Tuesday, November 22, 2011

Why is banking more healthy than smoking?

Australia has introduced a law requiring all cigarette packages to look alike (see below). Main argument behind this is avoiding branding of cigarettes so smoking wouldn't look cool anymore for example. Theoretically this would mean that cigarettes as a product would be only consumed based upon its characteristics and the psychological value of consuming the product would not be defined to a customer. Will this reduce smoking? Only time will tell. What is interesting here is that this is one of the precedents of modern time where regulator has forbidden marketing in such a concrete way.

It is not possible to compare smoking with banking but no one would argue that both have had a major negative effect on modern society. While smoking is the direct cause of many deadly diseases, risk taking in banking sector (or in finance more generally) has caused millions of people to lower their living standards in recent years mainly starting with the crash of Lehman Brothers. The direct effect of both is difficult to assess although smoking has received much more attention in this area.

What is the point of all this? I would argue that banking similarly to production of cigarettes as a potentially well-being-threatening area of business is a commodity which should be handled like an utility rather than as profit seeking entity. If banks were to be stripped of their possibilities to (1) take massive risks in order to maximize profits, (2) make people believe that they too can enjoy the life of a millionaire once they fill their loan application and (3) regulate the way that bonuses are paid in finance sector then maybe we would have a system where banking is a utility. This would mean that banking would be a low-margin business with concrete rules for all participants - we would lose the value proposition similarly to what Australia is doing with smoking. This would mean that banks fulfill certain tasks given to them by governments. The interest paid on loans and deposits would be regulated by governments together with other aspects of banks activity.

Maybe then we would find solutions for avoiding the next Lehman Brothers crash, find some cure for inequality inspiring the Occupy Wall Street movement and solve the moral dilemma of the need of saving the banks. While this would definitely kill innovation in finance you could ask whether we need innovation in order to offer products for those that aren't able to get these themselves?

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