“I’m so bored. I hate my life.” - Britney Spears

Das Langweilige ist interessant geworden, weil das Interessante angefangen hat langweilig zu werden. – Thomas Mann

"Never for money/always for love" - The Talking Heads

Tuesday, May 29, 2012

some small bank reform suggestions

An article by Thomas Phillipson is summarized here:

“I find that the unit cost of intermediation has increased since the mid-1970s and is now significantly higher than it was at the turn of the twentieth century. In other words, the finance industry that sustained the expansion of railroads, steel and chemical industries, and later the electricity and automobile revolutions seems to have been more efficient than the current finance industry.”

He further finds “that this (annual) unit cost is around 2% and relatively stable over time. In other words, I estimate that it costs two cents per year to create and maintain one dollar of intermediated financial asset.”

The bottom-line of Philippon’s findings is that bankers’ compensation is increasing, contributing to a static unit cost, even though technology is automating:

“The income share grows from 2% to 6% from 1870 to 1930. It shrinks to less than 4% in 1950, grows slowly to 5% in 1980, and then increases rapidly to more than 8% in 2010. Surprisingly, the tremendous improvements in information technologies of the past 30 years have not led to a decrease in the average cost of intermediation, or at least not yet.”

And this is the industry we just hugely subsidized. When the state could take advantage of the information technologies, set up a bank in post offices, and pretty much supply commercial banking at a fraction of the price to mainstream America. In my view, banking should be divided up into commercial banking, investment banking, which lends to real companies, and casino banking. The latter includes all derivates and whatnot. It should simply be merged with casinos, and taken out of the financial system entirely. This would allow the gamblers to gamble to their heart's delight without affecting anything outside their sphere. If pension funds were hooked up with the poker prowess of some superbowl poker player, I think it would violate the rules in place. But pension funds are hooked up with other more dangerous poker players. Cut that thread, and we could get back to the real economy of real wealth that is basically unthreatened, at the moment, by a crisis.

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