Friday, July 31, 2009

I really should be more grateful to banks

Yesterday, I received the following comment:

Alice handily ignores the increased quality of life brought to everyone in the UK over the past decade through the substantial contribution to the country's GDP by the financial services industry.

Net-net, this effect dwarfs the amount the Government will have spent re-capitalising the banks... it wouldn't surprise me if the UK taxpayer actually turned a profit when Northern Rock and RBS are sold off.

But don't let facts stand in the way of your vitriol Alice


I have been feeling pangs of guilt all day. Have I really been so ungrateful for all the wonderful things that the financial sector has done for me during the last 10 or so years? Will I be the lucky beneficiary of the bail-out as NRK and RBS are sold off for a profit? Oh, I do hope so.

But what of the relationship between the financial sector and GDP growth? Have I, buried deep in a pile of vitriol, missed the "substantial contribution" to the country's GDP generated by the financial system?

The financial sector can generate real increases in GDP in three ways. First, it offers an efficient payments system. However, banks have been doing this effectively for at least a century. Very little additional GDP was generated in the last 10 years because banks clear cheques and handle inter-bank transfers quickly.

Second, banks help finance investment, which increases the productive capacity of the economy and generates higher living standard. However, the sad truth is that these days most bank lending goes on financing consumption and housing related speculation. Investment levels in the UK have barely changed over the last ten years.

Which brings us onto the third channel through which banks can affect GDP - they can finance consumption. However, this kind of lending simply transfers disposable income from the future into today. If I take a loan to buy a plasma TV. Consumption goes up today, and this is reflected in GDP. However, I have to pay the loan back and this means lower consumption and GDP in the future.

This is why the UK economy enjoyed such strong growth over the last decade. We were spending money we expected to get in the future. Banks allowed us to do this, and we built up a massive pile of household debt. In fact, this debt stock is so high that banks can no longer rely on us to pay it back. This led to many of our banks sliding into insolvency, leading the government to commit 90 percent of GDP to clean up the mess.

For this, anonymous wants me to feel grateful. Sorry, I can't do it. Instead, I am angry about the excesses of the past that have led to this sorry state of affairs. I am fearful for the future because of the cost that the bank bailout will impose on my standard of living.

You can call that vitriol if you want, but that is how I feel.

14 comments:

  1. Well said.

    The poster's comments would be accurate IF the banks were loaning for improving the long-term economy of the country, and if the debt were therefore self-liquidating.

    As it was the debt was purely for consumption. Sure, there are two sides to that (lender and borrower), but it's good for the economy only in the short term. Long term it's a cancer. If the banks lend to borrowers who can't repay, let the bank go bust. The bank and shareholders will pay for their mistakes, a more astute bank will step in and pick up the good assets, and the country as a whole will be better off.

    We have precious little to thanks the banks for over the last decade - or our government for that matter.

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  2. I don't blame the banks, I blame whoever did Basel2, for it caused credit to stop being limited.

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  3. Anti - Basle2 really didn't get going (much) before it got pulled - and not at all in the States.

    Anon@18:09 - +1 - pulled-forward demand has one major flaw: mathematics.
    The poster in question sounds like a shill for an insurance company - probably Aviva.

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  4. A great blog entry. The banking system has been screwing the country for years.

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  5. Banks can add nothing productive to an economy other than more money. More money simply redistributes wealth, it does not add to it!

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  6. You're right, Alice.

    The increase in the standard of living was done on tick.

    And Nu Lab used the credit boom to mask the damage they were doing to Britain. Record numbers of middle-class people emigrated if you remember. Things were that good.

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  7. Not to defend the other commenter, but a banking/finance sector can add to a country's GDP if it is doing banking/finance for residents of foreign countries. How much of the profits in the UK banking sector came from this insourcing I don't know.

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  8. Ive taken to reading Adam Smith.

    The banks do not produce anything, they merely shuffle the monetised assets produced by others, so its really just a blip of statistical analysis that has banks contribute to GDP at all.

    Alice, don't take comments personally on this blog. You do a grand job bringing interesting debating topics to the table. I read you first now, before OH and Guido. Keep up the good work.

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  9. Whoever wrote that original comment is either stupid or mad.

    You keep up the good work, Alice.

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  10. Suddenly Alice knows about economics... Why don't you go back to panicking about house prices going to the moon without you and never returning like you have been all week.

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  11. Alice, you have done a nice 1-2-3 summary of what banks can and cannot do for us. It really is as simple as that, it's basic textbook stuff.

    Keep the faith.

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  12. Alice - you miss the point again. British banks don't just serve the British economy - we see capital in and loans to Europe, the Middle East, Asia and beyond being serviced in London.

    I am glad my comments get elevated to your main blog as it gives us a chance to discuss them easily.

    By providing a service to foreign corporations and levying a fee for those services the income counts towards our (British) GDP and is distributed to the shareholders and staff of the banks. This them finds its way down to the real economy as the employees use this money to increase their living standard.

    Next time - try and think before you write long bitter blog posts than are so completely and obviously demonstrably wrong!

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  13. Mr "Anonymous", the only person whose writing is "obviously demonstrably wrong" is you, because even if your assertion about the banks also making money abroad is true, this money is absolutely dwarfed by the damage that the subsequent fallout has inflicted on the economy.

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  14. Well, it's yer apples 'n oranges, innit?

    UK banks make some profits from johnny foreigner and bring that money into this country. Whoopy-doo, good news. Don't knock it, it's profit.

    On the other hand they have lent too much to too many people who couldn't afford to repay, thereby boosting short-term consumer spending at the cost of longer-term losses as chickens come home to roost. Whoopy-doo insofar as they made a profit from it, non-whoopy-doo insofar as the losses exceed the past profits.

    On the third hand they gambled by buying chunks of debt without knowing what they were buying. Potential losses are still sitting in the sluice room waiting for the right moment to spill out all over the floor. Also non-whoopy-doo.

    Different things but only one long-term solution to the non-whoopy-doos. Lend only to decent risks. Do that and, over time, all losses will be covered. Consumer spending will be suppressed below the level of the silly money years, but so it should be.

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