Bankers get vilified along with other businessmen, sometimes just for being too rich, or for charging market rates, or for trying to make bigger profits. But there are also perfectly valid reasons for even free-marketeers to vilify bankers. This talk from former bank regulator Bill Black reminds us of these reasons.
This is an excerpt from the website The Big Picture:
If you are a banker and wish to grow your bank (lending) at 50% per year – as was happening in Iceland, Ireland and much of Europe, for example – you would have to beat your competition – as in charge a lower interest rate. But if markets are working properly, your competition will try to match your rates – and you wouldn’t end up making more loans, and your income would fall. All bankers would lose. That’s why banks are the biggest proponents of crony capitalism – and are the world leaders in crony capitalism.
Also the strategy Black describes for profiting in the short term definitely relies, ultimately, on bailouts:
Bill Black’s Recipe for Bankers to become Billionaires: 1. Grow massively, 2. By making very poor quality loans at high rates of interest, 3. Use extreme leverage (high corporate debt), and 4. Set aside virtually no loss reserves for the massive losses that will be coming. If you do these four things, you are mathematically guaranteed to report record short-term income. Akerlof and Romer referred to it as a sure thing – it is guaranteed.
