Bankers don't create wealth

[dikkertjedap]

... they shuffle money, create an illusion of wealth and then it turns out not to exist after all, but they have spent this non-existent money so we (in the real economy) have to stump it up to prevent them going belly up 'as they are too big too fail'. I hope that politicians finally wake up to the fact that it is the REAL economy which creates wealth, e.g. REAL business producing and trading REAL goods. Banks could contribute if they provide finance on reasonable terms to these REAL businesses so they can grow, hey, but that is not happening, doesn't suit the bankers who cannot care less about the real economy. Nothing has changed, all what we are going through now can happen again. What a legacy have we created for future generations!

I thought the banking sector was responsible for creating 1/6 pounds of GDP.
Is this not right then?

The actual economic purpose of banks has been forgotten in the greed and chaos. We do need banks to act as a finacial intermediary between lenders and borrowers and carry out certain financial transations such as foreign exchange and to advise firms on things like takeovers and so on.

However, the last ten years has seen bankers enriching themselves at the expense of the entire economy. That is why they need to have their operations reigned in to take them back to the true and proper economic purpose they should be serving.

the last ten years has seen bankers enriching themselves at the expense of the entire economy

People are greedy - banks have very little to do with intrinsic capitalist culture of wanting something for nothing.

There is basic banking which creates value, and there is casino investment banking which is really just gambling with other people's money.

In the 1930's aftre the Great Crash, the US Glass-Steagal act forced banks to separate the 2 (so you couldn't fund gambling with depositors' money), but it got rescenided in the 90's - with predictable results. It's interesting that no government has managed to get something like the Glass Steagal put back yet.

Banks are not just there to lend money....or to stash it in vaults for you.

the purpose of a bank is to make money for its shareholders.

there are many ways to achieve this.

what wealth 'creation' is beyond making a profit....arguably all any business does is churn money...

If the purpose of a bank is to make money for its shareholder (which I do not agree with, I believe banks fulfil a broader role in society) why have they been so bad at it and why are only bankers profiting not shareholders (given the atrocious performance of bank shares). If it is true what you say Edless then bankers' bonuses should track share prices of their banks closely. They don't - they are totally out of kilter. If anything I have come to the view that they destroy wealth. In the end the taxpayer will have to start funding businesses who want to expand, as banks are unwilling to do so. So what is the point of still having banks????

Banks lend money to individuals and companies. Those functions absolutely lead to wealth creation. It is pretty basic.

...arguably all any business does is churn money...

Not always. In manufacturing, for example, a business takes a raw or intermediate material and converts it into something else with more value. There's real value created there rather than just churning.

I like to think of our economy at its base level, ignoring the shuffling of paper money. 'Things' which people make are of value to others and so can be traded for other 'things' such as food, tools, computers, cake, wine, someone's services (doctor, teacher, window cleaner, lawyer, mechanic, whatever).

What would a bank (or banker) be able to offer in exchange for a cabbage?

I'm not slating banking/bankers, just finding it hard to understand the 'actual' value they create. I do understand how important the banking industry is to the UK's GDP, however.

Banks lend money to individuals and companies. Those functions absolutely lead to wealth creation. It is pretty basic.

But basically all they do is to lend one person's money to another and cream some off for themselves. It's more like a tax than value creation, isn't it?

The crucial element is that banks take short term deposits while lending for longer terms. The difference between the rate they pay depositors and the rate collected from borrowers is a fee to cover the risk of not being repaid.

Without credit it is difficult for businesses to invest for growth.

What I mean is that banks/bankers don't create wealth. If banks lend to the right businesses enabling them to expand, then they ENABLE those businesses to CREATE WEALTH. In the past, a good banker was somebody who really understood businesses/business people. Anyway, even that the banks are not doing today, hence they did not meet what was agreed under Project Merlin (and to be honest I think only naive politicians thought that the banks would stick to such an agreement, I think most other people always thought this was never going to happen as banks/bankers are a law upon themselves).

No1) share price and share dividend are not the same thing. share price fluctuates from day to day which the general profitability and value of a bank does not.

no2) banks offer services ....money is a service. in return for your cabbage, we might say, buy 80% of all outstanding cabbage-related debt..collect it for you, and get cabbage growers through the difficult gap between delivering cabbages and getting paid for them. or banks might lend against the value of cabbage-harvesting equipment, thus making it affordable, or, the bank might simply allow the cabbage farmer an overdraft in order to deal with fluctuations in day-to-day cash flow...all of these things are worth cabbages. They may also trade in cabbage-futures, cabbage-stock, and long term cabbage-bonds...

your cleaner doesn't produce anything tangible either, but that doesn't mean their service isn't useful. bear in mind in the example of the manafacturing company that sells above the cost (thus generating a profit) that the money they make in sales comes from somewhere too.. it is just more churn. the only 'wealth generation' per se - is when the treasury prints money!

One of the key roles of banks is maturity transformation i.e. you put your money in the bank on a short term instant access basis but banks lend long term to finance businesses and mortgages etc. Most private individuals can't afford the risk of locking up their capital for years so couldn't lend directly to businessess in the 3-7 year time horizon they may need.

Not all investment banking is casino banking either. Derivatives can be used as a risk management tool. For example, the transport industry may manage its fuel costs by using futures, agricultural and food industries may seek to fix the prices or the price ranges for produce such as wheat or coffee. Companies use interest rate and currency derivatives to reduce the risk of fluctuations in costs allowing for more predictable long term planning.

You could as what value does a call centre add but that doesn't mean that businesses don't need them. Banking is a service industry - some of the problems arose from people forgetting that.

YABU because you're confusing 'wealth' with 'manufactured goods'. None of the service industries produce goods, as such. Their product is valuable nonetheless. How about the hotel trade, for example? Legal services? Property management? All perfectly legitimate sectors of the economy that don't produce one solitary manufactured good between them. Banks buy and sell money products and are meant to manage risk. They spectacularly failed to manage the risk four years, made a lot of bad decisions, and is it any wonder if they are reluctant to invest in anything other than cast-iron businesses today?

I've not been able to work out where the vast profits that the banks make actually come from. And they must be making huge profits or they wouldn't get their bonuses.

Ok, they charge interest on loans, whcih was fine when the borrower could sell his huge hotel/ office block at the end of the loan but that isn't happening now, and they make profits by hedging against losses but who is giving them that money (you can't bet on a horse winning and bet on it losing and make a fortune, if anything, unless the tout has infinite funds and is happy to lose).

Are the world's banks just shuffling money about - the dollar goes up so they sell their dollars (to who?) to make a profit then use that to buy the japanese yen because it is low which they then sell (to which mug this time?) when it rises.

I feel there must be a loser somewhere (third world countries?)/ chinese worker on a pittance/ tax payers.

"I've not been able to work out where the vast profits that the banks make actually come from"

Don't you know anyone on an interest only mortgage? Anyone that only pays the minimum on a credit card? Pay insurance that you never claim on? Those are personal finance examples of how money can generate profit for a bank over a very long period of time without there ever needing to be the sale of an asset. And hedging against losses... your bookies example is a good one. Bookies will 'lay off' bets quite often so that they reduce their exposure should they have to pay out on a big win. It's exactly the same laying off process for big banks and very common indeed when it comes to insurance.

are you an economist? No, I thought not

of course they create wealth
they employ people
they pax tax, shit loads
they also provide people with the means to buy expensive shit and stimulate the economy further

Banks try to lend money to people who will create wealth (and can thus pay them back), and decline to lend money to people who will destroy wealth (where they wouldn't get paid back).

In that way, the more efficiently they allocate capital, they bigger the profit they make. So their interests are aligned with the wider interests of the economy.

That's how it's supposed to work anyway...

Banks provide service (you seem to think some services are valuable - why not this one) to people/companies who need it, they provide capital both directly and acting as intermediaries.

Being real is a matter of opinion - most things that manufacturers produce are inherently unnecessary- most services are unnecessary.

As a banker i use services and products - are the providers of these creating wealth? does it matter who the services etc are provided to? I have books/software etc that are only used by my industry- does this mean that the books etc are real?

It seem convenient for people in a recession to blame the banks as most popular whipping boy. It was much the same in the 20s crash. if we did not have the centre of excellence we have for banking in England all the out of work people would be a lot worse off. There is no inherent good in wealth being made through mining coal in the UK than through providing high quality services.

It is always convenient if you cannot drum up a war to distract the masses to have something they can hate and at present it is the banks. If this Government isn't careful though they will make things much worse by following the views of the rampant and largely unknowledgeable herd.

You can scan a bank's earnings and see that profit comes from the interest margin between deposits and loans, fees on credit cards, fees to manage client money, fees and commission at investment banks on client trades. Subtract costs including massive wage bills and you get profit.

I don't deny that banks make profits as such (shareholders don't seem to get much out of it though), but I am arguing that they do not create wealth.

At best (and many do clearly not do this) they ENABLE others (producers of goods/services to expand to meet demand) to create wealth, but they do not create wealth themselves.

Another banker bashing thread, then. YAWN.

A few, very senior leaders in a few teams within large financial services organisations made some stupid decisions about managing risk.

The vast majority of bank employees are ordinary, hard working people who pay their taxes on ordinary salaries.

Just because YOU don't understand banking and finance doesn't make it universally bad.

Some of the people complaining about recession and cuts need to look in their own lives and remember the loans that they took out to go on holiday and couldn't afford to pay back, and the massive increases in the value of their houses due to the credit boom.

They also need to remember the irresponsible financial management of the last government... and that government's failure to properly regulate the financial services industry.

Yes, MosE. You can as much blame the profligate poor in my view who ignored the virutues of their forefathers of savings, living within their means, neither a borrower nor lender be and went on a great self indulgent consumer spree and took out loans they could not afford as any banker or cycle or market or regulator. People have responsibility for themselves.

Just because it's easy to steal (riots) doesn't mean you should.

Just because someone will lend you what you cannot afford doesn't mean you should.

It's one reason pay day loans and the like are growing so much, people never learn.