In a recent interview with the German newspaper Spiegel, Nobel Prizewinner Muhamud Yunus expressed the view that capitalism has degenerated into a casino. The financial markets, he said, are propelled by greed and speculation has reached catastrophic proportions. It was put to him that the current financial crisis began as a credit crisis -- homeowners in the US could no longer pay down their mortgages while at his Grameen Bank, which provides microloans, the repayment rate is close to 100 percent. Did he think his bank could be a model for the entire finance world? He replied that the fundamental difference was that his business was very connected to the real economy. “When we provide a loan of $200, that money will go to buy a cow somewhere. If we lend $100, someone will maybe buy some chickens. In other words, the money goes to something with concrete value. Finance and the real economy have to be connected. In the US, the financial system has completely split off from the real economy. Castles were built in the sky, and suddenly people realized that these castles don't exist at all. That was the point at which the financial system collapsed.”
In our recent report Tomorrows Owners we pointed out that the world economy was made up of three interacting systems – the real economy of goods and services, the financial economy, of which the Grameen Bank is an example, which provides finance in support of the real economy, and the ‘casino economy’ where people trade in derivatives for profit. People assumed that the banks to which they entrusted their savings were solidly based in the financial economy and woke up too late to find that these august institutions had one foot in the casino economy.
Also, because they did not understand the systems nature of the economy as a whole, even very sophisticated people were not sensitive to the impact the casino economy could have on the real economy. Writing in the Times (October 13th) Jay Light, Dean of Harvard Business School said “Nobody had put all the pieces together. We just didn't understand how interwoven the different elements were and how we would get this conflagration. None of us really realised that this course of events would expose such a fragile structure.”
So, it is time for the banks to return to their true economic role and social purpose, to support real wealth creation and to resume lending so that those who create society’s wealth can get their chickens and cows.