The Contribution of the Financial Sector – Miracle or Mirage?

This is the title of the new Andrew Haldane speech (read it with graphs) . The speech is drawn from a paper written for this LSE book:  Future of Finance.

In this speech/paper, Haldane breaks the miracle of financial sector and calls it a mirage instead.

He begins saying, though we have seen the worst crisis since Great Depression, financial firms continue to show great results. How do we square this circle?

the official statistics on the contribution of the financial sector paint a rather different picture. According to the National Accounts, the nominal gross value-added (GVA) of the financial sector in the UK grew at the fastest pace on record in 2008Q4. As a share of wholeeconomy output, the direct contribution of the UK financial sector rose to 9% in the last quarter of 2008. Financial corporations’ gross operating surplus (GVA less compensation for employees and other taxes on production) increased by £5.0bn to £20bn, also the largest quarterly increase on record. At a time when people believed banks were contributing the least to the economy since the 1930s, the National Accounts indicated the financial sector was contributing the most since the mid-1980s. How do we begin to square this circle?

He points to a couple of key points:

  • We need to present all financial sector contributions after  adjusting it with risk. As high risks lead to higher returns, without adjusting risks we will see only blowed up results. He explains all this with really neat examples
  • As measuring risk has always been tricky, we need to work on this.
  • Most growth etc in finance has anyways come from increasing leverage, taking advantage of loose regulation and trading tail risks. The moment we adjust all this with a proper measure of risk, miracle becomes a mirage

In the end he says:

finance is anything but monolithic. But understanding of these different business lines is complicated by the absence of reliable data on many of these activities. There are several open questions about the some of these activities, not least those for which returns appear to be high. This includes questions about the risks they embody and about the competitive structure of the markets in which they are traded. These are issues for both prudential regulators and the competition authorities, working in tandem. If experience after the Great Depression is any guide, it seems likely that these structural issues will take centre-stage in the period ahead.

Excellent speech/paper by Haldane as always. It is full of tables and graphs which help understand the issues much better.

3 Responses to “The Contribution of the Financial Sector – Miracle or Mirage?”

  1. The Contribution of the Financial Sector – Miracle or Mirage? « Nevada Foreclosure Mediation Says:

    […] The Contribution of the Financial Sector – Miracle or Mirage? MEN OR MTHYS? This is the title of the new Andrew Haldane speech. The speech is drawn from a paper written for this LSE book: Future of Finance. […]

  2. Jim Says:

    Volcker recently said the financial sector’s only real contribution to society in the last 50 years was the ATM.

    That’s about right.

    1) Jack the capital requirements to minimize the economy’s exposure to fractional reserve banking risk. Let’s pick a number. I like 100%, but how about 20%? And wholesale loans don’t count. Retail counts.

    2) Allow a free market to set interest rates. It will stop the savings penalty, and for all intents and purposes, make ratings agencies extinct. A group of economists at a central bank can manage an interest rate and ipso facto an economy? You’ve got to be kidding.

    3) My small business owner plumber is all in, even when the bookkeeper absconds with the money. His personal wealth is still collateral. That’s free market capitalism. Institute such laws for all corporations in all positions of Director and above. Not an owner you say? Yeah he is, by proxy. Should have been that way since the birth of the corporation.

    They’ll just hide it you say, or gift it to the wife? Two simple laws. You can’t hide it. If you get caught trying to hide it, or a judge deems the gifts and transfers were not an attempt at deception, but later overturned by the Supreme Court, they both lose everything and go to jail.

    4) Free markets need information. All public Balance Sheets must stipulate all risk, otherwise it is not a market. Therefore one way or the other, derivatives must be on the financial statements. Let them figure it out. But they have to describe how they did it. And remember, lying is a felony. See number 3.

    5) Separate speculation from banking. We want boring, staid banks. Like life insurance companies. NO sector in the economy, including construction, is large enough anymore to cause a recession. Except for banking that is.

    End of problem.

  3. learn-finance Says:

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