Some food for thought – and rather important bearing in mind the state of the banks at the current time and their role in the economy!
The function of a bank is to act as an intermediary between lenders and borrowers. Over time, banks have been allowed to take on additional activities, and they have devised many perplexing financial instruments. As a result, banks have grown immensely and generated outsized profits for stakeholders. Since we live on a planet with limited resources, it’s not possible for the economy, including the banking sector, to grow forever.
The recent financial crisis is not due to a lack of liquidity in the economy; it is due to the unsustainable growth of financial assets that are not backed by real assets. What led to the crisis was an increase in paper money, created out of thin air, through convoluted financial instruments. Borrowers will be able to pay back the debt only if the real wealth in the economy can grow as fast as the debt.
In a growing economy with a growing financial sector, people have ―more money‖ for consuming more things. However, beyond a certain point, it becomes impossible to consume more things. We can only produce and maintain so many real assets, such as roads, buildings and our stocks of natural resources.
Debt for financing these assets has to be paid off either by the folks who borrowed the money, or by future generations who will inherit an economy and monetary system embedded in an Earth rife with environmental problems. The financial crisis provides grounds for shifting to a new steady state banking model, in which financial institutions concentrate on strengthening their core function as an intermediary between lenders and borrowers.