Banking and Finance Industry

Banking and Finance Industry, Part 2

Exploring the framework for a “Balanced Development” model

Ramses Rashidi

In the last article we talked about the growth and development of the banking and finance industry up to World War II and its impact on society and economy. Here, we are going to further examine the fragmented nature of growth and development of the banking and finance industry in the modern times.

Financial and Social Devastation

World War II had a huge impact on the global economy and the lives of people across the planet. The mass destruction and killing of millions of people showed the brutality of the human race. It caused a major slow-down in the global social and economic development and in some areas it even moved us backwards. Self-interest, unbridled nationalism, racial fervor, religious intolerance and political ambition to expand and control resources were at the core of the great conflict. By the time it was over it had taken the lives of some 62 million people (including the genocide of 11 million Jews) at a cost of over a trillion U.S. Dollars. Needless to say, the financial institutions during the war were mainly supporting the war efforts in their respective countries. The United States and the Soviet Union subsequently emerged as the superpowers of the post-war era.

Post-War Boom and the Independence Movement

The post-war years witnessed a period of social and economic boom. After more than 20 years of economic depression and war that made it difficult to start a family and raise children, and in many parts of the world there was a baby boom period that lasted till the mid 60’s. In the United States the 50’s and 60’s were a period of dynamic economic growth. The activities in the construction industry, the development of the real estate market, and the growth of new technologies fueled the banking and finance industry with increasing numbers of home mortgages and business loans for the start of new ventures. This period also witnessed the impact of the Korean War in the 50’s and the Vietnam War in the 60’s, which in turn caused radical social changes across America and some other parts of the world. The surfacing of the Counter-Culture, the Hippies, the anti-war protests and the civil-rights movements were among the major developments of this era. The American Peace Corps., which was focused on the development of the global community, was one of the truly positive highlights of this period.

The European countries, which had been ravaged by the war, were busy rebuilding their economies and financial institutions in the post-war years. Meanwhile, there was a strong trend towards gaining independence among the former colonies of the European powers. Vietnam, India, Pakistan, Indonesia, Cambodia, Sudan, Morocco, Tunisia, Libya, Uganda and scores of other Countries gained their independence in the years following World War II. The newly emerging countries had to build their economies with hard work and loans from the U.S., the World Bank, and other International development funds.

Centrally Planned Economy and Stagnation

The Soviet Union and China, in the decades following the war, were hard at work experimenting with communism. In China there were a series of campaigns to push the country towards becoming an industrial giant and the ideal society. The “Great Leap Forward”, “100 Flowers Bloom” and the “Cultural Revolution”, one by one caused irreversible damage, including famine, alienation of the intellectuals, social breakdown, and economic stagnation. The centrally-planned economy which was supposed to create equity and welfare for all members of society, ended up causing global isolation, stifling human potential, and restricting initiatives. With the financial institutions in the hands of the government, the scope of the activities of banking and finance were also fairly limited. The picture in the Soviet Union, generally speaking, was not much different. A series of hardcore communist leaders including; Lenin, Stalin, Khrushchev and Brezhnev ruled the country with an iron fist and in the extreme tradition. In the mid 80’s, Gorbachev, a visionary leader, began making significant changes to the centrally planned economy and in a series of reforms which led to demise of the socialist order, helped establish a democratic and free market system, with many of the former Soviet republics gaining their independence as a direct consequence.

Inflation, Environmentalism and Feminism

The 70’s were basically a period to focus on “self”. The social activism of the 60’s was replaced with having fun. Discos, movies, concerts, amusement parks, and the great outdoors became popular gathering places. During the 70’s, the oil crisis, high gas prices and inflation throughout the world meant a period of economic stagnation - the worst since the Great Depression. The term “stagflation” was commonly used to indicate the combination of “stagnation” and “inflation”. Double digit interest rates and 20+% prime rates meant a tight market where banks and financial institutions had to be very creative in order to survive. The concept of the “global economy” and the need to go beyond local markets became more popular. Also, during this period environmentalism and feminism emerged as very distinctive, transformative movements.

The U.S. Savings and Loan Crisis

The 80’s and the 90’s were a tough period for the financial industry. The failure of more than 1,000 U.S. Savings and Loans (S&L) institutions, which cost the government over USD $160 billion in terms of bankruptcy, bailouts and assistance programs contributed to the large budget deficit and the economic recession of the 90’s. The cause of the failure of the S&Ls was primarily deregulation, imprudent real estate loans and other measures that these institutions adopted to survive the troubled times. In addition, between 1980 and 1994 over 1600 banks insured by Federal Deposit Insurance Corporation (FDIC) were closed or received assistance.

Global Banking and Finance

In the 80’s, governments in many parts of the world started a trend in privatization and deregulation. Large companies went global. Finance of trade and offering banking services in the overseas markets were adopted by an increasing number of large banks in the U.S. and Europe. Foreign investment by Japanese and other oil-producing countries resulted in the U.S. stock market becoming the largest in the world. The growth of the global financial markets brought about changes in the political and social orientation of a number of countries around the world. Gradually, ideology, ethnicity and nationalism started to take a backseat to the need for general economic prosperity and development. As a result, a variety of financial institutions emerged to meet the needs of the global market. In this process banks as well as non-banks participated in offering financial services ranging from insurance, pension, mutual funds, money market, loans, credits and securities.

As one can see from the last two articles, the growth of the banking and finance industry has had a profound impact on society, the environment and the economy. At the same time, the changes in society and the economy affect the way we manage our finances. To create a balanced development model we need to carefully plan and design a financial model that will fit our specific locality, and one which will utilize the human resources, protect our natural resources, support social relations and facilitate growth.

In the next article we will further examine the growth and development of the banking and finance industry and its future prospects.

Ramses Rashidi (ramses@cbdus.org) is the founder and director of Center for Balanced Development.

The center is a non-profit organization dedicated to providing resources and services to foster global balance in social, personal, ecological and economic development.