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The Problem with Modern Banking

When it comes to free markets and competition I am always more inclined to side with the idea that competition is a good thing that drives a more efficient outcome than bureaucratically managed markets. At the same time, we have to recognize that some degree of government is a good thing. There are, after all, many things that private competitive companies don’t want to engage in because they’re generally contradictory to a profit based business model.¹

But then there are things like modern banking, which are more complex. Modern banking is a system that thrives on competition because these companies compete to provide the lowest cost financial services to the end user. The incredible decline in the cost of investment management and the rise of free online banking are great examples of competition driving down costs and benefiting all of us. At the same time, there is an unpleasant reality in the world of private competitive banking – some banks will do anything and everything to make a higher profit. And this sometimes involves wide scale fraudulent activity.

The recent case of Well Fargo brings all of this to the forefront again. Wells is accused of creating millions of fraudulent accounts all in the name of profits. Now, this might seem benign on the surface. After all, we’re talking about millions of dollars in a nearly 19 trillion dollar economy and less than 1% of a workforce that engaged in criminal activity. Still, this brings back worries of the financial crisis during which there was widespread fraud that exacerbated the financial crisis and brought the economy to the brink.

I try to maintain a rather apolitical and operational view of things at all times. People sometimes accuse me of being a bank apologist for various reasons when most of the time I am simply trying to explain how banks work. But I must admit that I recognize a seeming contradiction in this industry – the profit motive creates a fragility in certain firms that are essential to the healthy functioning of the entire economy. The problem is, banks aren’t like other companies. They are the plumbing in our economic house. We rely on them to function smoothly at all times.

So, the question is, is banking an industry where competitive capitalist markets actually make the economy more fragile than it should be? I don’t know the right answer and I can’t say that I’ve done the research necessary to identify better solutions.² But this is a problem we will probably be thinking about for as long as we’re all alive. If you have some thoughts on the topic feel free to use the forum to discuss.  I’d love to know what the smart readers here think.

¹ – Some examples include the maintenance of a standing army, putting out fires and things like that. 

² – Perhaps there is no easy solution as modern banking has become so complex that it’s literally impossible to run banks as though they’re credit unions or old school deposit creating banks. That’s a scary prospect – that our economy is becoming so complex that we actually can’t regulate it well….