Banks should maximise profit, and should not have to consider environmentally responsibility, equity, etc.

The conference in Edinburgh last week on banking was organised by Friends of the Earth and was entitled “Just Banking” with “scales of justice” logos plastered all over the literature handed out. The implication of the latter, plus the actual titles of several of the meetings was very much geared towards environmental, ecological and equity matters.

However, several of the more enthusiastic supporters of the above objectives had little grasp of how to achieve their desired objectives at minimum cost.

That is, the latter “enthusiasts” have no grasp of the Tinbergen Principle. Jan Tinbergen was an economics Nobel laureate, and his principle (or at least my preferred variation on it) states that for each policy objective, one policy instrument is required, and one only. I.e. the above “enthusiasts” were advocating policies that would have resulted in more than one policy instrument for each objective.


The environment.

For example, one way of inducing banks to invest in environmentally responsible ways is to make them consider the environmental effects of each investment decision. That involves a HUGE amount of person-hours, bureaucracy, form filling and so on.

Moreover, the latter imposition on banks fails to deal with investments that are NOT bank funded!!!

A vastly cheaper way of cutting CO2 emissions, for example, is simply to tax carbon based fuels, as is already done. In Britain, about 60% of the retail price of petrol and diesel is tax. (Personally I’d be happy to see the retail price of petrol and diesel doubled.)

And the latter sort of tax AUTOMATICALLY makes CO2 emitting investments less profitable: it will divert investment (bank funded and non-bank funded) away from petrol and diesel consuming activities and towards other forms of economic activity. Job done. No need for any extra bureaucracy.


Equality.

At least one speaker at the Edinburgh conference claimed that banks should promote equality. I’m baffled. I cannot for the life of me see how banks do much to this end, laudable as equality is.

We ALREADY SPEND BILLIONS promoting equality: progressive personal taxes, social security, state education, etc. That is, using Tinbergen phraseology, we already have “policy instruments” to deal with inequality. And presumably we have chosen the most efficient instruments. Further policy instruments are a waste of time – never mine further and probably LESS EFFICIENT instruments.


Bubble blowing versus productive investments.

Another popular criticism of banks is that they invest and lend relatively safe ways, e.g. in property rather than in productive activities.

Well given that those who deposit money in banks want their money back, banks are bound to do go for relatively safe investments, aren’t they? If you want to take a risk with your money and potentially make bumper profits, then invest direct in the stock exchange, set up your own business, pay a visit to Las Vegas, or put your money on a horse – the options are numerous. No one is stopping you.

But don’t ask to have to have your cake and eat it: that is, don’t expect an institution to invest your money in a risky and potentially profitable way, at the same time as expecting your money to be 100% safe.

Indeed, therein lies one of the basic flaws in the existing banking system: depositors are promised 100% safety thanks to the taxpayer, while banks can lend in relatively risky ways. The solution to that problem, as advocated on p.7-8 of this submission to the Vickers commission, is to force depositors to choose between 100% safe deposit accounts and “investment” or “risky” deposits where they get a decent rate of interest, but stand to lose their money if it all goes belly up.



Fatuous statement of the obvious: we need more money put into productive investments.

Obviously a country will be better off if more capital is put into productive investments. That just begs the $64k question: “which investments are productive?”. Anyone who has a sure fire answer to that question will quickly make a billion.

Simply diverting money from property to allegedly productive industries other forms of investment will not automatically raise GDP. Some of the latter or “other” investments will be winners and some will be losers.

It looks like the UK is not too good at making finance available to small businesses compared to other countries. So there is probably SOME MERIT in putting this right. But I doubt that in itself will transform economic growth.