Imagine how the world would look if banking were seen as a service, out of which profit can reasonably be made, as I suggested in my last post, instead of being seen almost exclusively as a profit-making business. Instead of thinking about the impact of two more grisly days for trading in bank shares on both sides of the Atlantic, let’s spend some time on how things might be different.
I take some inspiration from Muhammad Yunus, founder of the Grameen Bank that has pioneered micro-credit (small loans, low interest, and easy repayment terms) since the mid-1970s. When he gave his acceptance lecture for the Nobel Peace Prize in 2006, he asked for a broader definition of the concept of an entrepreneur.
Instead of seeing entrepreneurs as “one-dimensional human beings, who are dedicated to one mission in their business lives − to maximize profit”, he asked his audience to “suppose an entrepreneur, instead of having a single source of motivation (such as, maximizing profit), now has two sources of motivation, which are mutually exclusive, but equally compelling − a) maximization of profit and b) doing good to people and the world.”
What I want to suggest with the idea of banking as a service is somewhere in the same territory. Running a car company, it’s absolutely legitimate that you are motivated by profit. You should operate within legal frameworks to ensure that the cars you produce are safe and that you offer proper employment conditions. But essentially you are there to make money and we accept that. If we don’t like your cars we won’t buy and you’ll go bust and that’s business life.
But if you are running public transport, the motive ought not to be purely profit. If it is, you will cut unprofitable bus routes, depriving people of the ability to get themselves to school, work, the shops, hospital etc. It’s a service, and you can make a profit out of that, but you are not allowed to maximise profit (here I disagree with the way Muhammad Yunus phrased his argument). What you have to do is achieve adequate profit while providing adequate service – the two motives in balance with each other.
In banking, I think we have now discovered – if we did not know already – that the same logic applies. Banks successfully maximised profits for a couple of decades and now we are paying the price. The national debt was about £640 billion last August and now it’s pushing £700 billion. If the Royal Bank of Scotland goes down for a third time, stays down (see my last post) and is nationalised, that will add its debt of £1,900 billion to the national debt – yes, compared to pre bail-out times, the UK’s national indebtedness will have quadrupled.
And if the RBS goes down for a third time and is not nationalised, then its clients and plenty of other people and companies will be right Royally done over.
Whatever the best short-term route out of this mess might be, it must be glaringly obvious that we do not want to risk going back into such a mess ever again. So as we come out of it, we need to think through a thorough-going reform of the banking sector.
And that re-think starts by a simple albeit huge shift in the underlying philosophy, taking it from a business to a service in which adequate profits are allowed and indeed encouraged, but profit maximization is out. That would at a stroke rule out all those nifty little debt packaging processes that produced a system in which literally nobody knows who owes whom how much, in which over £15 billion of public money has been put into a bank that is now valued by the stock market at less than £4 billion, in which the risks of even more catastrophic failure can no longer be ignored.