Socially useless, privately useful.

Earlier this week, Lord Turner described much of our banking sector's activities as "socially useless". Well, if much of banking provides no value to society, why do bankers bother? The reason is simple, industry insiders are using these "socially useless" activities to rip off shareholders and savers.

Whatever bankers might say, running a bank is a straightforward business. A bank makes loans, and receives interest. It also provides non-lending services, such as money transfers, exchange rate sales, for which it receives fees. So long as a bank lends to firms and individuals who can pay back the loans, then the cash just rolls in.

Once the cash floods into the bank, it needs to be distributed. Some of it needs to go on running costs. Of course, the government needs their cut; a modest amount of tax needs to be paid. The rest goes to either the staff, the shareholders, or to depositors.

For the jokers who run banks, the question is simple; how do we get to keep as much of the residual profits without passing it on as interest payments to depositors or alienating the shareholders?

The answer is to generate a huge quantity of useless financial transactions which can be passed off as risk management techniques. These transactions, which are typically described as derivatives, generates huge bonuses for the staff and neatly redistributes income away from shareholders and depositors.

So, Lord Turner is right when he says that much of banking is socially useless. However, for bank staff, it is privately very useful. It keeps the profits of banking in the pockets of bankers at the expense of the rest of us.