Guest Post: Banks Are An Endangered Species

Tyler Durden's picture

Submitted by John Aziz of Azizonomics

Banks Are An Endangered Species

In the long run, all the hullabaloo about the various global banking crises is just hot air.

The old establishment banks — the ones that have been bailed out this week in Spain, and in 2008 in America — are unnecessary middlemen. This is because of the ludicrous spreads from which they profit. They borrow from central banks and from depositors at absurdly low rates of interest (that’s what ZIRP is all about) and lend at vastly higher rates. What useful function does it serve? At one time, banks generated value by being wise lenders, lending to businesses that they determined would add value. Today they prefer gamble up even bigger profits in the zero-sum derivatives casino and shadow banking whorehouse, requiring frequent bailouts when such schemes go awry. They are dinosaurs that offer no real value to their shareholders, their customers, or to society.

And for all their claims of systemic importance, for all the bailouts, all the whining, all the pontification they are gradually being sidelined by other forms of intermediation, specifically peer-to-peer lending wherein lenders and borrowers are matched directly often via the internet. The lender gets interest, the borrower pays interest, but because there is no middleman taking a (huge) cut both rates are more favourable — the borrower pays less interest, the lender receives more interest.

The market for such lending has already grown to £250 million-a-year in the UK alone. The BBC reports:

Lending via three websites that link savers with borrowers – bypassing the banking system – has topped £250m.


The “new age” finance carries no protection for deposits, but is being tipped as a serious threat to traditional banks.


The peer-to-peer sites are led by Zopa, which has lent more than £200m since it started in 2005.


Funding Circle, specialising in business loans, has topped £34m, and RateSetter has reached £24m.


Last month the government said it would lend these sort of firms £100m to help expand their own lending to businesses.

Alas, the government could lend these firms ten times that (that would still be a tiny sliver of what they have channelled to the establishment banks in recent years) and the market would still be rigged in favour of the establishment banks.

That’s because of deposit insurance. Money lent peer-to-peer is not insured by the government, whereas money deposited in banks is. This is a heinous advantage that the dinosaur banks have been given by government fiat, and certainly a huge stumbling block to peer-to-peer lending forcing the dinosaur banking system to either massively cut their spreads, or go out of business.

Governments who want a fair free market banking system with the benefits of real competition should either extend some form of deposit insurance to peer-to-peer lending schemes, or should get rid of deposit insurance altogether. Everyone wins except the banks and large financial corporations — lenders get more interest for their money, borrowers pay lower rates, and the parasitic establishment banking system that has vampirised the taxpayer for trillions must either choose to drastically reform itself to compete against peer-to-peer lending, or go out of business.

In a free market without the unfair advantage of deposit insurance the banking dinosaurs profiting from huge spreads would be an endangered species. They are only surviving and prospering because the government has rigged the rules of the game for their favour. That cannot last forever.

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Colombian Gringo's picture

The function of the banks are to rob the 99.9% in favor of the elitist monsters who really run this world

ZerOhead's picture

Sure... 0.25% mortgage financing to homeowners might allow the economy to recover and boost property values but how are the politicians and banksters going to cash in?

Banks are not an endangered but a protected species for a reason.

greyghost's picture

this is the second time i have read about the failure of the banks as we know them. having worked in the automotive field for thirty five years i remember back in the early 1990's how banks were dead. the hype then was how the auto companies could raise their own capital and lend direct to the car buyer and finance all the auto purchases. damn banks are still around. just another dead theory.

Chaffinch's picture

We certainly don't need anything like the number of banks which currently exist - possibly we don't need any at all!

LetThemEatRand's picture

The problem is and always will be that the individuals in charge get to keep the profit and are not responsible for the losses.  The corporate form itself is flawed because there is no personal responsibility for the guys at the top.  What do they care if their corporation goes under so long as they get theirs first.  We have all been brainwashed as a society into believing that the corporate form is necessary for the free market.  In fact the corporation is the biggest enemy of the free market.

GeneMarchbanks's picture

You're on point here. Evasion of responsibility is easy when you're part of a collective even if you're a CEO. Additionally, the apathy and general impotence of the population allows for enormous abuses.

Roger O. Thornhill's picture

Corporations (the behemoth ones) used to be responsible until they got into bed with this post WWII bloated government which writes regulations that favor the 'behemoths' specifically - think General Electric. Now the government makes sweetheart deals with Bloat, Inc. and gives them money - and in return these TBTF corps back politicians (buy them) or hire them later as a reward for the corruption.

It is the centralized government monstrosity that has allowed this sick "mating" to occur. Without the centralized government to support the fat, bloated, 'corp'ses, these monsters would collapse from their own weight and smaller, better run corporations would have a chance.

The reality is, if the big banks had failed in 2008, smaller, wiser banks would have rushed in and taken their place - instead of 7 banks, there would be 200 or more smaller entities that would not be 'too big to fail'. The crooks would've lost their jobs and bonuses, and the smarter, leaner, smaller guys would have been rewarded. And we wouldn't be lurching toward an endgame, as we now are.

aerojet's picture

I don't think the 19th century was any better when it came to robber barons robbing everyone.  At least they don't show up at protests with machine guns anymore.

kridkrid's picture

Chicken or the egg.  Sometimes people have an emotional tie to pinning the blame on "big government"... and as someone who would prefer there to be "no government"... I'm not opposed to an anti-big government take.  But it many ways, our government has been co-opted by big business... mostly big finance, which favors big business.

This didn't happen overnight.  I say this because the "divide and conquer" nature of our one party system with two fictitious sides keeps people at odds with each other's POV... the left tends to blame big business and the right tends to blame big government as if these are two separate entities.  They are not... they are a unified front that represents our corporatist state.

blunderdog's picture

     Corporations (the behemoth ones) used to be responsible...

This myth is SO pervasive I'm really curious where it comes from.  Marketing departments?  Early PR firms?  I've read the Rand books, so I guess if your understanding of history comes from fiction, maybe that'd be a decent explanation.  But that's just a bunch of bullshit. 

Corporations have *always* existed solely to concentrate wealth in the hands of the owners.  They've used many tactics over the centuries to do this, and from time to time, certain people may have been convinced that the owners of some company (like GE, in the case of the quoted poster, apparently) are interested in "doing their part" in a healthy society.

That's never been a corporate priority.  They have ALWAYS dumped poisons in the rivers, worked slaves and/or paid-employees into early graves, and denied accountability for the outcomes of any of their business practices.  This is necessary to produce the greatest possible profits, which is the only reason they exist in the first place.

This is what they do--it's their FUNCTION.

Roger O. Thornhill's picture

I stand corrected - you make a good point. Monster corps weren't responsible because they wanted to be. It was forced on them by the market, by lawsuits against them, by many levers. In the past the behemoths could at least be driven out of business more easily and not be propped up by their 'friends' in government (it was much harder to be as corrupt as it is now - at least it was easier to expose it). Remember Adam Smith. The 'invisible hand' does have a real effect - at least it does when it is not marginalised by cronyism.

Also, for an alternate example - think Soviet Union, which was all government and caused vast pollution and ecological damage (not to mention genocidal murders of the population under their boot) - full on government causes incredible damage - they make corporate atrocities pale in comparison.

There is no perfect system. no 'philosopher king' to look for or save us. People will always be corrupt and take advantage, it is our nature, but letting it become entrenched and enabled by government (which uses brute force) makes it much harder to stop.

LetThemEatRand's picture

Accountability is the key to everything.  As it stands now, we have zero accountability for corporate CEO's such as those who run the banks.   They can crash the system and their own companies and walk away with hundreds of millions or billions (think Fuld and Mozilo).  We have almost zero accountability for our elected national government because the big corporations control the media and thus the message (the sheep are asleep largely because of the role of the corporate owned media).   The government of the Soviet Union had no accountability.  The solution is a transparent system with accountability.  The corporate form is inherently wrong because its entire purpose is to shield the individuals in charge from personal accountability.  Government -- properly controlled and implemented -- can have accountability.

kridkrid's picture

Government -- properly controlled and implemented -- can have accountability. Why?  Why can't I make the same blanket statement about corporations?  In fact, those sorts of protections were in place when our "state" first accepted the role of a corporation in American life.  Corporation were to serve the public good and charters could easily be revoked.  

Government can't be properly controlled, I don't believe.

Zero Govt's picture

Kridkrid -  Govt is a monopoly, it is designed from birth to be arrogant, out of control, insensitive and completely deaf to end-users needs 

nothing good ever came out of a monopoly ...Govt's entire history if resounding (and final) proof of this maxim

LetThemEatRand's picture

The whole concept of the corporation is to protect the owners and executives from personal liability for anything.  Our government at least is elected.   Checks and balances etc.

kridkrid's picture

oh... I think in a free society, checks and balances exist with corporation as well.  don't buy sh-t from them, for example.  A bit simplistic, but mostly true.  There is a ton of mis-information out there about the need to reign in corporations.  Standard oil is/was the perfect example.  They were losing market share and prices were decreasing when the gov't won its case to break it up.  the gov't wasn't needed there.  The case for regulation has created the opportunity to exploit regulatory capture.... ultimately the marriage of corporations and government.  

jonan's picture

i thought the president was "elected" by the electoral college...

all your votes are belong to us

Roger O. Thornhill's picture

We agree (maybe all of us really do on some level). We would like a sound, sane system.

The question is how to have that accountability - a consequence for actions. I feel large centralized government becomes horribly disconnected from the people. Whereas locally I can go have a meeting with the town mayor, and at least that mayor has to face the people in the streets - he/she/it isn't hidden behind layers of security. So I am against 'bigger and more centralized' as it appears to cause the bad players to have a place to hide while excercising their ghastly power.

The thing the founders understood were checks and balances. These checks and balances have been bypassed over time. Look up "stare decisis" if you want to know how it was done. The imperial presidency, the layers of bureacracy all act as enablers of corruption and unaccountability. These are backed up by egregious legal precedent (ie the distortion of the commerce clause).

One thing that was different in the past - there was a belief in honor on some level - your honor meant something. Dueling was not just make believe - it really did occur (bless you Aaron Burr!). We have lost the concept of honor - I personally blame relativism as a philosophy for its murder. When all is relative you have nothing to navigate by, it is a fast track to solipsism, and when you have enough people who have no honorable core it doesn't matter what you do - the next step for society is off a cliff.


Zero Govt's picture

R.O. Thornhill -  you need to be specific where your local town Major represents you, on what issue? ..what that you couldn't go get for yourself?

if you want a kiddies playground on a patch of land and i want a car park how does the Major fairly represent us both??

that is the failure of representation at local and national level, it is an impossibility and a nonsense (buck pass) to suggest someone should do something for you/us

there is an alternative: freedom  ...freedom from the nonsense theory/idealogy that is we can be represented by someone else, a paid public servant. It doesnpt take long for them to think they're King for the Day and start ordering people about, cushy in their job and sorrounding themselves with doting crones

Freedom allows me to buy a piece of land and develop a car park and you to work and save up and buy some land for a kiddies playground. You earn your way by being productive in society to give back if you're feeling alturistic

nobody can represent us. the entire representation idea is a washed-up antiquated sham spread by charlatans wanting an easy job living off the backs of others (politicians)

Roger O. Thornhill's picture

You are correct - freedom is the key. When I talk to my Mayor and get him to do what I wanted, I effectively corrupt him at that moment. Government is mostly always captured by the crooks. Corrupt types, the power hungry, are always drawn to government, and over time it becomes more oppressive in relation to the power it wields.

The problem is that our culture now which believes in utopian idealism - we think we can make it all perfect. Truly the road to our hell is paved with these good (misguided) intentions. I don't think people believe that if we were truly free it would be better. They are afraid and feel someone has to 'be in charge.' That's the cultural cancer. I know we would all be better off with less government - certainly the ability to commit mass genocide would be severely hampered! I do think more and more people are waking up to liberty as the old media (which spews authoritarianism) slowly crumbles.

Zero Govt's picture

i agree people are scared of the thought of not having a Govt

maybe this time Govt causes socio-economic chaos we'll be able to get the point across that Govt caused the problems and is not the solution

the key battleground as i've mentioned many times here is small business, about 1% of the population, who do the vast majority of real emplyment and most tax raising for Govt

if small business people can be converted away from the rotten belief in Govt then the game is up for the parasite class

Zero Govt's picture

Big Govt is the enabler and protector of Big Corpse (and Big Banks)

without Big Govt there would be considerably fewer Big Corpse, maybe none of the size of GE which is a vast array of industries. Nuclear for starters wouldnpt exist for GE without massive Govt subsidies. Trains and wind turbines for Siemens would not exist without the same huge Govt subsidies for these vastly inefficient and uncompetitive industries

From the Govt tree all the rotten fruits hang ...we'd be absolutely staggered just how stagnant our econimy is if we were able to compare it to a free (from Govt) market economy, the vibrancy, wealth and progress we're missing is simply immense 

we need to kill the ultimate diseased dinosaur: Govt 

Stop Paying Your Taxes ...starve the sucker

FreeNewEnergy's picture

I take great umbrage to the comment above for the line:

People will always be corrupt and take advantage, it is our nature...


Maybe it's your nature, and maybe it's the nature of many, but it's certainly not mine. I've been through the corporate and government ringer, and want no part of it, nor do I wish to emulate it.

Let people do as they please. Corporations and governments are nothing but extortionist murderers of the human spirit. Would people be allowed to do as they wish, to make simple lives, mostly, without interferences of the elitists, the world would be far better.

I left the paycheck game many years ago. Haven't had a "job" since the 70s and am better for it. Anyone who thinks allowing Big Brother to skim 20-30-40% of your wages is OK is nothing more than a slave.

Human nature is not to conquer and dominate, but to live in harmony and peace.

Time for the world awaken to a new, better reality.

batterycharged's picture

I'm confused, is the author suggesting getting rid of the FDIC?

I guess repealling Glass-Steagel wasn't enough, now let's endorse bank runs by removing any guarantee depositors will not have their money stolen by Jamie Dimon.

So far this Aziz guy is 0-2, IMHO.

Free market people are as wacko as communists. Oh, the holy land....the mirage of something that does not exist, never has existed and never will exist.


The free market and Jesus....WILL SET YOU FREE!

kridkrid's picture

The illusion that the government can keep you protected from the sociopaths like Jamie Dimon was created to protect sociopaths like Jamie Dimon.  That may not have been the intent, but that is the result.  Fractional reserve banking is the ultimate ponzi scheme.  The FDIC helps to first sanction it and then perpetuate it.  Nothing more, nothing less.  Someday, this war is going to end...

Manthong's picture

The free market,  with a little help from Divine Providence will help this rev of the U.S.A. once again break free of the (central) bank.

Most of the bad debt today is the fault of the lenders and should be repudiated.

From that perspective, Mr Aziz is correct in his assertion regarding the fate of the banks.

kridkrid's picture

I agree, I think.  It's the fault of lenders... and the lenders co-opted the government in order to make that apparatus that much larger.  It's a cancer.

disabledvet's picture

I didn't see any mention of "bank bailouts" nor QE either. Simply put "there is no way having gotten trillions the Government gets rid of the FDIC." same goes for increasing taxes I might add. Doubtful that North Dakota folks will win but they've put eliminating property taxes on their ballot. Talk about "good for hiring." total long shot from what I hear tho.

aerojet's picture

As a former libertarian, I understand what you are saying.  The free market as it has come to be understood is a place where any business can dine on you and your family with zero accountability.  It would be a level playing field for about five minutes, then after the massive slash and burn land grab, you would end up with something like the former USSR has with absolute out-and-out criminals and gangsters running everything important.  We almost have that now, anyways.  But the idea that a free market would somehow bring the sociopaths to heel is pretty flawed if you ask me.  Instead, it would just allow polluters to pollute, killers to kill, and place the middle class at the mercy of anyone who didn't care to act civilized.  Think of melamine in baby formula in China and that's the free market--you're free to die whenever someone decides they don't give a shit about doing things right.  Again, we almost have that right now. 

kridkrid's picture

I think you hit on something important as we think through how best to organize society.... how do we best limit the damage that can be done by sociopaths? - Interesting debate between an anarchist and minarchist.  I listened to it a few weeks back on a relatively long drive.  good food for thought... they certainly address the challenged posed by sociopaths.

Zero Govt's picture

aerojet  -  is is Big Govt that brings you Big out-of-control Corpse you think Goldmans, Morgan, Haliburton, Exon-Mobile are competitive animals of the free market or Big Govt?

the free market works in exactly the same as a forest. Some trees push their way to the top of the jungle (through merit, by pleasing consumers: productivity) but there are always small and medium sized trees snapping at their heels. Eventually the big trees through attrition or age give way to younger aggressive competitors

the forest is very much like our own lifespans and economic productivity. Watch the music market as big bands become usurped by new bands. This is the cycle of all life

it is only where freedom is perverted, by that most perverse monopoly, Govt, where the big bad dinosaurs are propped up forever and a day (see Goldmans, Morgan and GE now)

the free market provides the ultimate refresher course and mechanism for change: competition

it is Govt intervention that perverts freedom with rules and laws and legislation which perverts the competition mechanism working (see reems of rules for utilities, planning laws to stop oil, coal and gas development)

it is Govt that leads to gigantic rotten dinosaurs, not the forever refreshing (competing) free market

Zero Govt's picture

batterycharged  -  gee there i was thinking it was the Govt and Govt propped up, Govt guaranteed, Govt (mis)managed, Govt regulated, Govt Depts (like law) that was failing all around us

thank fuck for the FDIC, no moral hazard there, and no they've not made more promises than their arse can cash Sireee, all is well, another (worthless) political guarantee will save us all

Colonial Intent's picture

The free market is corrupted.

The government is corrupted.

Don't let yourself become corrupt.

Best of luck to you all.

Dr. Engali's picture

Wow  Rand you and I agree on something.

BigJim's picture

Yes, bit of a shock to the system, isn't it...

LetThemEatRand's picture

But we still disagree about the role of government.  At least we can agree that the corporate form is a common enemy.

kridkrid's picture

Well said.  The brainwashing is so pervasive that most don't realize that it's happening.  Kind of how if you live near a dairy farm, after a while you don't even notice the smell. 

StychoKiller's picture

Yet, Govt regulation (in the form of Sorbanes-Oxley), your favorite solution, was supposed to fix this!  Perhaps you should go home and re-think your life...

GeneMarchbanks's picture

For the millionth time, banks can:

1) Match savers and borrowers

2) Provide a safe payment mechanism

3) Some basic* risk management

* Subjective, I know, but regardless it is necessary and can never ever have a 'scientific' basis

Aside from that, there nothing else they can offer.

CrazyCooter's picture

Well, that is what these sites do, right?

I am not disagreeing, but I feel like I missed something in your comment.

I am going to take a look at all three sites when I get home. I find the whole notion rather curiuos. I mean, it seems that without the CB, this is what banking was over 100 years ago (i.e. before the central bank/fed).



ThisIsBob's picture

You missed the most important one: They can  make political contributions.

MacGruber's picture

Saw a great documentary on the financial system and there was a great line, "back 30 years ago banking used to be boring. Bankers made an average wage for an average day's work". I'd like to go back to that time. In my mind banks and insurance companies should be non-profits, anyone trading futures should have a proven interest in the underlying asset, derivatives should have 100% reserves (if its a casino then you should be backed like a casino player), loans 50%... oh, and and the Fed.

Peter Pan's picture

Reminds me of the bank manager I had years ago. He was in the office at 7.30am and gone by 1.00pm so he could play golf with his clients. Took on the local branch with 3 loans officers and left it with 17. As he once said to me: "I make two decisions. One is about the character of the borrower and the other is about the value of the security."  Many years ago when interest rates had gone well north of 15% here in Australia, he even sourced cheaper private money for my business. The man was a gem and deserves his happy retirement. More like him are needed.

aerojet's picture

If he was so conservative, how did they go from three loan officers up to 17?  Did the population of Australia go up by the equivalent multiplier?  Or were they making riskier loans like, oh I don't know, every single other bank on the planet was?

Peter Pan's picture

He just didn't ask for copies of 5000 tax returns, budget forecasts, bring me this bring me that type of attitude. On more than one occasion when time when was of the essence he would give me both an approval and the write to draw down even before the paperwork was done. As I said, he would make a measured judgment based on character and security.

Tirpitz's picture

That peer to peer lending is on the upswing, throughout the world. Could just be that the taxpayers will lend to their governments peer to peer style just one way, via heavy taxation.

Without them banks, who's doing all the money printing, the multiplying of fiat, the apparent financing of wars and conquests?

kridkrid's picture

Peer to peer lending is interesting, but your second paragraph is even more telling.  Money and markets are created by states to finance and perpetuate wars.  Peer to peer money would be would be a logical step in our evolution to a stateless society, I think.

aerojet's picture

It's only interesting if I can send out my thugs to break legs when the fuckers don't pay on time.

tgatliff's picture

This article must be an advertisement, because it completely ignores why traditional banks are so powerful and connected.   It is because they buy (and heavily leverage) its corresponding Treasury bonds.   This is its true source of power.   In better times when there were actual savers, it made sense, but in todays world of funny money land, paying interest to middle men makes no sense whatsoever.