Re: DANGEROUS CURRENTS

[Victor Milne]

A professor once cautioned a class I was in (many years ago) that "yes but" means "no". I am saying "yes but".

 

-----Original Message-----
From: Ed Weick <[EMAIL PROTECTED]>
To: Futurework <[EMAIL PROTECTED]>
Date: October 23, 1998 10:20 AM
Subject: Re: DANGEROUS CURRENTS

Victor Milne:

snip

>Do you see the incredible assumption? Unlimited growth. At the ten per cent
>growth rate that banks want their profits would have to double every 7.2
>years. Even at a "mere" 8 per cent it would only take nine years.
>

Ed Weick:

 >However, I do think that we have to be a little careful with numbers.  I've prepared a >little table to illustrate.   I hope I can post it without it looking too confusing.

 

>Profits are the difference between all revenues and all costs.  In the table, I've >assumed that revenues are initially $10,000 (a very small and poor bank) and costs >are $9,700 throughout the period depicted.  The bank starts out with a profit of $300 >during the initial period.  Being a very well run bank, it is able to achieve its objective >of increasing profits by 10% annually, so that, in agreement with what you have said, >profits more than double.  However, while profits rise rapidly, revenues rise only very >slowly, about 0.3% per year.  Costs, which best reflect the value of the earth's >resources being used by the bank, do not rise at all.  This should not be considered >unusual for a bank because it shouldn't cost that much more to negotiate a loan for a >higher than a lower value, and simply making an entry for $2 million should not cost >much more than an entry for $1.5 million.  In the case I've developed, therefore, the >impact of the bank on the earth's dwindling resource base is zero, though I do >recognize that costs could increase as revenues do.

 

snip

 

>My example is entirely hypothetical.  However, it does make that point that one needs >to be careful about drawing conclusions without giving some careful thought to >numbers.

 

My Reply:

 

I quite appreciate that when we start off from a small base, a large percentage rate of increase is insignificant. We are, however, talking about the Big Five in Canada. If they (and all the other big banks in the world) were to achieve a 64-fold multiplication of profits in 50 years, the impact would be far from insignificant. I agree that they are not going to do it, but that is what they are trying to do with no regard for the effects it will have on society and the environment.

 

I apologize for giving my comments a misleading focus on banking alone, which I had not intended to do. As I see it banks are at the top of the industrial food chain. All the other industries want to increase their profits by 10 per cent per year or whatever their industry standard is. So the point about the banks' profits is just that it is an indicator of what is happening throughout all industries.

 

Take an oversimplified chain. We focus first on a manufacturer of widgets, who wants to increase his profits by 10 per cent per year. Upstream from this is the machine tool manufacturer who wants to increase his profits and beyond that the steel company supplying the raw material for both widgets and machinery to make widgets. Downstream from our widget manufacturer is the trucking company transporting the widgets and the retailer selling them, all wanting to increase profits. Helping to finance all of these operations are the banks. What is the impact on the environment of all this? Are we not accelerating towards the Limits to Growth--if we have not indeed already passed them.

 

 

 

>The example does raise a few additional issues, however.  One concerns how the >bank might increase its revenues at the rate shown.  It could do so in several ways.  If >the economy was expanding rapidly, its credit providing operations would >undoubtedly expand, and perhaps it could charge higher interest rates.  Please note, >however, that the issue here is the economy calling on the bank, not the bank pushing >the economy.  That is, if the bank is prudent and conservative, it will only lend when >borrowers come to it with relatively safe requests for loans.

 

"Prudent and conservative" are words I no longer associate with banks. This is another way of saying that in the real world banks do push the economy to some extent. They are out drumming up business as surely as Coca-Cola or any other manufacturer of consumer products. As for "the economy calling on the bank", I think this is a dangerous level of abstraction. The economy is nothing more than the sum total of decisions made by individual people with economic power. I am talking about the need to stop these people from plunging the world into irreversible damage by passing the limits of growth, whether this be done by moral suasion (hah!) or by legislative coercion.

 

>Another way my bank could increase its revenues is through increasing market >share.  During recent years, banks have done so not so much at the expense of other >banks but by moving into other financial markets - e.g. by taking over trust companies >and by expanding into the mortgage business.  Yet a third way is attaching charges to >a lot of things that banks used to do free.  And, as I'm sure you know, there has been >some recent controversy around banks tying one kind of business to another - e.g. >pressuring borrowers to do other types of business with a particular bank, such as >moving their mortgages over.

 

>However, you should note that at least some of the foregoing are "zero sum" in their >overall economic effect.  There is only so much trust business out there.  If a bank >goes into the trust business, it does so either by taking over trust companies or >crowding them out.  If it is able to coerce people into transferring their mortgages, >others lose those mortgages as investments.

 

I'm not sure it's totally zero sum. Presumably the bank took over the trust company because it was a good trust company increasing its profits by 10 per cent per year and wants it to go doing so as an arm of the bank. You are certainly correct that increases in profits through takeovers are zero sum in banking or in any other industry, and as such they do not enter into the argument on limits to growth. They do of course have a social cost. You refer below to the increasing gap between rich and poor, and that is surely one of the causes. A bank with a trust operation surely has fewer employees than a bank and a separate trust company conducting the same volume of business.

 

Victor Milne

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