Investment banking

Professor Charles A.E. Goodhart has an column at VoxEU.org in which he discusses Investment banking. Goodhart argues that the protestors who occupy Wall Street and financial centres around the world and claim that investment banks are “socially useless” are wrong. His column argues that investment banking is critical to any effective economy and the idea that policymakers can safeguard retail banking alone is not only tragically mistaken but also horribly dangerous.

Markets get made by participants taking positions. No one objects to agents taking positions if they bear the loss themselves. Problems arise when there are major externalities to society from such losses. It is the thesis of this note that the role of investment banks is so central to the efficient operation of our complex financial system that losses to such banks have major social externalities. The idea that, once you have carved out the ‘socially valuable’ parts of retail banking, ie the payments system and retail lending and deposit-taking, you can liquidate the rest without massive adverse effects is not only tragically mistaken but also horribly dangerous.

Goodhart is right that investment banking is critical to the economy but I can't help thinking that the best policy would be that governments don't "safeguard" any form of banking.