The Ethics of Banking: Conclusions from the Financial Crisis (Issues ...

The Outsourcing of Asset Management 181
investment management combined to produce a higher degree of speculation and
risk propensity in the capital and credit market. 52
This desire on the part of investors for higher returns from the outsourcing of
investment management might be characterized as investor “greed”. But that would
be to underestimate the systemic effects of the raising of average returns. It is natural
for an investor who sees higher average returns in the market to strive to match them
with his own portfolio. This is hardly a case of pathological greed. Nevertheless, perhaps
it is fair to criticize investors for being too greedy for systemic reasons because
they amplify the dynamic which leads to an increasingly speculative and risk-laden
capital and credit market, and which must ultimately culminate in the financial
market crisis, and because the desire for convenience, wishful thinking, and the
expectation of higher returns makes them more trusting of financial intermediaries
than they should be. 53
The idea that others, even if well-paid, want nothing more than to make rich
people’s wealth grow as much as possible is unfounded. Financial intermediation
is constantly allied with the risk of being exploited by the financial intermediary.
The growth in outsourcing increases this individual risk, and along with it, the
systemic risk of undue risk-propensity in the capital and credit market, with the
consequence that hyper-speculation takes hold of the financial markets. A lesser
degree of outsourcing would diminish this risk.
When capital owners fully outsource the investment risk, legitimation problems
of capitalism also arise, because if all property owners left the management of their
capital assets to others, it would nullify the argument that an owner’s interest in looking
after his property and managing it with due diligence is one of the main benefits
of the economic system of private property. If the management of capital assets were
turned over entirely to financial intermediaries, any such constellation of incomegeneration
from capital ownership would hark back to the “workless income” from
capital and land ownership that has been much criticized in the past, especially
in the nineteenth century. The relationship between the outsourcing of investment
management, a higher appetite for risk and speculation among financial intermediaries,
and hyper-speculation culminating in a financial crisis, makes it clear that the
52 The higher pressure of competition is most apparent, as Posner shows, in the USA where deregulation
did away with the former division between investment and savings banks. POSNER (2009),
p. 130: “Notice the pernicious effect of competition, and ultimately of deregulation, on bank safety.
Deregulation increased competition in banking by allowing other financial firms to offer close substitutes
for banking services.” This increasing competition put the banks under pressure, affecting
not only their advisory arms but also their credit business: “Increased competition in turn compressed
the margin between the interest rates that banks paid to borrow capital for lending and the
interest rate they charged their borrowers. The narrower the margin, the more leverage banks need
in order to obtain enough revenue net of their borrowing costs to cover other expenses and provide
a return to their shareholders.”
53 One can also interpret this problem as an instantiation of the more general problem that the
middleman causes costs, and that middlemen try to extend their services beyond the useful.
BRANDEIS (1914), p. 97, wrote of the banking industry’s tendency, like any other intermediary’s,
to over-extend its services: “Eliminate the banker-middleman where he is superfluous.”