The Inequity Conduit
Much has been said recently about the increase of inequity in the world. Thomas Piketty’s recent book entitled Capital in the Twenty First Century seems to have kick-started additional debate on the subject but even before the release of that book it seemed to me that wealth inequality was being spoken about more frequently.
I have not yet read Piketty’s book so I’m not in a position to comment on it. I would instead like to ramble on a bit about my own views on the banking and finance industries and their possible role in the growing level of wealth inequality which seems to have occurred particularly since the nineteen eighties.
To begin with, there seems to be little doubt that the gap between the rich and the poor is rising in Australia. When a conservative bastion such as the Australian is publishing articles like the one below, you can be reasonably confident that there is a consensus on the issue. A Link to the article is below.
What is the role of the finance industry and in particular the banks in all this? I’m not suggesting that the banks are at fault here. I’m not suggesting that they are the part of some global conspiracy to usher in a new world order. I think rather that as our financial system has evolved the banks have become a kind of inequity conduit. This conduit facilitates the transfer of wealth from those people who are relatively poorer to people that are relatively richer.
Consider who funds the banks. Who profits when banks profit? The answer of course is the banks shareholders. The people in a position to become shareholders of a banking institution are already wealthy. They are wealthy enough to be able to divert some of their income towards investment.
Then consider the borrowers. The person who has borrowed money is often not wealthy. This is why they have had to borrow the money in the first place. Furthermore they are often borrowing it to buy a house which is a fairly basic living requirement for everyone.
Of course when money is borrowed interest is paid on it. However that interest, which when borrowed over long terms often outweighs the amount which is originally borrowed. It is that interest which allows the banks to operate and to be profitable. Of course the profits in effect take money straight from the relatively poor to and pass it to those relatively richer.
Thus the banking and finance industries facilitate the transference of wealth from those who are not wealthy, and thus have to borrow money, to those who are already wealthy and thus can afford to divert money towards investment. This is funnelling money directly from the poorer people in our society to those in a stronger financial position.
Given that so many people in Australia rely on credit just to buy a house and that this reliance on credit so obviously transfers wealth from those with less money to those who have more, it is really so surprising that the gap between the rich and the poor is increasing? Given the current system what other outcome could we reasonably expect?
It’s also worth further clarifying that this situation isn’t really the banks fault. They can hardly be blamed for operating a service which so many people demand. I strongly believe that people should have access to finance to pursue their dreams, whether that dream is a business venture or owning a humble home. The finance industry also provides employment for many Australians. It’s not all bad.
Yet the system we currently have is doing damage in my view. Money should not be transferred from the poor to those already rich simply because those poorer people want to live in a house instead of renting. Just think what would happen to the economy if the money those poorer people spent on interest was instead used for discretional spending? How much economic benefit would that generate for us all? How many more small businesses could flourish?
Yet for this outcome to occur the ‘profit’ would have to be taken out of the finance industry. I’m not sure how you go about that. To me though, it just seems so very important that as a society we find an alternative to the existing system. Whatever solution adopted could hardly be worse than the existing system. Consider the current risks inherent in the banking system and the consequences to us if a bank were to fail.
The banking industry, we are repeatedly told, is too big to fail. Whilst Australia avoided any big tax payer funded bail outs during the GFC, the Government still stepped in to secure deposits. There is little doubt in my mind that if one of the ‘big four’ Australian banks failed the government would have to step in and bail it out with taxpayer funds. Whilst that would hurt Australians, not bailing out the bank would hurt Australians more.
So if one of the many risks, which the finance industry says they manage appropriately, is realised by one of the big four banks and it fails who pays? The banks and their shareholders do not carry all the costs of this failure. It is the tax payer who funds the almost inevitable bail out. Yet we as tax payers have no real say over the conduct of the big banks. Some taxpayers who are shareholders in a bank may have some small portion of control. Most tax payers however are utterly powerless.
I’m deeply uncomfortable with this situation. Something so important to society in general, important enough for the government to bail it out with tax payer funds, should in some way be beholden to the taxpayer. If the government can bail out an organisation with taxpayer funds then the taxpayer should have a say in how these organisations are managed. I’m not sure how you could sensibly argue against that.
I’d also add that perhaps large financial organisations should have wider goals than simple revenue generation. Surely an organisation which is so important to communities and business, where the quality of their service and their risk management is so important to the wider community, should not be driven by profit alone. Ultimately though, the banks primary goal is to generate profit for their shareholders. Despite their fluffy advertising this is the reality of the situation.
This leads me to suggest something which I am also deeply uncomfortable with. For most of my life I’ve been strongly in favour of privatising government organisations as on balance I believe private organisations are more efficient. Yet as I’ve matured I’ve come to realise that while efficiency is important so is quality of service. Where quality is paramount organisations whose prime motivation is to maximise profit should not be entrusted with delivery of service.
In my view the quality of the risk management within banks and financial institutions is paramount to their survival and the services they provide are vital to the community. For these reasons, I would suggest that perhaps financial services would be better delivered by government instead of private enterprise. In this way the profit motive which drives most banks would be removed or at least reduced. If the government made money that ‘profit’ could be diverted back into the community, as opposed to being delivered to the hands of those who are already relatively wealthy.
It’s far from a perfect solution and as history has consistently shown, organisations managed by government are less efficient. But given the choice between an efficient yet more inequitable model and a less efficient but fairer one, I know which one I’d prefer to have. Which would you prefer?