Sunday, 16 January 2011

The Banking Con

The bankers who are urging us to "move on" from the bankers' bonus issue are right. It is not the bonuses we should be focusing on, but the artificial profits these bonuses are based upon. We all know that the majority of financial transactions in the City have nothing to do with financing trades in goods and services, but are pure speculation, or gambling if you prefer.

But it is gambling with loaded dice. Through the use of interest rate swaps and other derivatives, massive bank to bank financial transactions can be manipulated by a small banking elite. Bank profits are boosted by massively increasing the cost of banking overall just by the sheer number of transactions and the shepherding of the resulting profit into the investment banking arms of these banks. The winners are the international banking elite who "justify" their bonuses on the back of these manufactured trades. The losers are the banks customers, including investors, who get higher costs and lower returns than they otherwise would. The fact that investors do not complain about these lower returns shows just how profitable banking can be. Eventually these manufactured trades get so complex and the artificial profits so high that the whole system collapses, but hey, by this time these banks are "too big to fail" and gullible governments step in to bail them out.

Having worked at a firm of money brokers, I have seen just how enormous this banking con has become. Governments need to work together to call the bankers bluff by introducing a punitive Tobin tax on speculative transactions, as well as outlawing artificially created trades which benefit no one except the bankers themselves.

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