The Deficiency of Trust: How Banks are Failing Us

By Konstantine Roccas, Staff Writer

Last month in Cyprus, tens of thousands of Cypriot citizens woke up to find out that their government, in a move unprecedented in modern financial history, had agreed to a special tax levy on depositor accounts over 100,000 euros. To finance the bank bailout they were to receive, the Cypriot government was forced by the Troika of lenders to literally take money away from people’s bank accounts. This left people all around the world worried about the security of their deposits in banks. Even though the Cypriot government and European Union claim that this move was one-time only, real fears persist that Cyprus was a dress-rehearsal for a depositor levy on a much larger scale.

Since 2008 when Lehman Brothers went under, setting off a financial chain-reaction worldwide, there has been increasing concern over the power of financial institutions and their ability to get away with dubious investments with your money. We, as regular folk, use banks as a secure place to store our money and choose a bank to do so because we trust them to not do anything that could risk our investments. Since 2008, this trust has come under much scrutiny, because after all, tax-payer funded dollars are being used to pay for the bail-outs requested by these supposed “safe havens for investment and fiscal storage.” If Cyprus is any indication, we may be paying for future bailouts straight out of our bank accounts.

In any case, bank failure is nothing new; 50 years after the creation of the first modern bank in Venice in 1157, the banking system was riddled with banking failures. What isnew however, are the ways in which we are paying for the mistakes of over-enthused bankers world-wide.Frankly speaking, banks are failing us, and we’re paying for their mistakes.

Image Courtesy of NPR.org

The Deficiency of ‘Trustee-ship’:

Banks are not supposed to make mistakes. Yes, accidents do happen, but we trust in banks to keep our money secure while we go about our lives. Economist Richard D. Wolff explains that when we entrust a bank with our deposits, “they are supposed to lend out a portion of those deposits, but do so very prudently to make sure that they are not taking excessive risk, because after all they are investing other people’s moneydeposited with them with the idea of trusteeship or safety. ”

“So if a bank takes a depositors money, and invests it in a way that loses money, they are ipso facto defunct and deficient in their performance,” continues Wolff.

The problem is that once we give the banks our money, there is very little we can do to tell them how to invest the money. Sure we can choose from a variety of investments such as RRSPs and GICs, but we have absolutely no control over the larger decision making process of a bank. After all, when you open up a bank account anywhere in the world and deposit money, you are giving the bank the right to invest and move your money around however they see fit.

This all comes to a head when a bank finds out that its returns are less than what they had anticipated and come to the conclusion that they wasted their deposits and do not have the money to return to depositors. This is what is “collectively known as bank failure,” says Wolff.

At this point, the banks run to the government and beg for money to ensure the entire economic system doesn’t collapse.