Wednesday, 29 October 2008

Banks - They always go bust

Every bank ends up going bust.

This seems to be as true as every man dies. The fact that there are some men still alive that haven't yet died doesn't disprove this. We know we are mortal and we ought to know that banks are as well. The fact that some banks haven't yet gone bust, though by the time you read this there may well be fewer than when I wrote it, likewise doesn't alter the inevitability of them going bust.

Banks collapsing here in the UK hadn't been very common until the last couple of years. The run on Northern Rock came as a real surprise to a lot of us. In fact, there had been a bank failure in the early nineties. BCCI, Bank of Credit and Commerce International was quite a spectacular failure but hadn't really directly impacted on people. The only run on a bank that had really made an impact had been the one in Mary Poppins.

But taking a longer view, bank failures are not only commonplace, they are an inevitable part and parcel of the way banks operate. One of the most illustrious banks in history was Barings. Despite being a British bank during the Napoleonic wars Barings played a key role in the financing of Napoleon's war effort. They really did believe in light touch regulation in those days! Amongst many notable activities they actually put up the money for the Louisiana purchase. This netted Napoleon some eight million dollars which he used to wage a series of disastrous wars across the continent. Still, I guess business was business. Napoleon himself was wary of the power of bankers -

"When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes... Money has no motherland; financiers are without patriotism and without decency; their sole object is gain." -- Napoleon Bonaparte, 1815

We all need to get used to treating our relationships with our bank as a Faustian bargain with the Devil. We might get riches and success out of it, but there is always the prospect of ending up in Hell.

Postscript - a lot of people are scared by banks, see

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