v=ZUXd3LJZ3hg)

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mainframer
I'm seeing a lot of percentages and no source data here.

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sandstrom
A great book on this subject is The Bankers New Clothes.

It explains the history of banking, why banks are useful and also why many
banks today are dysfunctional and harmful.

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acty1
Enter Bitcoin.

They will not be our masters much longer now that they will lose their
monopoly on trust.

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rb808
I'm not even sure what this means - in what ways are they our masters?

~~~
wu-ikkyu
Master: a man who has people working for him, especially servants or slaves.

If you work for money, then by extension you work for the bank, because that
is where money is apparated.

The bank is the one who decides how much money is to be created, and who gets
it first.

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eternalban
It amazes me that NY Times gets away with this sort of patronizing articles
with their presumed (educated) readership.

"Mainstreet vs Wallstreet". <expletive deleted>

