Banking and Finance Industry, Part 3

Exploring the framework for a “Balanced Development” model


Ramses Rashidi

©2008 Center for Balanced Development (


In the last two articles we talked about the growth and development of the banking and finance industry and its impact on society and economy. Here, we are going to examine the fragmented nature of growth and development in the banking and finance industry in the modern times and its future prospects.


Modern Banking System and Social Impact

Banking is probably the most lucrative business where you can apply great leverage. For example, for every dollar in deposit a bank would lend $5. In other words, a 5 to 1 leverage ratio. This concept seems to work when the economy is in good shape and the market is growing. But in an economic downturn banks are left with more loans than actual value on already leveraged loans. In the recent economic slowdown in the U.S., which is still going on, in 2007 alone there were over 2.2 million home foreclosures. As the prices of homes dropped, a bank could have mortgages worth $15 million and actual property worth only $10 million. This trend that happens as part of the economic cycle is really devastating to the social structure as well as the economy. Young families who had worked hard to save money for a home or building up their businesses, are suddenly faced with bankruptcy and losing their home –– a huge lifetime investment gone, down the tube. The impact of this trend goes beyond the mere loss of money and effort. Often times, the pressure and stress caused by this economic rollercoaster ride, can break the family structure and affect the healthy growth of the next generation.


Financial Markets and Speculation

Sales of stocks, bonds and commodities, as well as investments in funds that support the financial market’s growth is also based on leverage and speculation. Here the leverage or the PE (Price/Earning) ratios are fairly high.  As an example; if the PE ratio is 8 that means that the investor is paying $8 for every $1 of earnings. This ratio can be higher for popular stocks where prices could be as much as 50 times its earnings. The growth potential, performance, market sector prospects (e.g. telecom), and risk factors are among the elements that decide the popularity of a stock or an investment program. At times, speculations among buyers can artificially increase the demand causing an “economic bubble”.  This is usually followed by panic in selling and the prices falling quickly, which could lead to a “crash” as has happened in the past. This raises the question as to whether the banking and finance industry serves society or society serve the financial institutions?


Credit System and Credit Rating

A huge part of the financial industry is the credit system. The use of credit cards, including Visa, MasterCard, American Express and Discover is big business, with a total volume of charges in the U.S. exceeding $1.57 trillion in 2007. With 20%+ interest rates, credit card debt has become a part of life in modern civilization. Today, it’s hard to imagine living without credit which is basically the ability to borrow money. Without the credit rating, it’s almost impossible to buy anything on long-term. The higher your credit rating the easier it is to get financing and the lower the rates. The credit rating system is now used when you want to rent an apartment, buy a car or even apply for a job. If you have bad credit, life can become really quite difficult. Imagine, the economy slows down, you lose your job, you can’t make payments on your house, which goes into foreclosure, and your credit rating takes a further nosedive. It sounds like living in a Las Vegas-type casino, rather than being a contributing member of the modern human society.


Foreign Exchange Market

The Foreign Exchange (FOREX) market is a fairly new segment of the financial industry where one speculates on the foreign exchange rate fluctuations.  The volume of trade in this market currently stands at an average of $3 trillion per day. It’s a unique market that is extremely liquid, with a variety of traders, geographical dispersion and high volume at low profit margins with little cross-border regulations. The exchange rate is often based on GDP, inflation, interest rates, budget and trade deficits or surpluses, and the market conditions. However, speculation plays a big role in the FOREX market where it can affect currency devaluations and national economies. For example, in 1992 currency speculation forced the Central Bank of Sweden to raise interest rates to 500% per annum and devalue the Krona (the Swedish currency), or in 1997 when the Malaysian Ringgit was devalued due to the FOREX market speculations. Many countries have taken measures to protect themselves against the exchange rate fluctuations caused by traders.


Global or Universal Currency

The idea of the use of currency to unify an empire or country can be traced back to China’s Qin Dynasty in 250 BC where a national copper coin was adopted to strengthen the unification of the Chinese empire. In the early 1700s each of the thirteen colonies in America issued their own banknotes (colonial currency). Later, the U.S. Continental Congress issued continental currency to support the unification of the colonies and the Revolutionary War.


The concept of a global currency has been around since the days of the Spanish Silver Coin which was used in the 17th and 18th centuries throughout Spain’s territories from America all the way to Asia. The Success of the U.S. dollar in the 20th century that has been used as the financial medium in global trade and the strength of the “Euro” in the recent years as the currency of choice in the global market representing diverse European countries with different cultures and economies, has strengthened the case for the adoption of a global currency as the means for balancing the world economy. Since the inception of the Euro, the European Union’s economy has picked up momentum, and now with a GDP of $11.9 trillion per year, it has become the second largest economy in the world after the United States.


Observing the EU model as an example, we can see that a global or universal currency would benefit the global economy in a number of ways. It would eliminate the FOREX market and the speculation that might undermine the development of the local economy of countries around the world. It would erase the transaction costs and the balance of payments. There would be no chance of currency failure. It would get rid of the uncertainty of “hedge funds” which affect the value of goods and services. It can simplify the printing of money by the Universal Central Bank, and reduce its circulation cost while increasing the efficiency. It would eliminate the need for countries to maintain an international reserve of other currencies, and most of all, it can get rid of national debt that burdens so many countries around the world.


A universal currency would also address the huge disparity among nations in terms of access to resources and funding for local development. It would facilitate growth of international collaboration and trade while fostering the nurturing of human potential and the education of the masses. Environmentally, it would allow us to protect and utilize our natural resources in a more responsible and far-sighted fashion.


However, some economists argue that a single universal currency is not practical as it would hamper the management of national monetary policy and adjusting of interest rates since in this model there is only one Universal Interest Rate. The other argument is about Islamic Banks which instead of interest rates; they charge a fee for transactions.


Universal Value System (UVS)

Here, the author presents an idea that he has been developing over many years and it might be adopted at some point in the future. Once we have gone beyond the hurdle of the universal currency, the next stage of the evolution of the financial industry could have to do with creating a Universal Value System (UVS). Here, through a system of arbitration, supervised by the Universal Value System Regulatory Commission (UVSRC), each individual is born with a lifetime debit/credit card which will be used to add or subtract value. The value or the debit/credit system would depend on the impact of the products and services on society, human potential, natural resources and the economy. This approach will effectively reflect the real cost of goods and services, and would foster the growth and development of united communities, socially educated individuals, well-utilized resources, healthy environments and a balanced economy.


In particular, I would like to thank Michael Lindsay for sharing his insight of the finance market.

In the next articles we will examine the growth and development of Science and Technology.


Ramses Rashidi ( 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.