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Tuesday 31 August 2010

When I studied economics years ago, I recall we were taught that banks serve as financial intermediaries. They take deposits from people in their communities, which they in turn loan to local businesses to invest in productive activities that respond to community needs. The bank absorbs a certain risk in the process, for which it is rewarded with a modest profit. It seems that as a society we have lost sight of the crucial difference between productive investment and gambling, between the banker and the bookie, and between the insurer and the speculator. Productive investment in a farm, a factory, a restaurant, a retail store, a cleaning service, education, physical infrastructure, and much more increases the real wealth of the society. The proper function of the banker is to convert savings into productive investment. The role of the bookie is to calculate the odds and hold the bets of people who are gambling on the outcome of a race in which they have no other skin in the game. Gambling on which horse is going to win the Kentucky Derby produces no new value for society. Wall Street defenders commonly argue that Wall Street speculation stabilizes markets and protects real producers and real consumers from disruptive price swings. Beyond the mounting evidence that Wall Street speculation often creates and accentuates price volatility, this represents a failure to distinguish between the function of the insurer, who serves a vitally important social function by pooling risks to folks who have real skin in the game, and that of the speculator who has no other skin in the game beyond the bet placed with the bookie. It is entirely proper for me to take out fire insurance on my home. It is something else entirely when a stranger places a bet that my house will be destroyed by fire in the coming month. David Korten

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