Who Does The Banking Sector Benefit?

People’s view of the banking sector depends mostly on how stable it is at the current time, and the big hit that some banks took during what is known as the great recession beginning with the crisis of 2007 did affect things to a considerable degree.

When people see banks getting big bailouts from the government, especially investment banks, which a lot of people aren’t too familiar with what exactly they do, benefiting fat cats on Wall Street perhaps, while they struggle, this is bound to create some negative views.

Who Does The Banking Sector Benefit?Some do think that banks mostly benefit the elite, in the same way that they may see business in general benefiting the rich, this whole 1% versus 99% phenomenon that we’ve seen lately, although that has died down quite a bit since the peak of the financial crisis.

People would camp out in public places for extended periods of time to express their dissatisfaction with the status quo even though they generally didn’t have much of an idea what should be done, just merely railing against what they see as inequitable wealth distribution.

People’s confidence in banks waned during this time, as it always does when banks are faced with difficulties, but the thing about the banking sector is that it is so essential to our lives that love it or hate it, it still will play a very prominent role in our lives, and the beat always goes on.

This is one of the reasons why banks don’t really put up much of a public relations effort during these times, or at any time actually, they will continue to compete with each other of course as all businesses do but as far as the sector goes they already have a very captive market and will just wait these things out, and not really feel much need to respond.

There may be a small percentage of people who may at least try to reduce their use of the banking sector, but this doesn’t have much of an impact at all overall, as we simply rely on banks too much, especially today.

Banks certainly don’t mostly benefit the few as some people may think though, they benefit all of us, to a very substantial degree, and no other business sector even comes close. There is a reason why governments will do pretty much everything to support the banking industry, and it’s because this industry is indeed that important to the lives of everyone.

Banking Is Essential to Modern Life

What would life without banking be like? Banking and commerce go hand in hand, and commerce beyond the barter system requires banking to make it run, to the degree that if we didn’t have banking, we’d all be reduced to living off the land and trading the products of our labor directly.

Any sort of money being exchanged requires banking to manage it, and therefore money would not even exist without it. Governments use their central banks to manage currency and the economy, and a lot of people don’t realize that this is banking as well, and central banks are the cornerstone of our economy as the bank of banks so to speak.

Even in the frontier days of the United States for instance we had banking, one of the things that the settlers brought over with them from Europe, and in other areas of the world you’d have to go back much further than that. Banks aren’t just integral to the modern economy, they are an essential component of what we consider to be civilization itself.

So it’s not as if opting out of the world of using banking is a reasonable option for people, you could move to a cabin out in the woods and live off the land, grow your own food, make your own clothes out of animal hides perhaps, and not purchase anything whatsoever, but this is not something that people are going to want to do,

So people will need to rely on banking to some degree at least, to a large degree at a minimum actually, although we are still free to do things like not keep money in the bank or not borrow, not deal with banks directly in other words.

This all requires us to be paid in cash and to transact completely in cash as well, and cash comes from and goes to the banking system, and all the transactions we make go through banks as well, so banking will still have a big impact upon our lives regardless.

People do keep money in banks, and borrow money from them though, so even if they are of the distorted belief that the banking system is run by a few powerful people and we are all their slaves, or other preposterous theories, even those folks are going to remain parties to the whole affair whether they like it or not.

Banks Are the Cornerstone of Modern Economies

Economies are reliant upon money, that’s what economies are, the exchange of money for things of value. So banks play a central role in all this, as businesses that involve themselves with the exchange of money, and in particular, in the granting of credit.

Our economy is a credit economy actually, to a far greater degree than most people imagine, even in spite of their generously using credit themselves. The entire system is credit based. People operate on credit, businesses rely on credit even more, and governments use credit to an even bigger degree. Credit is what drives our economy, to the point where our money supply is only about 10% currency and about 90% credit.

Banks of course play a central role in the credit granting process, which includes central banks of course, who play the role of overseeing this whole operation.

The role of credit in our economy is grossly underappreciated by the masses though, and many think that there is too much credit out there and we should look to cut back, and this might be the case with their own lives, perhaps having overextended themselves, but the economy in general needs credit, it is its life blood actually.

The reason why governments are so concerned about the welfare of banks and will use drastic steps if necessary to assist them, often to the chagrin of the public, is to not have credit markets constrict too much, as when the lending stops, everything grinds to a halt, and this can even bring down the economy.

This is what happened to some degree during the Great Depression, and its effects were felt for many years. To a lesser extent this is what we also saw during this latest recession, and since the money supply and credit are one in the same really, when credit dries up, so does money. When there is less money this has a constricting effect on the economy, and the less money there is, the bigger the effect.

So banks provide a lot more than just a place to cash your pay check, to park your money, to get a mortgage or a car loan, or a credit card, or a line of credit, or purchase investments, or whatever. All of these things impact people’s lives significantly of course but the biggest impact the banking system has, by far, is being the grease that keeps the economy rolling.

So Who Really Benefits From All of This?

Some may claim that modern economies are addicted to credit, and that’s not completely untrue, but they don’t really take into account what the alternative would be, which would be a far more depressed economy than we have.

It actually only takes a modest easing of credit to bring on not just a recession but a full blown depression, and it doesn’t stop there, you can see the entire economy collapse if credit is reduced enough.

A good analogy here would be people looking to buy a house, and people of ordinary means cannot really ever save up for one, at least a normal residence, although they could perhaps build a cabin in the woods or some kind of shanty if they wanted to.

Given a limited budget for housing costs, if their housing costs were zero, they could perhaps save up for a house, but this would typically take 20 years or more, so they not only have to wait for it, but where are they going to live in the mean time?  Unless they want to live in a cardboard box for all this time, what happens is that the money they could save is given to someone else for rent.

So to buy a house, they need credit, and now they can live in their house now, and their rent payments can now go toward paying down their mortgage, and build wealth that way.

With our economy, our current prosperity is our house, and credit is the vehicle that we may achieve this prosperity, or in this case maintain it. Banks do make a profit from both extending a mortgage to you and by lending money in general, providing the credit that the economy as a whole relies on, but in both of these cases this is an additional cost that is necessary to pay if you want to live in a house or be economically prosperous.

So the answer to who benefits from the banking system is that we all do, the rich and the poor alike, and of course some people are wealthier than others due to the nature of capitalism but banking is a mechanism that raises the level of all boats, both big and small, without which they would all sink to the bottom of the sea so to speak.

Eric Baker

Editor, MarketReview.com

Eric has a deep understanding of what moves prices and how we can predict them to take advantage. He also understands why so many traders fail and how they may help themselves.

Contact Eric: eric@marketreview.com

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