Everyday investors like us have to figure out how to profit from the intricate financial landscape that is defined by large financial institutions. Expert in banking and professor at Massey University’s School of Economics and Finance David Tripe talks to me in the latest Everyday Investor episode.
Banks’ Influence Can Cut Both Ways
Banks have a disproportionate amount of sway over our monetary life, with the ability to improve our situations while also occasionally demanding payment in full. Money flows in and out of investments through the banking system that banks have developed and polished, therefore any discussion of banking is fundamentally a discussion of money, power and the rails our wealth move on.
Banks alone can’t make or break financial stability, but they can generate an environment where worry and avarice can dominate our 3am fears. We use mortgages to buy property, and the value usually rises over time. This may sound cynical, but it emphasises how crucial healthy banks are to a well-functioning economy.
Our economic security depends on a banking system that is both robust and reliable. In order to succeed as regular investors, we must control our spending, make wise choices, and stick to our plans. The current banking crisis, however, shows how important it is to keep an eye out for any changes in the economy, and in some of the large institutions that have ‘systemic’ importance too.
The global banking system is vulnerable to credit, market, and operational risks due to its interconnected nature. Regulation helps reduce this risk, but in the process, creates additional risk as a byproduct.
Building wealth using leverage (mortgages) from a bank, whether we see it this way or not, is somewhat akin to gigantic Ponzi scheme. Those who arrived sooner are doing much better than the recent converts, but we’re all here for the same thing: Financial security.
While it may not yet be the end of the world for banks as know it, there’s increasing speculation it’s getting closer. The number of banks are consolidating, cash is less common, central banks are starting to deploy CBDC’s (central bank issued digital currencies), and there’s a silent global currency war occurring while we’re looking at the kinetic war.
Profitability in excess of what’s reasonable may be something to look into, but perhaps ensuring banks are well resourced for transformation ahead isn’t such a bad idea?