Banking for the Welfare State

Peter Foster has a nice piece in today’s Financial Post arguing that the Murdoch affair is obscuring a bigger scandal: the financial profligacy of American and European governments. The extravagant spending of the former is being highlighted by the ongoing negotiations over the debt ceiling, while that of the latter, of course, is being put into sharp relief by Greece’s budget crisis.

Speaking of the Euro sovereign debt situation, Foster well observes:

This is a crisis not of “greed” but of the European super state, of overbloated welfarism, and of a banking system intertwined with governments … 

Foster’s last point about the banking system is worth pondering. As large buyers of government bonds, the commercial banks play a key role in financing the welfare state. Indeed, they are incentivized to do so inasmuch as regulations allow banks to reserve less capital for government bond positions than would otherwise be required for other loans on the asset side of their balance sheets.

The new Basel III regulations arguably enhance this incentive. Basel III, after all, mandates banks to raise the level of shareholder equity relative to risk weighted assets. Now there are two ways of going about this. The obvious way is for a bank to raise equity by issuing new shares. Another way to increase the ratio, however, is by adjusting the denominator – that is, by reducing the riskiness of the loan portfolio (HT: Vincent Fernando at Business Insider) . Since government bonds are viewed as less risky, given the state’s authority to tax,  holding a greater proportion of them will lower the risk of the bank’s assets.

Just one of several ways in which high finance serves the cause of big government.


One Response to “Banking for the Welfare State”

  1. Redmond says:

    Do not forget of course, that with Central banking, the reserves of a bank can simply be increased with the touch of a button! and what will that bank purchase with its new-found reserves???

    Here are some interesting quotes from the Proceedings of the Royal Commission on Banking and Currency, Canada, Ottawa,1933 – the commission that led the way for the Bank of Canada. We will be conducting more research on the BoC as time passes.

    Lord MacMillan, RCBC chairman (p. 208): “One is apt sometimes to think of the banks as though they could themselves produce wealth. That, of course, is a mistake. A good banking system is the best possible assistance to business and industry, but it does not itself create wealth."

    Idem (p. 209): “After all, the banking system is the servant of the people. In the long run, the prosperity of the banks is intimately associated with the prosperity of the country, and it is very important that there should be sympathy between the two interests.”

    Professor Carrothers of the University of British Columbia (p. 360): “The gold standard no longer exists to control and to prove harmful fluctuations in exchange rates. It is unlikely that the gold standard will be restored for some time. Some other machinery of control is necessary. Control of exchange rates and of international movements of capital have been found necessary already to meet the situation. The central bank would appear to be the logical institution in which to vest this control in Canada. Centralized control of the banking system is necessary to secure the coordination between banking policy, government financial policy and trade policy.”

    Vancouver Society for Technocratic Research (p. 425): “The inefficiency of the present system is shown in the fact that during times when business is good, it is comparatively easy to borrow from the banks, but in times when conditions are adverse, as they are now, such borrowing is practically impossible.”

    Mr. McGeer (p. 467): “The conventions of the international gold standard are so fundamentally opposed to modern social and economic conditions that no government could, even if it wished , gave effect to them, must be evident to anyone who is prepared to recognize that he is living in the 20th and not in the 19th century. The international gold standard system is an anachronism in the 20th century; it can never again function, but as its high priests still hold away over the nations and regard it as sacrilegious even to discuss alternative systems, there appears nothing for it but to await the further inevitable collapse of the structure built upon it.”

    Mr. McGeer (p. 519): “Now, my lord, when you realize that the great purchasing power of the depositors in the banks of the United States rose from 1914 to 1929 from 18 000 millions to 53 000 millions of dollars, and you have not got very much difficulty in appreciating what was the cause of the boom in the United States which ended in the disastrous hysteria of speculation; it was the uncontrolled inflation of bank credit.”

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