Casino

1. What is the problem?

In the past the activities of banks consisted almost exclusively of collecting and managing savings and lending.

The income of the bank came from the interest rates on the loans. Gradually banks started to offer other services. They discovered that they did not necessarily need to actually finance things like oil or grain, to profit from it.

The decrease of restrictive regulations made it possible for banks to concentrate more on developing and marketing financial products. Banks became a “money outlet”.

They steered away form financing the society and its needs and became a casino, where money is simply being used to create more money.

Thus banks lost much of their value to society as a financier. More: they bring prosperity and the stability of society at risk.

2. How does it work?

The bank casino will buy, for itself or for a rich customer, an option to buy a certain amount of grain or oil at a fixed price, at a fixed date. The bank or speculator who acquires this option is not planning to ever really buy this grain or oil, but is betting that the prices will rise and that he will be able to sell his option at a higher price.

This "money outlet” works on the basis of expectations. The events that could lead to the higher value of that grain or oil, have not yet taken place when an investor acquires the financial product. It is speculating on profit, but speculating comes with risks. Banks have specialists to assess those risks, but even the most sophisticated computer model predicting the future is not infallible. Economics is not an exact science. As in a casino, many expectations end up false.

A famous example of the current crisis is trading in packaged subprime mortgages. U.S. financial institutions provided mortgage loans to people who really could not repay these loans. The banks did not keep these bad loans in their own books. They mixed them with other loans and sold them to financial institutions around the world. It became increasingly unclear who had to repay what to whom and risk analyses became more and more foggy. When more and more people could not repay their loans, too many houses came back on the market and the prices collapsed. But even at these reduced prices, houses didn’t get sold as everyone who was solvable already had a house and a loan.. This is how short time profit turned into long time losses for financial institutions and ultimately for the whole society who had to rescue banks with taxpayers' money.

3. What is at stake?

The casino operations of financial institutions have many devastating consequences. The credit crisis in the US has ensured that innocent people were put out of their houses. Speculation on food leads to higher food prices and thus to more underfed people as whole groups can no longer afford to eat.

The bank casino is immense. There is ten times more money in derivatives than in the real economy. An awful lot of money (including savings from customers) can be moved at very short notice. Badly assessed or hyped values as well as estimates lead to erroneous esteemed bank balance sheets full of air bubbles and retractable to large losses. Losses at banks lead to major shocks in the financial world, in the economy and thus in society. This creates crises, followed by banks – and the peoples savings – in need to get rescued and state funds getting looted. And with an empty treasury, governments are being pressured ( by the financial world!) to press through heavy cuts and anti social policies.

Banks can choose not to speculate (too much) with the money they manage. Triodos Bank does, for example. But the urge to maximise profits and the pressure to take risks is high in the financial sector. The government could protect the bankers from themselves and install an extra tax on speculative transactions or (re-)install a legal separation between deposit banking and investment banking in place.