What is Wall Street’s job? Wall Street’s job is simple. It is to increase earnings for their shareholders. It is not to provide jobs for the private sector. It is not to make sure the US economy is running smoothly. It is not to make sure you feel good about your day to day life. It is to generate a profit for its owners. This is the essence of private banking. To generate a profit. But banks play a unique role in our capitalist system. I’ve explained before that banks are not the engine of capitalism. They are simply the oil in the machine. As the oil in our machine, banks must be functioning smoothly in order for the machine as a whole to be functioning smoothly. So when big banks do bad things that threaten their well-being parts of the system begin to malfunction. And sometimes when these mistakes are big enough the contagion leads to the entire machine malfunctioning and requiring a major repair (hello 2008!).
But make no mistake, your local bank is not your best friend or a public purpose serving charity. For instance, when a bank extends a mortgage (a word literally meaning “death security pledge” from the latin root “mortuus” for death and germanic “security pledge”) they are not doing you some charitable service to help you buy your home. They are rating your credit risk and evaluating you as a potential profit engine for their shareholders. That might not be the most pleasant way to think about it, but it is what it is. A bank is not a charity. It does not really care if your mortgage results in jobs or happiness for you. Of course, it would be great if this did because that might result in more future business, but the bank does not need these things from you in order to generate a profit. It really just wants to manage its risks in a way that helps to generate a profit for their shareholders without excessive risk. Obviously, the debtor finds the mortgage advantageous, but don’t confuse this service for charity work. It’s just good old fashioned profit seeking and offering a service where one is needed (in this case, the debtor being able to obtain money they could not otherwise currently obtain).Read it at Pragmatic Capitalism
Misunderstanding Banking is Helping Bankrupt an Entire Society
By Cullen Roche
Cullen remains one of my primary go-to sources for a clear, objective view of our monetary system. While this post is strong in many facets, it appears to downplay the role of government in the current environment. Deposit guarantees, creditor bailouts and tax laws are just a few of the ways in which government alters the price of credit. These actions, which impact the decisions of both banks and consumers, may unintentionally exacerbate the normal boom/bust cycle.