There seems to be a new trend amongst the financial institutions. After the great sub-prime debacle, as a result of which several Western governments had to “bail out” the banks by providing funding for them (running to several hundred billions), a new plan was floated that allowed a government to use a portion of the deposited funds to save the bank. Is this legal? Apparently, yes it is. That is because when a deposit is made, the bank OWNS the money and the depositor has a CLAIM to his/her money. In simpler words, one gives up ownership to the bank of whatever is deposited at the bank. So the banks own your money, and if they lose it due to poor business (or from gambles) the depositors are the ones to lose it all (or some if they are lucky). The banks play with depositor money by the way, a result of the Financial Services Modernization Act of 1999, which allowed the banks to play (read “gamble”) with depositor funds again, which was banned by the Glass-Steagall Act of 1939.
Straight up, this is nothing more than “covered gambling”. Imagine being bankrolled by a billionaire to go about making huge bets (closest I can think of to covered gambling).
How is this any different than investing in actual business? Two ways, one legal, one from a business ethics perspective.
- The original owner of the asset is required to give specific consent for using the owner’s assets for any economic activity. This is the legal perspective in that the depositor does not surrender ownership of the asset.
- The bank does not “bet” on whether an event will occur or not, actual investments have to be made that generate jobs. This is to do with business ethics.
This is nothing more than providing further support for the “casino capitalism” that led to the current economic crisis. Probably the biggest reason why unregulated (even loosely regulated) finance was thought of as a “parasite” by many classical economists.