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www.grameeneconomics.com

Remembering Norman Macrae 1923-2010

How to Avert A Great Depression Through the Hungry 2010s?
Answer, By Making All Banking Very Much Cheaper
This was Norman Macrae's last article written in December 2008
If banks in rich democracies had been truly competitive
institutions, at least one of them somewhere would have seized
the main opportunity created by the computer. This main
opportunity was to make all deposit-banking vastly cheaper than
ever before. By this cheapening it should make such banking
hugely more profitable. Then further competition would search
for the cheapest ways to guide all the world's saving into the
most profitable (or otherwise most desirable) forms of capital
investment, thus enriching all mankind.
Instead, during 2008 the total losses of banks in rich democracies
- in North America, West Europe and Japan - soared into trillions
of dollars. Fearful for their solvency, these banks virtually stopped
lending. The issuance of corporate bonds, commercial paper, and
many other financial products largely ceased. Hedge and
insurance firms also crashed. Mankind is thus threatened in the
2010s with its longest great depression since the hungry 1930s.
Why? The strange answer seems to be that other happy
consequences of modern technology promised to make this
cheapening even faster. Call centres in Bangalore vastly undercut
the middle class salaries of Midland bank clerk who until the
1950s expensively answered clients' questions in their branches
in the City of London. Cheap mobile phones kept village ladies in
once miserable Bangladesh as fully in touch with market prices as
is the chief research officer of the First National Bank of
Somewhere in California. His weekly salary is still 1000 times
greater than the previous annual earnings of that village lady. The
cost-effective way of running the old Midland or First National
then seemed to be to cut its total salary cost by something like
99%. This did not please Western welfare governments, or the
decent chief executives of the old Midland or First National bank.
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Awaiting the sensation of a short sharp shock
From a cheap and chippy chopper on a big black block
- WS Gilbert in The Mikado - why it is uncomfortable to work in an
industry which needs 99% redundancies.
Western welfare governments have long preferred to run their
banks in high cost cartels, and even invented reasons why this
seems to be moral. Their deposit-banks have usually kept in cash
only 10% of the total amount deposited with them. If 11% of
depositors suddenly feared that their banks might go bust, this
could accelerate a run that would send them bust indeed.
Governments therefore thought that depositors would be less
fearful if they were assured that the banks were officially and
tightly regulated. Actually, this mainly meant that the banks had
to hire ever more expensive lawyers so as to escape any crippling
consequences from this regulation. The attached quote shows
that Samuel Pepys understood this fact of life in his Diaries of July
21, 1662.
I see it is impossible for the King to have things done so cheaply
as do other men
- Samuel Pepys on discovering an important commercial fact of
life in his Diary, 21 July, 1662
The decent bosses of the deposit banks felt that the best way of
avoiding sacking nine tenths of their staffs was by competing
with a very different sort of financing called merchant banking
whose earnings and bonuses were far more generous than those
given to their own staff. These merchant banks were of peculiarly
differing pedigree. In London, it was assumed that they could best
be run by families like Barings who had done the job for over 200
years. In the 1990s, Barings went totally bust because one of its
hired traders bet much of its money on a hunch that a bad
earthquake in Japan meant that the shares of Japanese banks and
insurance companies would become more profitable. In Zurich,
merchant banks felt it most moral to keep the accounts of their
depositors totally secret, especially if these accounts were being
used to defraud their own countries' tax authorities. In 2008 those
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secretive banks were then defrauded. In Wall Street, Goldman
Sachs and Lehman Bros bid up their annual bonuses to millions of
dollars for each partner. In 2008 even Goldman Sachs made a loss
and Lehman Bros went bust.
A former chairman of the Federal Reserve argues that "fearful
investors clearly require a far larger capital cushion to lend
unsecured to any financial intermediary now". He therefore thinks
that taxpayers money should be ladled into them to make those
investors less fearful. This seems far more likely to make
depositors intermittently more terrified and cause any depression
into the 2010s to linger on and on.
In the 1930s, the chief economic adviser to the government of
Siam was called Prince Damrong. I try always to remember it
- quote from former director of International Monetary Fund.
One of the few big banks to make a profit in 2008 was the
Grameen Bank (which means Village Bank) in that once basketcase
country called Bangladesh. The sole staff in a branch serving
several villages was once a woman student. It is now more usually
someone who has learnt to use the computer in the right way.
The rest of this report will examine how this marvellously costcutting
operation works. Perhaps the most relevant and terrifying
analogy is to commercial airlines. In 1945, there were only a tiny
number of passenger airmiles flown on them. In each successive
year these increased hugely and in this slump time 2009 there will
be billions of passenger airmiles flown. In the late 1940s most
governments therefore created national airlines and were
confident they would flourish in this boom industry, with official
regulation assuring they would be safe. Instead all proceeded to
lose money, and later privatised but large airlines also did. The
present trend is to cost cutting airlines like Ryan Air.
The same will happen to banks. Large banks mislending to the
rich have run into losses that have created the slump. Politicians,
thinking they are saving the world, are mislending huge sums to
these mislenders and will eventually make the slump worst.
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How to create cost-cutting banks? To begin with Consider
Bangladesh - peculiar as this may seem.
START IN A STARVING VILLAGE
The Nobel peace prize for 2006 was controversially awarded, in
Oslo, to a "banker for the poor" in usually unfashionable
Bangladesh. Since the microcredit system pioneered by this Dr
Muhammad Yunus really has lifted record millions of Bangladeshi
women from the world's direst poverty, some of the world's
toughest tycoons have thrilled to his stated aim to "harness the
powers of the free market to solve the problems of poverty".
To his fans' delight and astonishment, he is achieving exactly that.
In the past quarter of a century, his Grameen Bank has lent
(without collateral or lawyers) increasing billions of dollars to
millions of poor women in the previously starving villages of
Bangladesh, and got an extraordinary 99% repayment back. His
often illiterate customers have started millions of successful small
businesses in unimagined fields like mobile telephone ladies and
saleswomen of the world's cheapest yogurt. All these successes
have been won by keeping costs incredibly low. A banking
operation that would cost Goldman Sachs $100 in New York or
London would cost Grameen in Bangladesh well under 100 cents.
This is a huge development in human history. Money can now be
directly channelled into productive use by the world's poorest
people, while unsuccessful lending to the rich has caused a world
slump. How do we switch custom to cost-cutting banks?
During Bangladeshi's terrible famine year of 1974, Dr Yunus ( who
had won his doctorate in economics in a free market American
university, which most founders of banks have not done) came
back to his 1940 birthplace of Chittagong, as professor of
economics at the university there. He started lecturing on his
republic's 5 year plan, which like most 5 year plans was economic
nonsense. In search of reality he took a field party of his students
to one of the nearby famine threatened villages. His group
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analysed that all 42 of the village's small businesses (such as tiny
farm plots and market stalls) were indeed going bust unless they
could borrow a tiny total $27 on reasonable terms.
The first thought was to give the $27 as charity. But Yunus lectured
that a social business dollar, which had to be paid back after
careful use in an income generating activity was much more
effective than a charity dollar, which might be used only once and
frittered away. The careful use of loans in very small quantities,
says Yunus "means that you bring in a business model, you
become concerned about the costs, the revenue, how to bring
more efficiency, new technology, how to redesign, every year you
review the whole thing. Charity doesn't bring that whole
package".
Mercifully, all those first 42 tiny loans were fully repaid, and lent
back. After 9 years of further experiments, Yunus in 1983 founded
his Grameen Bank. Its priority was to make loans that were
desperately needed by those of the poor that did repay them.
Indeed, he argues that "access to credit is a human right so long as
that credit is repaid". This is the reverse of the usual banking
priority, which is first (and in credit crunches only) to make the
safest loans those to the rich that can provide collateral.
In these last 25 years, Grameen has provided increasing $billions
of loans to poor people with that astonishing 99% repayment
rate. In 2006, it had 7 million borrowing customers, 97% of them
women, in 140,000 villages of Bangladesh. Microcredit had by
then reached 80% of Bangladesh's poorest rural families. Over half
of Grameen's own borrowers had successful small businesses. The
women borrowers predominated because they usually are the
poorest people in rural Islam and proved best in paying back.
When a Grameen bank manager goes to a new village, he has
entrepreneurially to seek for poor but viable borrowers. He earns a
star if he achieves 100% repayment of loans, and other stars if his
customers are fulfilling most of the 16 guarantees that all
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customers are asked to pledge, ranging from intensive vegetable
growing, through sending all their children to school, to
renouncing dowries. A branch with no stars would be in danger of
closing, so borrowers rally round with suggestions, such as which
unreliable repayers to exclude. Borrowers from the bank who do
repay are called owners of the bank and receive incentives such as
opportunities for insurance, and for winning university
scholarships for their children.
A GENERATION ON - ENTREPRENEURIAL FUTURES ARE MOBILISING

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