In my view, there is often a link between economic crises and poor management on the part of investment banks. In order to put up with this, shouldn't there be a very compelling reason for them to exist?
An argument I've heard are that they promote liquidity. But don't they just have a monopoly on it? People could just privately invest their own money without these banks, generating the same liquidity. Moreover, instead of trillions of dollars in government bailouts for investment banks, that money could be injected in the economy or cut from taxes to increase liquidity.
I've also heard that investment banks generate wealth. But when I think about it, do stocks and derivatives changing hands really benefit entrepreneurs and the real economy? If Person A buys a stock of Boeing, his money goes to whoever previously owned that stock; another bank or an individual, but unless its the first time Boeing issued that stock, it does not go to Boeing. How does investment banking then benefit the economy, or the company whose wealth is being manipulated?
Finally, the big issue I have with investment banking is that contracts made with people buying things like Mortgage-Backed Securities and the investment bank actually engage third parties. As was shown in 2008, a failure of these banks does not only harm the people involved in the contract, but homeowners who see housing prices fall or lose their homes as a result of contracts they were in no way involved in.
Read more: Why are investment banks necessary in the economy?
