In his memoirs about the remarkable rise of The Home Depot, the great Bernie Marcus oh-so-thankfully went against the grain of seemingly all modern thought in writing that “bankers put their careers on the line, and for that we protect them.” Amen. Bankers, investment bankers, VCs and other financial intermediaries aren’t the nefarious problem, rather they’re the solution. Without them matching worthy (and frequently “impossible”) ideas with capital, there’s no progress.
Which requires a digression. It similarly goes against the grain of seemingly all modern economic thought to say that savers are the lifeblood of all economic progress, that contra the musings of the vast majority of economists, savers are the growth catalysts. Without their willingness to delay gratification, there would be no capital to fund new ideas, including Marcus and Arthur Blank’s The Home Depot. Without savings, there’s no way they could have brought the transformation of modern home improvement to life.
Marcus plainly understood the truth about savers in an intuitive way seemingly lost on economists and politicians. Savers delay gratification with compound returns top of mind. If their savings are put to work wisely, they’ll have access to the exponentially more in the future.
Which is where bankers and other financial intermediaries come in. They’re doing the crucial work of effectively putting the prudent together with businesses of all stripes. Precisely because compound interest/returns are the most powerful force in all of investing, they must do their jobs well. Marcus and his colleagues treated the financiers enormously well with this truth always running through their heads: if they rewarded bankers with diligent work, the bankers would take care of them. Basic stuff?
Not so fast. Lawmakers and economists act as though savers’ needs are immaterial. To use but one of many examples, on March 23, 2021 Illinois legislators voted the Predatory Loan Prevention Act into law. The latter mandated an interest rate cap of 36% on small-dollar loans issued to subprime borrowers. The goal was to reduce the cost of borrowing for the poorest in Illinois, but the actual result was that Illinois’ poorest citizens increasingly had no access to loans at all. Put another way, in an attempt to shield subprime borrowers from high rates of interest, Illinois lawmakers pushed their most vulnerable into the hands of the very loan sharks long known to be most predatory.
This is what happens when savers and their financial intermediaries are treated poorly, and without regard to reality. Markets continue to reflect reality, albeit in ways counter to what politicians desire.
Sadly, economists are frequently no better when it comes to indifference about savers and bankers. In a recent opinion piece, Harvard professor Jason Furman observed about inflation that it “helps stimulate investment, because any given nominal borrowing cost becomes less onerous.” Furman wrote seriously, and in writing as he did, he imagined that in debt markets there are borrowers only. Actually, there are savers and bankers too, something plainly lost on Furman. Bernie Marcus could teach him a few things.
In particular, Marcus surely knows that no one borrows money, and no one lends it either. When we borrow we seek access to resources in the near-term, and savers transfer this access to us in return for greater resource access down the line born of compound returns. Which is basic stuff. As Marcus knows well, but economists seemingly don’t, there are no entrepreneurs without savings.
In which case you can’t love progress without the savers and bankers who make it possible. If you treat savers and bankers poorly, markets will speak their mind in ways none of us like.
Originally published at RealClear Markets
