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?
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.