International Banking: Not Properly Supervised?
Today I listened to a very interesting audio lecture, part of an excellent series you can get for free on the web called "Wizards of Money." The whole series is an accessible introduction to and critique of the global financial system.
In episode two, "Financial Risk Transfer," the writer/narrator Smithy makes the argument that the international banking system is not properly supervised.
The body that claims to supervise the banking industry on an international level is based in Basel, Switzerland, and is called the Bank for International Settlements (BIS). BIS is funded by the central banks of the richest countries in the world, and is, apparently, as important as the IMF and World Bank, and yet few of us have heard of the BIS, while many people have heard of the IMF and World Bank.
Smithy sees a few problems with the BIS: namely, it works in secrecy and is run by people who also sit on the Boards of central banks and, I think in some cases, by those who sit on the Boards of large financial services companies. These people, even with the best intentions, have too many connections to those who can personally profit from BIS policies. They are not in a good position to make sound banking policies that serve the public at large. Smithy argues instead for a democratically elected international banking supervisory system, one that is more transparant and actually accountable to the public.
Why do we need a supervisory structure for the international banking industry?
Smithy explains that "banks want to hold as little capital as possible, so that they can create a maximum amount of loans (or money) that can bring in higher profits. From their perspective a safety net [enforced by a supervisory structure] has an 'opportunity cost' which limits the profits they can make."
Banks and others in the finance industry want to take big risks in order to make big gains. And, in the current system they can take big risks without paying the full price if their risks fail. In the event of an impending failure, there will be a bailout to prevent a breakdown of confidence in the global financial system. Thus, Smithy argues, the financiers can take big risks and either make big bucks or get bailed out. They really can't lose. This seems to be most true in the extreme cases, as when speculators mucked up the Thai currency and more or less destroyed the Thai economy. Thailand was then bailed out with an IMF loan, which refinanced Thailand's debt (and imposed structural adjustment policies) so that it could still pay back its US creditors.
Smithy's larger point is that the banking system should have supervision that PREVENTS the need for bailouts, rather than having a system, as we do now, that has few preventative measures on things like speculation, and relies on bailout as a way to avoid a meltdown of the whole system.
One more point worth mentioning: Smithy links poor supervision of the finance industry to growing income inequality.
She says, "An increasing amount of financial activity [is] driven by those who have so much excess money that the bulk of their transactions are speculative. This inequality and these risks increase with each publicly funded bailout, which then further increases income and wealth gaps. And so the cycle continues, with this positive feedback built in to make the whole system more and more unstable."
It seems that speculation (and a whole bunch of related financial activities that Idont yet understand, except to know that they are not investments in actual companies or goods, but rather bets on things like changing currencies) is the big threat to the safety of the global financial system. There may be a time when the system collapses in such a big way that even an IMF bailout won't fix it, and Smithy alludes to the scary facist possibilities that could emerge.
So, the questions for me are:
Is it public knowledge who sits on the BIS?
How does speculation work?
Could I talk to a speculator?
Is it possible that if I had a savings account or a CD in a commerical bank that my money was being used in speculation schemes? How common is speculation?
Are there any politicians or NGOS, in the US or elsewhere, who are addressing the regulation of speculation?
What other kinds of companies comprise the financial industry --aside from banks?
Today I listened to a very interesting audio lecture, part of an excellent series you can get for free on the web called "Wizards of Money." The whole series is an accessible introduction to and critique of the global financial system.
In episode two, "Financial Risk Transfer," the writer/narrator Smithy makes the argument that the international banking system is not properly supervised.
The body that claims to supervise the banking industry on an international level is based in Basel, Switzerland, and is called the Bank for International Settlements (BIS). BIS is funded by the central banks of the richest countries in the world, and is, apparently, as important as the IMF and World Bank, and yet few of us have heard of the BIS, while many people have heard of the IMF and World Bank.
Smithy sees a few problems with the BIS: namely, it works in secrecy and is run by people who also sit on the Boards of central banks and, I think in some cases, by those who sit on the Boards of large financial services companies. These people, even with the best intentions, have too many connections to those who can personally profit from BIS policies. They are not in a good position to make sound banking policies that serve the public at large. Smithy argues instead for a democratically elected international banking supervisory system, one that is more transparant and actually accountable to the public.
Why do we need a supervisory structure for the international banking industry?
Smithy explains that "banks want to hold as little capital as possible, so that they can create a maximum amount of loans (or money) that can bring in higher profits. From their perspective a safety net [enforced by a supervisory structure] has an 'opportunity cost' which limits the profits they can make."
Banks and others in the finance industry want to take big risks in order to make big gains. And, in the current system they can take big risks without paying the full price if their risks fail. In the event of an impending failure, there will be a bailout to prevent a breakdown of confidence in the global financial system. Thus, Smithy argues, the financiers can take big risks and either make big bucks or get bailed out. They really can't lose. This seems to be most true in the extreme cases, as when speculators mucked up the Thai currency and more or less destroyed the Thai economy. Thailand was then bailed out with an IMF loan, which refinanced Thailand's debt (and imposed structural adjustment policies) so that it could still pay back its US creditors.
Smithy's larger point is that the banking system should have supervision that PREVENTS the need for bailouts, rather than having a system, as we do now, that has few preventative measures on things like speculation, and relies on bailout as a way to avoid a meltdown of the whole system.
One more point worth mentioning: Smithy links poor supervision of the finance industry to growing income inequality.
She says, "An increasing amount of financial activity [is] driven by those who have so much excess money that the bulk of their transactions are speculative. This inequality and these risks increase with each publicly funded bailout, which then further increases income and wealth gaps. And so the cycle continues, with this positive feedback built in to make the whole system more and more unstable."
It seems that speculation (and a whole bunch of related financial activities that Idont yet understand, except to know that they are not investments in actual companies or goods, but rather bets on things like changing currencies) is the big threat to the safety of the global financial system. There may be a time when the system collapses in such a big way that even an IMF bailout won't fix it, and Smithy alludes to the scary facist possibilities that could emerge.
So, the questions for me are:
Is it public knowledge who sits on the BIS?
How does speculation work?
Could I talk to a speculator?
Is it possible that if I had a savings account or a CD in a commerical bank that my money was being used in speculation schemes? How common is speculation?
Are there any politicians or NGOS, in the US or elsewhere, who are addressing the regulation of speculation?
What other kinds of companies comprise the financial industry --aside from banks?
posted by oat collective at 4:34 PM
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