Profit is Secondary to a Bank
From Zanecorpwiki
2010-02-07
The Obama administration is currently proposing what, at least at the moment, seems like a return to the Glas-Steigal limitations that separated classic bank operations from investment operations. The Republicans, as typified by Scott Garrett's January 21st, 2010 PBS NewsHour interview, have taken the line that forcing such a separation will hurt "banks profits" and thereby hurt the banking sector.
I can't say whether Mr. Garrett is cynically misleading his constituents or whether he's being mislead by others, but it's certain that he's dead wrong. His statements represent a fundamental misunderstanding of the function of banks in the economy.
There's nothing sophisticated about how banks work, most Americans understand it: banks take in deposits and makes loans. That's it. Banks operational capital doesn't depend on profit, it's provided by investments.
The idea that banks need to "maximize profits" in order to function is a false idea. Banks function is to organize individual deposits into a predictable capital stream. Certainly banks need to cover their costs and make some small profit (which is why loan interest is higher than deposit interest), but the idea that they need the massive profits that large FI's sought/seek under the existing system is simply a lie.
The problem is that when banks pursue high profit activity, they necessarily engage in high risk activity, and they do so with depositors money. It's simply gambling with other people's money. It's a bad idea economically, and it's absolutely immoral as well.
Banks lie at the conservative end of the investment spectrum. The idea for depositors is that they're money is safe. That's why they're called depositors and not investors. For society, the banks organize ready capital for normal business. What the big FI's have done and are trying to do again is to have their cake and eat it too--which means they keep their cake and eat yours. You simply cannot mix investment operations with banking operations, because if you don, you're not a bank, you're an investment firm gambling with depositors money.
I just keep saying the same thing over and over from one direction then the next... because it's such a simple concept and yet the Republicans just don't seem to get it. I know they're not idiots, and I like to think they're not knowingly lying so I'm going over this idea from one side, then the other, but it really is just that simple. Banks work off deposits, not profits. Period.
