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Banking essays

Banking essays



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Please forward this error screen to d0048n-daglinux. Finance is not merely prone to crises, it is shaped by them. Ask people this question and they are likely to pick familiar technologies such as printing or electricity. They are unlikely to suggest an banking essays that is just as significant: the financial contract.

Widely disliked and often considered grubby, it has nonetheless played an indispensable role in human development for at least 7,000 years. At its core, finance does just two simple things. It can act as an economic time machine, helping savers transport today’s surplus income into the future, or giving borrowers access to future earnings now. It can also act as a safety net, insuring against floods, fires or illness. By providing these two kinds of service, a well-tuned financial system smooths away life’s sharpest ups and downs, making an uncertain world more predictable. When bubbles burst and markets crash, plans paved years into the future can be destroyed.

As the impact of the crisis of 2008 subsides, leaving its legacy of unemployment and debt, it is worth asking if the right things are being done to support what is good about finance, and to remove what is poisonous. History is a good place to look for answers. Five devastating slumps—starting with America’s first crash, in 1792, and ending with the world’s biggest, in 1929—highlight two big trends in financial evolution. The first is that institutions that enhance people’s economic lives, such as central banks, deposit insurance and stock exchanges, are not the products of careful design in calm times, but are cobbled together at the bottom of financial cliffs. This makes the second trend more troubling.

The response to a crisis follows a familiar pattern. New parts of the financial system are vilified: a new type of bank, investor or asset is identified as the culprit and is then banned or regulated out of existence. It ends by entrenching public backing for private markets: other parts of finance deemed essential are given more state support. It is an approach that seems sensible and reassuring. Yet well-intentioned reforms have made this problem worse. 35,000 of deposits were insured by the state, would have made Bagehot nervous.

These five crises reveal where the titans of modern finance—the New York Stock Exchange, the Federal Reserve, Britain’s giant banks—come from. But they also highlight the way in which successive reforms have tended to insulate investors from risk, and thus offer lessons to regulators in the current post-crisis era. If one man deserves credit for both the brilliance and the horrors of modern finance it is Alexander Hamilton, the first Treasury secretary of the United States. In financial terms the young country was a blank canvas: in 1790, just 14 years after the Declaration of Independence, it had five banks and few insurers. Hamilton wanted a state-of-the-art financial set-up, like that of Britain or Holland. This new bank was an exciting investment opportunity.



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