Our neighbors decided on an unusual get together just before Christmas — our local Chinese restaurant on Elvis night.
Our seating plan offered me a situation I usually don’t find myself in – close proximity to a senior accountant — and in those situations, I usually revert to type and begin asking questions, like any good journo.
While our tubby singalike from the Midlands belted out some very good renditions of the King’s oeuvre, I decided to get serious for a moment, and take advantage of whatever knowledge he might have about the world financial crisis. During Love me Tender, I leaned over and whispered, “So what should we be doing about the banks?”
It’s a fair question to ask – and I ask it of almost everyone who might have some ideas — because in the UK, where I live, no one in charge seems to has a clue. It seems an especially pertinent question for today, when JP Morgan and other big Wall Street banks are on the verge of releasing the figures of the record bonuses they’re expected to pay to their highest fliers.
In the US, just since last April, all the major banks have reported bumper year-end results. Nevertheless, they have cut lending to businesses by $100 billion, even though getting credit moving again was the original purpose of the transatlantic bailouts. Meanwhile, bankers have reverted to engaging in the high-leverage risky practices such as subprime mortgage lending that placed the world in jeopardy.
Obama is shortly to announce his levy on banks to claw back some $70 billion of the $700 billion taxpayers spent to bail them out, and in the UK, Gordon Brown has announced a 50 per cent tax on bank bonuses. Meanwhile, the largest bailed out US banks are spending millions of the money they received from us, lobbying to kill legislation that may regulate many of the reckless practices that got them into trouble in the first place.
‘Shouldn’t we just stop some of these practices, since we now own the banks?’ I asked my neighbor.
'Well, it’s complicated,' he said. 'You have to give these people incentives to go on and make money.'
What are banks for?
Perhaps it is because I'm largely ignorant of world economics, but it doesn't seem to be the slightest bit complicated to me. It seems to me that what I’m really asking has to do with the real purpose of a bank and what its suppose to do with money, and also with the nature of the social contract.
In 1774, two years before America declared its independence, the very first Building Society was created in Birmingham, Great Britain.
A building society was, as its name suggested, an organization devoted to helping people build a house, and virtually every town in Britain had one in its name. Local people would join the society and put the money in as a pool; your savings would be loaned to one of your neighbors to build his house, and he would turn around and do the same for you. Although all of the society members, in a sense, ‘owned’ the Bulding Society, a building society was self-terminating. Once everyone in the neighborhood had a house, the society would be dissolved.
So in that sense, they were like a mutual or savings and loan, but with a self-destruct button. Those in charge at the time understood that their only purpose was to act as a community pool of money. A building society only needed to make enough money to cover its operational costs, not to make a profit.
Terminating societies continued to exist until 1980s – at which point, the banking laws in the UK were amended. Building societies were allowed to turn into banks. Most of them convinced their members to surrender their individual mutual rights in exchange for shares, and a number were swallowed up by larger banks. This was the ‘greed-is-good’ era of Margaret Thatcher, when numerous people, with their eye on a quick buck, joined building societies solely in order to gain voting rights, and subsequently pressured the other members to ‘demutualize’.
Suddenly, the emphasis was not in providing a service to members, but to generate profit for its shareholders. With that, as one study discovered, the pricing policies on demutualized societies grew less favorable for customers and more favorable to shareholders. The community cooperative had lost any semblance of its original function and turned into a pirate.
In America, largely because of the recent bailout, all the smaller community banks in America — who avoided these risky practices and more closely resemble a building society — are finding it impossible to compete, and are being swallowed up or closed down.
The problem is that modern banks have forgotten the basic reason for their existence as a cooperative pool of money, fairly distributed and we have lost any semblance of confidence in them because the mutual nature of the exchange has been entirely lost.
Move your money
Frustrated by the fact that Congress isn’t fixing things, publisher Ariana Huffington came up with an ingenious solution. Recently, she created a movement called Move Your Money, which urges Americans to move their money out of the large banks and into the local community banks. The idea is that if enough people move their money out of JP Morgan, Chase, Citibank, Bank of America, Wells Fargo, Goldman Sachs or Morgan Stanley, we will send a huge message to Wall Street and to the White House that we can no longer tolerate a bank that ignores the public interest. The Move Your Money website (www.moveyourmoney.org) lists all the smaller neighborhood banks that exist in your local area.
In the UK, Richard Branson and Virgin have announced their intention of setting up an alternative bank. So one of the first of the uncomplicated things we can do is move our money to smaller, less greedy banks.
Benefit of tit for tat
I was fascinated recently to see an experiment set up by the University of Leicester’s psychology department. They programmed two computers to be selfish and to engage in performing certain well-worn tasks, with no real benefit to working together.
Nevertheless, after a while, the scientists found that the computer programs began taking turns in perfect coordination. After initial uncoordinated interactions, as soon as the pair begin to coordinate efforts by chance, they began a duet of tit for tat.
Before long, they begin taking turns, and in perfect synch. The programs had worked out that by getting into coordinated turn-taking, they were both better off.
"This locks them into mutually beneficial coordinated turn-taking indefinitely," said the scientists.
Using evolutionary game theory and simulations, Professor Andrew Colman and Dr. Browning found that a similar variation of 'tit for tat' after their computer simulations evolved in at least two genetically different types.
From their work, they believe they've discovered that all living things have evolved to work better when they work together and take turns fairly.
Banks have become like the machines in the Matrix — a pointless, destructive law unto themselves. Nevertheless, they might learn something important from a couple of dumb computers.