The finance industry is making a comeback. It looks good on paper, but banks don’t actually ‘produce’ anything, and there’s a danger in having too much of a good thing.
Ok, here’s another bit of bank bashing.
Now I know banks make for easy targets. Everybody loves to hate them. And the truth is they probably deserve it. It’s shooting fish in a barrel.
But today, I’m not going to call them out for being soulless, self-serving parasites. I’m not going to say it. And I’m not going to stick the boot into any one bank in particular.
Instead, I want to take a big picture perspective and look at the role the whole financial sector plays in the make up of the Aussie economy, and why I think we’re currently on bit of a slippery slope.
The thing that’s tweaked me on to it was the release of the latest national accounts last week.
Amongst other things, what it showed was that the FIRE sector (Finance, Insurance and Real Estate) was making a comeback.
On the face of it this is a good thing. It shows up in the national accounts. GDP is up. GDP is a measure of production and wealth, therefore we’re producing more and we’re wealthier. We’re all better off… right?
Well, not so fast there young Timmy.
The first point is that GDP is a measure of all the things we pay for. If it doesn’t have a price tag, it isn’t counted. That means something like a parent staying home to raise kids – probably the most essential social service – isn’t counted.
It also sets up weird scenarios like, imagine there’s two options. A:: A young dad stays home a looks after the kids; or B:: he goes out and works earning $25/hr, and pays someone $25/hr to look after his kids.
In the eyes of GDP accounting, option B is worth $50 bucks/hr, option A – nothing. But you can’t tell me that we’re really any better off with option B (though I guess the government gets its tax take – if you value that sort of thing).
GDP goes up, but you can’t really say that we’re ‘wealthier’ as a country.
Likewise, if I paid that man $25/hr to run around in a circle all day, you can’t really argue that we’re all better off now.
(Hang on, I just described the A.I.S).
I’d argue it’s the kind of the same story with the FIRE sector.
The FIRE sector provides a service – intermediation. This is really useful – and without it the modern economic miracle would collapse. Banks provide financial intermediation. They connect savers with people who need to borrow, and facilitate the flow of money (basically and ideally – I know banks do a lot more than this). Insurers help people manage risks. Real estate agents help buyer and sellers find each other.
In this sense, they’re kind of the grease in the economic wheels. They help facilitate productive activity.
And so we can kind of think of it as the price we pay to make production happen.
Almost like a tax.
Or standover money.
With that in mind, take a look at this chart here. What it shows is the FIRE sector as a percent of GDP.
And what it shows is that it’s now back up to a record 10.8% of GDP. That means for every dollar we produce, the FIRE sector takes 10 cents.
The question we should be asking ourselves is, why is this increasing?
Why do we have to pay more of an intermediation tax for everything we produce?
Is the FIRE sector getting less efficient? (They need more money to help us produce the same amount.)
Any economy with an increasing FIRE sector is an economy that is getting less and less efficient at actually producing stuff – the useful stuff that actually makes us better off.
And so I welcomed it when I saw that after the GFC, the relative size of the FIRE sector was falling. I hoped it would go back down towards 6 cents in the dollar – where it was in the eighties.
But no. After a brief pause, the FIRE sector is coming back – just like a zombie.
And what really worries me is that these bankers are just finding cute and novel ways to push money around. Round and round it goes. Derivatives, currency speculation, sub-prime mortgage backed securities… And it doesn’t produce anything of value.
And this would be fine if they just finding ways to rip each other off, but as the GFC showed, all those fun and games can have a big impact on the economy…
… and it’s everyday folk like us left holding the baby when the whole house of cards comes crashing down.
And the bigger the banks get, the harder they fall… on us. And so you have what we have – an implicit government guarantee to bail out the big four if anything should go wrong.
And the bankers laugh and laugh and collect 200 dollars.
And so we’ve got a banking inquiry on right now. My proposal is the government should look at ways to rein the FIRE sector in. Find out ways to improve the productivity of actually useful economic activity, and help us avoid the trap of lugging these spoilt king kongs around on our shoulders.
But who did the government put in charge of the inquiry? David Murray – the former CEO of Commonwealth Bank.
Brilliant. How tough do you think he’s going to be on his former mates before he goes back to a plumb consultancy job somewhere?
Forget it.
We should get on to this, before the memory of the GFC – and the havoc caused by a unaccountable banking sector – fades from memory.
And then let’s get back to actually producing things.
Jack says
David Murray appointment is a joke.
Derivitives, currency speculation and most other exotics are 90% pure gambling and the real reason for the use of these products has been lost in the maze.
Yes you guessed it ‘we the people’will be left holding the bag whilst the FAT CATS have carefully ensconsed their grubby immoral guns offshore where they can’t be touched.
That’s why I left Banking 10 years ago and became a Finance Broker, I hate the Big 4 Banks with a passion and I worked for them for 30 years before I saw through their greed.
Groundhog day all over again and again and again.
My son’s 20something best mate just received a $1million dollar bonus on top of his annual salary of $250k for successfully gambling in the A$ yen market. What a Joke if it wasn’t an absolute DISGRACE!!! and it’s happening everysecond of the day.
Where are we going…………….to HELL in a handbasket.
lisa says
omg how do we change this. its ok talking about it but what on earth can we do to change it?
Alison says
Have you heard of the Glass-Stegall separation of retail banking from investment banking? the idea is to protect the mum and dad home owners.
And now there has been discussion at the G20 to force the “too big to fail” banks to call on bondholders rather than governments to bail them out – bail-inable bonds (something like the Greek banks did recently).
Frosty says
Spot on David, as a retired mortgage broker of some 14 years,big banks throughout the world are at the cause of much of the worlds financial problems. Back in the late 90’s I borrowed over $1/2 million and the advice that the bank kept giving me would have sent me broke had I followed it. Jon, love reading your articles, I have a sense of humour similar to yours and which I incorporate in my writings too. What about sending your article to good old Tony A.
Andrew Charlton says
Jon I normally agree with almost everything you say, but a GLARING error in the above: The guy returning to work for $25/h and paying $25/h in child care is CREATING a $25/h job for the child care worker. So as an economy, yes I can tell you that we are better off – $25/h better off.
Bob Chapman says
and unemployment goes down by maybe two
Andrew Charlton says
Definitely at least one Bob.
Dean says
The banks have become so intrinsic to ones way of life that avoiding their manipulations, deceits and out right thievery has become almost impossible. One could say that they embody Jons c#%^ approach to “getting ahead” rather well.
Of course, being treated like silly c#%^s by these mobs means we turn a bit c#%^ish ourselves, which wait on, were we not encouraged to do, by Jon, just a few days ago.
So therefore, im not quite sure what Jons complaining about?
Yes, its a dog eat dog world out there.. These banker c#%^s are just the rottweilers and pit bulls of the genus, and most of us c#%^s are dopey loveable labradors..or even worse, snappy nervous c#%^ chihuahuas, with plenty of bark and no bite.
David and Frostys comments above, having worked for, and thus being exposed to these c#%^s true characters, are interesting. Guys..can you give us any concrete advice on how to minimise the impact of these big c#%^s?
he he.
mark says
couldn’t agree with the thrust of this article more….
David says
Which politician will stand up to any bank ?
Abbott is a jobs for the boys man, so hence David Murray.
The banks make about $30 billion a year profit, less than 15 million Australians
would have a bank account – $2,000 profit from every account holding Australian ?
where is the morality in that ? Bit like the morality in asylum seeker policy.
But then did our Prime Minister ever take a moral stand in his life ?
I wonder if politicians get special sweetheart deals from the banks.
Maybe their interest rates, not their amount of borrowings, should feature on their disclosure statements.
Gerry says
Look ya silly W. V.s why don’t you play the banks at their own game, and use them, like they use you. Get a credit card from a Bank, any Bank, and run up as much of your essential and discretionary living expenses on it as possible for a month to two. It’s particularly good if you have to purchase a large (price that is) one off item in the period. At the same time put the money you would have spent on the essentials and discretionary into a savings account or better still if you have a mortgage, put it in an offset account or pay it directly into the mortgage, but make sure you can redraw, if necessary. Then apply for a card at another Bank offering zero per cent on balance transfers. There are plenty about offering zero or very low percent on balance transfers for up to twelve and fourteen month terms. Look for the ones with the nil or low annual fee too. Towards the end of the term, say about six weeks before it expires, search out which Banks are offering zero or low interest cards, and apply to roll over the balances on your other two cards into a new card with another Bank, or if the Bank, from which you have the current card is offering a deal it will probably be accommodative and allow you to roll it over with them. Cancel cards that are superfluous to your needs, to avoid paying the annual fee. You’ll still have to make minimum monthly payments, but don’t make any purchases with it. Use the first card to make the purchases, and pay them off monthly. Towards the end of the term you could probably hold off a months payment to increase the balance transfer into the next card. If you get knocked back on the application, pay out the balance of the card with the money you have been setting aside in your savings account, offset account or cash back. Its a system I’ve been using for more than four years, but have recently discontinued it because I don’t currently have any loans.
Frosty says
Gerry, I hope you realise that you are damaging your credit rating. Banks,(lenders) don’t look kindly on people who continually apply for credit. Every time you apply, even if you don’t take the deal, it still shows against your credit history and you become known as a borrowing junkie in banking circles.
Brendan says
Good tip Gerry. These little exploits are there for the consumer to take advantage of and the banks rely on the customer taking their eye off the ball and running over the interest free period.
One can certainly play this to their advantage as long as they stick to the plan!
Paul says
Australia was fortunate to escape a lot of the GFC because of the way the banks were set up prior to then. As you say John they are now heading the way of Europe and America which is very scary.
We had money thrown at our business in the UK pre-GFC, complete with free tickets to the equivalent of the Melbourne Cup (free food and drink all day), only to be told a few months later that the bank was overexposed and we needed to give them $250k cash back in a week!
I nearly fell on the floor laughing but they didn’t have sense of humour.
They make the rules up as they go along and there are more bank employed lobbyists than there are MPs.
Offset mortgages are not there to help us pay our loans off early, there so that if anything goes wrong – like we lose our job – the banks can grab every single cent as fast as possible because its all in one place. My advice, always keep your savings in a different bank to your loans. Might cost a bit more but its much more secure, at least you walk away with a shirt on your back.
Frosty says
Sorry Paul, it doesn’t matter where you park your assets, including cash, any bank that needs to chase you for defaulting has the legal right to take what you have where ever it is stashed.
Leo says
Well I’m flabbergasted! I know the banks charge like wounded bulls, but I wouldn’t own a home now if I couldn’t have gotten a loan from one of them. They are there to make a profit for their shareholders (wish I was one). There are many ways to take advantage of bank lending, e.g, use a loan to buy something cheap and sell it dearer. You don’t have to have a business to do this, just creativity. I borrowed for a vehicle to get me to my employment (job) in the week, and paid it off by using it to do work for me on the weekend. I use their loans now to make investments in property from which I profit. Think it through guys, use them as a tool for your own purposes.
All the best, Leo
Eileen says
I feel the same as you Leo, use the banks to buy property and make a profit on it. That doesn’t mean you pay over the odds for the property………..everyone wants a bargain!
I have bought two houses since August 2013 and have bagged two bargains………I love the banks!