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What Happens If Goldman Sachs Disappears?

  • Written by Syndicated Publisher 298 Comments298 Comments Comments
    October 27, 2011

    As Europe grinds out yet another doomed banking system rescue plan, it might be helpful to examine the underlying assumption, which is that we need these big banks.

    Do we really? If Goldman Sachs, JP Morgan Chase, Deutsche Bank, Crédit Lyonnais and five or six of their peers ceased to exist tonight, what would happen? Would their absence change the number of factories, hospitals, farms, biotech research labs, oil wells, or gold mines? Would there be fewer houses or cars? Would computers get slower or TVs lower-def? No. The world of tomorrow morning would have exactly the same amount of real wealth and productive capacity as it does today. The main thing it wouldn’t have is a lot of arcane financial instruments that don’t produce anything edible, and a hundred thousand or so bankers making inordinate amounts of money moving this paper around. To the extent that those bankers would have to take jobs making real things, the post-Goldman world would arguably be richer and more productive.

    The big banks’ disappearance might, admittedly, leave some ripples in the pond. Interest rates might rise and stock prices fall as countries like the US and Japan have to suddenly live within their means. Military budgets, public services and pensions would shrink dramatically. But there would be compensations. Where today’s low interest rate regime is devastating to retirees living on the proceeds of bank CDs and Treasury bonds, higher interest rates would give them back their personal incomes, probably more than offsetting lower Social Security and Medicare benefits. For young families, falling real estate prices (also due to higher interest rates) would bring starter homes within closer reach. And all those soldiers now occupying foreign countries, or training to, would be freed up to take real jobs alongside the ex-bankers.

    People who have leveraged themselves to the hilt to buy various assets would have to sell, of course, but savers — especially those with a lot of precious metals — would snap up those assets and put them to productive use. Apple and Warren Buffett’s Berkshire Hathaway between them have over $100 billion of ready cash, which they’ll use to acquire and deploy cheap assets. Community banks that focus on mortgages, business loans, and customer service(!) will thrive as depositors abandon Bank of America for local institutions. Farmers markets and local farms will grow to replace a disrupted global agribusiness supply chain. Freed from all those financial sector campaign contributions, politics might even get a little cleaner.

    Viewed this way, the process looks a lot less threatening, and might even be a path to the kind of world most rational people would prefer. So relax, let the big banks go, and let’s see what happens.

     

    About The Author

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    DollarCollapse.com is managed by John Rubino, co-author, with GoldMoney’s James Turk, of The Collapse of the Dollar and How to Profit From It (Doubleday, 2007), and author of Clean Money: Picking Winners in the Green-Tech Boom (Wiley, 2008), How to Profit from the Coming Real Estate Bust (Rodale, 2003) and Main Street, Not Wall Street (Morrow, 1998). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a Eurodollar trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He currently writes for CFA Magazine.

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