a shallow dive into economics, and the discovery of a (possible) heroine
Shemara Wikramanayake, speaking at the G20 International Conference on Climate
Don’t know much about economics, to put it mildly, being constitutionally work-shy and generally impoverished in a rich country, so it seems absurd for me to occasionally buy and try to make sense of Britain’s internationally focussed mag, The Economist. To be fair to myself, it does have many interesting articles on international politics, reminding me that the bizarreries of the USA and our domestic difficulties re housing and mortgages (in Australia) are far from the most-life threatening issues on the planet. But when it comes to bond markets, IPOs, floaters, monetary policy and the like, I defer to the cognoscenti while suffering a touch of FOMO.
So, with all that, I’m going to present here an almost incomprehensible (to me) letter to the editor from the August 26 2023 issue, entitled ‘Do we need banks?’
I’m not sure what part of David Apgar’s piece on narrow banking was the most entertaining (‘By Invitation’, August 12). The idea that the ‘Chicago Plan’ was conceived with ‘the Depression fresh in mind’ must be viewed as quite original. However, almost equally amusing was Mr Apgar’s suggestion that bank lending ‘fuels credit to enterprising businesses’, when he realises that the problem with Silicon Valley Bank was that it had invested an awful lot of money in notes issued by the Federal Reserve, supposedly also to fuel commerce (and thus revealing the mockery underlying quantitative easing).
None of this has anything to do with supporting ‘enterprising businesses’ that increase prosperity. Banking is doing something else. Banks should go out and make money from the people who deposit money, assuming that they will keep it safe. Instead they are admonished to multiply paying services offered to those who trust them, and still go bankrupt. Do we need the banks or do the banks need us? And if the latter, then why do we need the banks?
I can’t really make sense of much of this, but the writer’s final ‘killer punch’ is surely ridiculous. We needed and used banks in the past because it was unsafe to keep our money ‘under the bed’ or stuffed in oversized wallets. Nowadays WEIRD society is pretty well cashless and we pay with cards or phones electronically connected to our bank accounts. How would we manage without this? And banks need us to pay for their staff, their buildings etc. Think mutual providence(?).
Of course, as someone who has never taken out a loan in my life, I was clueless about how banks make profits. And the fact is, some banks make eye-watering profits. The CEO of the ‘Macquarie Group’ (whatever that means, but I presume it includes the Macquarie Bank which I think is an investment bank, meaning it has nothing to do with me), one Shemara Wikramanayake, earned just under $24 million in the 2022 financial year, presumably due to the profitability of the ‘Group’ she heads. This is an obscene amount of money, and I find it hard to believe she lives on the same planet as myself. Her Wikipedia profile presents her and her ‘Group’ as a heavy hitter in the financing of low carbon emissions technologies, which is great, but I just don’t understand such super-massive wealth disparities…
Having said all that, my hope in starting this piece was to try and understand the concept of quantitative easing, without the apparent cynicism of the letter quoted above (its author tells us that banking ‘is doing something else’ other than supporting enterprising businesses, inferring of course that ‘banking’ is out to make money for itself, which of course is necessarily true, otherwise it wouldn’t have the funds to continue supporting other enterprising businesses). Here’s how Forbes puts it:
Quantitative easing—QE for short—is a monetary policy strategy used by central banks like the Federal Reserve. With QE, a central bank purchases securities in an attempt to reduce interest rates, increase the supply of money and drive more lending to consumers and businesses. The goal is to stimulate economic activity during a financial crisis and keep credit flowing.
Which leads me to further questions – what’s a ‘central bank’, what are ‘securities’, and what is monetary policy’? I’m sure I’ve heard somewhen that it’s the opposite of fiscal policy but that don’t help much.
I’m guessing that the ‘Federal Reserve’ is the USA’s equivalent of our RBA (the Reserve Bank of Australia):
‘We conduct monetary policy, determine payments system policy, work to maintain a stable financial system, issue the nation’s banknotes, operate the core of the payments system and provide banking services to the government’.
Looks like it’ll take me a while to get to QE, but safly safly catchee monkey. Here’s the RBA again:
In Australia, monetary policy involves influencing interest rates to affect aggregate demand, employment and inflation in the economy. It is one of the main economic policies used to stabilise business cycles.
Of course, I’ve heard of the RBA raising/lowering interest rates, and this affects both savings and loans, obviously. But why does this have to be fixed nationally, why can’t banks fix their own rates and let the customer decide which bank to go with? And is it necessary for private banks to follow the RBA’s decisions? (From what I’ve gleaned they don’t have to but generally keep close to the RBA’s settings). And how do interest rates affect ‘aggregate demand’ (defined as ‘the total demand for goods and services within a particular market’)? Does anybody really understand all this – apart from the magnificently named Shemara Wikramanayake?
I must admit to having only a modicum of interest (careful with that word) in the minutiae of economics, but at least my teeny research has brought to mind Ms Wikramanayake as a rare female in the world of financial movers and shakers. She’s Australia’s highest paid CEO due to the profitability of the Group she heads. Obviously I can’t speak to the economics of that, or any attached ethical issues relating to such massive profits, but these profits appear to be related largely to industries and start-ups in the field of renewable, clean energy. In a world of too many macho anti-feminist thugs like Putin, Xi and those who govern Iran, Burma and too many other countries, we need more positive, future-facing, can-do types like her.
I might actually return to trying to understand QE, corporate bonds and the like, in later posts, but maybe not.
References
The Economist, 26/8 – 1/9/2023
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