Why You Should Never Trust a Banker

I’m reading Joseph Stiglitz’ Freefall: America, Free Markets, and the Sinking of the World Economy, and he has mentioned several times that the most recent banking crisis was far from the first. In fact, it seems bankers have a history of creating financial disasters; I am old enough to remember the U.S. Savings and Loan crisis, caused by crooked bankers and enabled by crooked politicians, and Stiglitz mentions that there have been many such crises around the world.

It shouldn’t be any surprise that bankers routinely cause financial crises. While Stiglitz cites reality to back up the need for strict oversight of bankers, basic common sense should yield the same conclusion, for two reasons:

• Bankers deal with money – a lot of it. That is going to attract greedy and unethical people.
• Bankers make their money using other people’s money.

Given the immediate and enormous impact money has on our lives, large sums of money will act like a magnet for greedy people, especially those who want something for nothing. And what better way to get something for nothing than by gambling with other people’s money, where you get a huge profit if you win and there is no negative consequence if you lose? The only way to do better than that is outright theft, a la Berbie Madoff, but so far there are still consequences in that field.

The two reasons previously mentioned mean there is a great deal of moral hazard in the banking industry, and while many bankers will be responsible and trustworthy (with sufficient oversight), it only takes a few to thoroughly corrupt the whole system. Those few, of course, will make the most money and therefore will have the resources to buy politicians to remove barriers to making even more money – and more risk. As it becomes easier and easier to get rich quick in the banking industry, more and more unscrupulous people will drive out responsible bankers and sensible laws…until the result is a crisis.

By that point, of course, they have bought enough influence to ensure a bailout for themselves and no oversight that might cramp their style going forward.

This is why banking is best when boring.