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Bypass the bankers

July 6, 2012

Ooh, a banking enquiry. Bob Diamond’s geezers will be quaking in their Guccis.

Any proposals aimed at taming the banks won’t amount to much. Better oversight? The financiers will steal all the good staff and run rings round the regulators. Improved central banking? Short of taking the Bank of England back under government control, little will change.

People like Martin Wolf of the Financial Times have suggested measures like prohibiting leverage of more than 10 to one and protecting the vulnerable from predatory mortgage sellers. Separating investment banking from ordinary deposit-taking and lending is critical to stop the bankers gambling with our money.

Those would be sensible ideas, but bankers would probably find a way round them.

Much of the problem is that banks have become so powerful that they run politics. The Tory party is funded by the banks. At least three Tory donors directly profited from the Libor scandal, according to the Telegraph. Labour hardly turn up their snouts at a few quid from the square mile.

As Wolf says: “Protecting democratic politics from plutocracy is among the biggest challenge to the health of democracies.” Financiers have always had their claws in politics — we’re talking the biggest lobbyists in history here — and they’ll push politicians to change legislation in their own favour. That’s unlikely to change soon, and it’s why the Tories aren’t making the banking inquiry independent.

Here’s a development that might really make a difference.

Andy Haldane, executive director of financial stability at the Bank of England, recently said that new technology could make “banking middle men … surplus links in the chain”.

The Internet is great at disintermediating between seller and buyer, cutting out the middleman and creating new efficiencies. Look at the success of Ebay.

The web also cuts costs. Email, Skype, Flickr, Facebook and WordPress. They’re all free because they’ve slashed fixed costs and made it almost costless to produce an additional unit. Why should banking be any different?

Banks also bundle lots of functions and services together. While that may have made sense a century ago, it probably doesn’t today except as a means for the banks to rip us off.

Powered by the Internet, a host of online companies are doing finance in a new way.

Zopa cuts out the high street by taking deposits direct over the Internet and lending them on. Loans are parcelled into small amounts so that any single lender bears only a small part of the risk. Borrowers and lenders decide on an appropriate interest rate and loan length. Zopa now represents nearly 1.5% of the UK lending market with monthly lending of £10-15 million. Only 0.7% of loans go bad, among the lowest of any institution in the UK.

A US website called Movenbank is introducing cashless, teller-free digital banking. Founder Brett King claims that the Internet, like in so many other industries, is revolutionising the business through cutting out the banks.

Kenya’s M-Pesa leads the way in mobile banking. I remember seeing people who’d probably never had a bank account buying food in the Nairobi markets with their mobile phones.

Haldane told the Telegraph that: “At present, these companies are tiny, but so, a decade and a half ago, was Google.”

The magnificence of the Internet is that rather than trying to storm the citadel, it lets the disempowered simply walk round it into new territory. Like many of the best confrontations with power, the solution is to subvert it rather than to wage a war you can’t win.


It would be wonderful if the web dethroned Barclays and co., but power always comes into the equation. Online banking might be efficient but efficiencies don’t always pass through to you and me. Bankers have often made arguments on the grounds of efficiency, but usually they appropriate the gains. The financiers will do their utmost to stop themselves being sidelined. Nothing’s stopping them buying Zopa et al. when they get too successful.

A famous bearded German once said that history repeats itself, first time as tragedy and second time as farce. The parallels between the current crisis, 1929, and the 19th century bubbles are eerie, despite the technological differences. Whether it’s the landed gentry drumming up support for their scams in fake railways, stock brokers convincing the credulous that the market will always rise, or Wall Street concocting derivatives that relieved ordinary people of their homes, financial crashes always seem much the same.

Hyman Minsky pointed out that financial stability creates financial instability almost automatically. Long economic upturns make the economy more and more complex, almost inevitably causing it to collapse as financiers try to outdo each other, chasing profits through ever more dodgy investment schemes until the debt created becomes unsustainble. The system is inherently unstable because markets tend to undermine themselves.

Whether or not we cut out the middle-banker, the pressure will always exist for someone to chase fictitious profits, to consolidate, merge and monopolise. I don’t really buy the old argument that the Internet and associated modern technology is somehow immune from the normal laws of capitalism by being inherently devolved. It’s not. Like all industry, it inevitably ends up in the hands of a few: at the moment, Google, Microsoft, Facebook and Apple.

The origin of money is critical. Banks don’t intermediate between savers and borrowers, a key point made by Keynes and Post-Keynesians like Steve Keen. Banks lend first and ask questions later rather than checking first how much savings they’ve got. To a large extent they create money free from the supposed constraints of savings, unlike what conventional theory says. The money supply isn’t a function of savings — it varies significantly depending on confidence, and the data bear this out in recent years. This said, online banking might finally break open the fiction that savers and borrowers are matched through banks.

What’s peculiar about capitalism is that it often sows the seeds of its own instability, as Marx said. Despite all the protests and tweeting by angry activists, it might be the profit motive that finally hits the bankers where it hurts.

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