News & Analysis
Scientific American: Banks Are Too Complex to Succeed, Except for Central Banks
Too Big to Succeed ...On December 20, 1994 Mexico's newly installed president Ernesto Zedillo devalued the currency, the peso, by 15%. As a candidate he had said he would "defend the peso like a dog." That day the peso went from 3.47, where it had been for a year, to 3.95 and the trading floors of Wall Street were filled with the sounds of barking dogs ... As the crisis continued to unfold it became clear that few, including myself, had understood what could go wrong. What had seemed a relatively straightforward asset was too complex to be managed in such an ad hoc manner. This is far more common on Wall Street than most realize. Just last year JP Morgan revealed a $6 billion loss from a convoluted investment in credit derivatives. The post mortem revealed that few, including the actual trader, understood the assets or the trade. It was even found that an error in a spreadsheet was partly responsible. – Scientific American
Dominant Social Theme: Big private-sector banks need to be busted up.
Free-Market Analysis: Okay, dear reader, here is a conundrum you can help us solve. First, some background.
Chris Amade is the author of a recent article that appeared in Scientific American entitled "Too Big to Succeed," excerpted above. Mr. Amade has a Ph.D. in physics and designed credit models for Salomon Brothers in its heyday.
Scientific American is a great place to publish an article because it is considered to be a pre-eminent magazine of science, a publication the editors of which pride themselves on common-sensical erudition.
So here's our question: How in the world can Mr. Amade write an article complaining that big banks are too complex and ought to be broken up without mentioning central banking?
Somehow, we are to believe that private-sector banking swims in an ether provided by central banks – but this atmosphere is normal and natural while private-sector banking is troubled and abnormal.
We're not making this up. Here's more from the article.
Banks have become massive, bloated with new complex financial products unleashed by deregulation. The assets at US commercial banks have increased five times to $13 trillion, with the bulk clustered at a few major institutions. JP Morgan, the largest, has $2.5 trillion in assets.
Much has been written about banks being "too big to fail." The equally important question is are they "too big to succeed?" Can anyone honestly risk manage $2 trillion in complex investments?
Okay, good points. But if managing US$2 trillion is complicated, how complicated is it to manage US$20 trillion or US$200 trillion? Around the world, central bankers are surely managing this much in aggregate.
The biggest and best scientific journal in the US and a big brain who used to write algorithms for Salomon Brothers have teamed up to bring us the considered opinion that no facility in the world can effectively run a US$2 trillion book. So, just to repeat ourselves, how come no one ever mentions that central banks – running ten or one hundred times that amount – are not up to the task, either?
It is really incredible that even the "best and brightest" can't see that the complexities of the modern money system are entirely out of hand and that it will not end well. Scientific American and Mr. Amade could have done everyone a favor by writing an article explaining that the modern monopoly, fiat-money system as administered by the good, gray men of central banking is not just destined to fail but will likely explode spectacularly.
Of course, we are being a bit facetious here, to be sure. We KNOW why central banks don't come in for the criticism they deserve. The power elite that runs these banks and derives its incomprehensible fortune from them doesn't gladly tolerate the criticism.
Those in the money business who are building up their careers are frightened to mention even the reality of Money Power, much less its problems.
And so we get logical inconsistencies like this one. Top brains writing in the most prestigious science magazines available about how big private-sector banks should be simplified.
But the REAL complexity – and the real disaster – does not lie with private sector banks but with the nightmare of central banking that now has spread about the world like a terrible mesh imprisoning us all.
The corrosive effect of Money Power is that its mere presence dissuades analysis. It perverts the larger conversation and thus renders smaller ones incomprehensible. This is part of the sadness of the Modern Age. The very best minds and institutions are reduced to presenting us with sophistic observations that clearly do not reveal the truth.
Conclusion: They do this because they are afraid. The reserve dollar is not the currency of the world today. Fear is the currency.
Posted by nithsdale on 02/16/13 12:13 AM
There has not been sound banking as treated in your definition since the invention of bank credit paper and that goes back hundreds of years.
All banks expand their "virtue" with all manner of paper equivalents for value in every country in the world. Their power to effect and affect monetary policy depends upon their alliance with whatever financial powers exist in the communities served and they work with all kinds of political structures and all kinds of people those structures serve. They recognize all kinds of wealth accumulation and play constantly with those who are successful in piling up "reserves", legal and illegal. They see their function as a "clearing house" between those who do business and they don't care what business is indulged. They are apolitiocal and completely amoral since money is their only interest and they only reject deals when they feel the "value" being offered cannot be retrieved through usual paths but they are also known to cover their "risks" by doing side deals.
It has ever been thus.
Writers on banking assume positions that have nothing to do with reality and have spurred actions against banking by arousing people to take action against bankers. The problems that emerge are exactly the kind of problems that come after "revolution" in any field. What was pure and simple in execution now is a haze of illogic and when the bankers disappear, like governments, etc., the people suddenly discover they need money but no one is around to handle the consequences of using it... .ergo no one has any money and with nothing to give, what is needed disappears and Man is in a desperate situation.
Our Western Societies are in trouble now because we have many more people than ever before and we trade with the world and consequently the bankers have more to handle, exchange, consummate transactions and then log them to every account requiring such entries. It was a nightmare that submerged the world after the many civil and world wars of the 19th and 20th Centuries and continues to this day.
The invention of the computer was fueled by bankers, as was the internet, because they saw they could deliver better with it. The introduction of bank checks, then cards to make different currency transactions faster did not solve the bankers' problems but compounded them. It increased the numbes of people using banks as never seen in history before. It has reached astronomical proportions which is why it is so easy to speak of trillions and billions seem so old fashioned!
It has been quite a ride with the bankers. They don't know where this is going... it is running faster than they can conceive and they are having a hard time trying to keep track. Some have given up.
Today, since the system is running wild with money worldwide, especially the dollar and now the euro, other entrants in this merry go round are looking at the problem from their vantage point, starting with new ideas from new minds, especially in the emerging countries. They were the first to recognize that money is now just an entry in an suthorized ledger which now is a master computer or many master computers and if a government can gain some control, it has a brand new way of governing. Just pass out the credits and see where they go.
Frankly, the Brit you chastize here is more realistic than you are. We are all part of this extraordinary value exchange, even the poor and we all live by it. We have come a long way quickly with electronic money so why not let it rip. Everyone in this world wants more so give it to them and let's see what happens.
Get real and look about you, look at your selves. You have had a goodrun with this experiment and you are just part of the whole. There is no way, even in Hell, that you are going to turn this spiggott off and the bankers know it. We are the ones concocting products, promoting ideas and things to have and the banks do what they can to accommodate us all.
If you stop the game, who is going to suffer? You, me and everyone else. This is our Brave New World and you cannot stop it and get off. Only a body from out of space can obliterate what has begun and will run until something other than Man stops it
Perhaps your new merger with a swiss group will enlarge your thinking since now you will be in the international trade lines.
Reply from The Daily Bell
The article is very simple. It points out that the regulatory urge to moderate private banking does not extend to central banks. Maybe you will address the actual article in your next screed.
Posted by seer on 02/14/13 12:25 AM
Trillions of dollars bet/hedged on derivatives and computer generated algorithms that trade almost instantly are driving the big investment banks. Not even close to sound banking unless one accepts the current reality as an ideal paradigm.
Posted by 1776 on 02/13/13 03:19 PM
Schiff: 'We're Going To Have A Major Economic Crisis,' 'Going To Take' One To Address Debt February 13, 2013
Click to view link
Posted by Friend_of_John_Galt on 02/13/13 02:54 PM
Several years ago, I had a subscription to Scientific American. I immediately noticed that the "scientists" reporting in the social sciences field had a very statist slant to their "findings." But the "hard" science reporting generally seemed unbiased.
Then Scientific American embraced anthropogenic global warming, and started pounding the drum for this scare meme (that required more statism and "social justice" as the solution).
I subsequently dropped my subscription to Scientific American and haven't bothered with it since. Sadly, it gives "science" a bad name.
Posted by bob on 02/13/13 01:31 PM
I would put it somewhat differently: The malignancy of The Central Banking, in its present form, has already spread to biggest and best scientific journals and publications.
Presently, the entire Central Banking system serves exclusively to the interests of an extremely small but very powerful special interest group, i.e., specifically, to its own owners.
Unfortunately, the present Central Banking system is in a direct confrontation with a free-market economy. Consequently, the entire Central Banking system stopped performing any productive and useful functions. Instead, it is trying to expand and protects its own power, benefits, and privileges. Therefore, it became a very aggressive and malignant cancer killing the host body.
Therefore, the entire world banking sector (its structure and mode of operations) has to be reformed and rebuilt on a quite different principals. A Central Banking system must start to perform much more limited but very specific productive functions like providing (similar to insurance companies) unbiased financial crises management functions without selecting winners and losers.
Posted by RomeyR on 02/13/13 12:48 PM
More than 30 years ago I reluctantly concluded that Scientific American had been utterly co-opted and corrupted. I have learned many things in the ensuing decades, most of which have strengthened my belief that SA is nothing more than a megaphone.
Reply from The Daily Bell
"Politically Correct Scientific American."
Posted by taxesbyanyothername on 02/13/13 11:15 AM
Forget Amade. If we just put Di Christina and Jeffry Sachs in charge the world can bureaucratize efficiently and scientifically. And all go gently into that good night.