Sunday, June 17, 2012

Should Banks be allowed to Gamble?

Banks are supposed to finance business activity and economic growth.  Make loans to home buyers and car buyers.  Loan to businesses to purchase inventory, build new plants, purchase production equipment.  We all agree that this kind of lending makes the economy grow.
   But if you are a bank with a pile of money, there are other things you can do, things which to my way of thinking are just gambling.  If the bank bets right it makes money.  But no matter how it bets, it does nothing for the economy.  In the gambling department we have commodities trading, foreign exchange trading, playing the stock market, sub prime mortgages, credit default swaps, Greek bonds, mortgage backed securities, and whatever it was that JP Morgan lost $2 billion doing.  That deal was so opaque that even the Wall St Journal hasn't figured it out yet.
  Bankers love to gamble because the return can be very high.  And the risks always seem so small.  A bank can make more money gambling than it can doing 30 year fixed rate mortgages.
   Trouble is, when a big bet goes bad it can wreck the entire world economy.  The current Great Depression 2.0 was triggered by Fannie Mae and Freddy Mac (special purpose government run banks) and some of the stupider Wall St banks got to playing with mortgage backed securities, especially the securities backed with sub prime mortgages.  This bit of gambling caused the economic crash that we still haven't fixed.
   Maybe we should forbid banks from gambling?
Limit banks to doing mortgages and car loans and making loans to real businesses, i.e. businesses that make things, grow things, mine things, sell things, transport things, or furnish telecommunications, gas, and electric power.  No loans to "businesses" that just play the various markets.   No loans to hedge funds or stock brokers or other banks.

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