Finance’s contribution to GDP — another sleight of hand?

Yesterday’s pub­lic­a­tion of fur­ther dismal GDP data for the UK is an op­por­tunity to re­con­sider its basis as the jus­ti­fic­a­tion for many as­pects of the cur­rent neo­lib­eral order. Bracketing out the ques­tion of whether eco­nomic growth is a valid lode­star for any just so­ciety, there comes the old but under-​frequented ques­tion1 about what con­sti­tutes growth and whether and in par­tic­ular fin­an­cial ser­vice activity of­fers any­thing pro­ductive at all.

The ques­tion de­serves cri­tique be­cause everyone from the Prime Minister to the banks loses no op­por­tunity to hammer the point that fin­an­cial ser­vices provide 10% of the UK’s GDP and con­sequently the sector should be protected.

The UK’s of­fi­cial GDP data is pre­pared by the Office for National Statistics (“ONS”) but pre­lim­inary re­search found the data­sets in­suf­fi­ciently de­tailed for the pur­poses of this ana­lysis. I there­fore turned to the Bank of England’s Quarterly Bulletin (Burgess 2011:Q32) and its help­fully pre­pare paper on meas­uring finance’s con­tri­bu­tion to GDP. Page ref­er­ences are to this paper.

The first thing we find is that among com­par­ator states the UK is out done by Ireland (10.5%) and Australia (11%) in terms of OECD as­sessed con­tri­bu­tions of fin­ance to na­tional GDP. The UK comes in with 9.5%; the U.S. 8.2% Continental European states offer 6% and less. Importantly, if also ob­vi­ously, the UK’s 9.5% varied con­sid­er­ably as the sector shrank during the Credit Crunch.3

Turning, how­ever, to our prin­cipal in­terest, we will look at that 65% of fin­an­cial ser­vices activity provided by banks and fin­an­cial in­ter­me­di­aries (thus ig­noring in­surers, pen­sion funds and others). Here is the break­down of how the banks’ con­tri­bu­tion is made up4:

  1. Fees and com­mis­sions re­ceiv­able (30% of gross
    output).(1) This direct measure of output in­cludes all the
    fees banks ob­tain from in­vest­ment banking activ­ities
    (un­der­writing, brokerage, ad­visory ser­vices), fees
    as­so­ci­ated with loans and ad­vances and cur­rent ac­counts
    (eg credit card, mort­gage and over­draft fees) and
    com­mis­sions as­so­ci­ated with sales of in­sur­ance products
    by banks. To provide a volume in­dic­ator, these rev­enue
    data are de­flated using the AWE series for the fin­an­cial
    ser­vices in­dustry, ex­cluding bo­nuses and ad­justed for
    changes in productivity.(2) This as­sumes that price changes
    in an in­dustry can be proxied by the part of pay growth
    that is not ac­counted for by pro­ductivity improvements.
  2. Net spread earn­ings (10% of gross output).(1) This is a
    measure of ser­vice in­come provided by banks in­volved in
    dealing activ­ities. It cap­tures earn­ings that banks re­ceive
    by un­der­taking trans­ac­tions at prices above or below the
    mid-​market price; for ex­ample, the sale of for­eign cur­rency
    to a con­sumer at a fa­vour­able rate to the bank. These
    earn­ings can be gen­er­ated on se­cur­ities and de­riv­at­ives as
    well as on for­eign ex­change. Net spread earn­ings are
    de­flated in the same way as fees and commissions.
  3. Other op­er­ating in­come (20% of gross output).(1) This
    com­ponent in­cludes rents re­ceived by banks and other
    mis­cel­laneous sources of in­come. These rev­enues are
    de­flated in the same way as those from fees and
    commissions.
  4. Financial Intermediation Services Indirectly Measured
    (FISIM) (40% of gross output).(1)(3) This measure uses the
    margin between the in­terest rates offered by banks and an
    as­sumed ref­er­ence rate to im­pute a ser­vice charge for all
    the valu­able activ­ities of banks that cannot be meas­ured
    dir­ectly. Akritidis (2007) provides a com­pre­hensive
    ac­count of how this has been im­ple­mented in the
    United Kingdom.

Commenting on these head­ings in turn:

  1. Fees and com­mis­sions re­ceiv­able. Those who have read my Short Legal History of the Credit Crunch (see links below) will not to be sur­prised to see that 30% of the banks’ GDP con­tri­bu­tion comes from screwing fees out of their hap­less cli­ents. In that series I showed how the eco­nomic crash the banks caused was used as a pre­text to charge ailing com­panies 6 – 7 figure fees for re­struc­turing ad­vice, fa­cility amend­ments, and agency work. At the start of the crisis Mitzuho Bank’s U.S. se­cur­ities outfit charged a whop­ping US$10,000,000 for struc­turing and man­age­ment fees on a se­cur­it­isa­tion packed with as­sets that it has simply made up out of thin air. I sig­ni­ficant rev­el­a­tion of the Crunch was how a fee-​based cul­ture had caused banks to act­ively ig­nore, if not down­right mil­itate against, the eco­nomic value of the in­vest­ments they were en­gaged in. To but it bluntly, 30% of the banks’ con­tri­bu­tion de­rives from pro­tec­tion rack­et­eering, fraud, and spivvery.
  2. Net spread earn­ings. As stated above this 10% comes from pro­pri­etary trading, de­riv­at­ives and sim­ilar. Thankfully it ap­pears (and I hope) that GDP is not based on the total no­tional value of these trades, which would amount to many times more than total global GDP, but on ac­tual real­ised gains and losses. But re­member, this is the area Hector Sants of the Financial Services Authority de­scribed as “so­cially use­less”, and which is the locus of various in­stances of banks dir­ectly bet­ting against their cli­ents’ in­terests, in some in­stances having ad­vised those cli­ents to take daft po­s­i­tions. Such cli­ents are called “mup­pets” at Goldman Sachs, we are now told. The re­cent scandal of banks selling swaps to small busi­nesses who com­pletely fail to un­der­stand them and have ended up out of the money no doubt also adds to this con­tri­bu­tion to na­tional GDP. Interesting, this is the area of much trum­peted “in­nov­a­tion”, but it is the smal­lest chunk of “pro­ductive effort”.
  3. Other op­er­ating in­come (30%) in­cluding rents. In re­cent dis­cus­sions with an ex-​bank ana­lyst who has joined the ranks of Occupy, I was in­formed that many merged banks are now sit­ting on sig­ni­ficant real es­tate in­her­ited from de­funct en­tities like HBOS and Dresdner. What the other sources of in­come are is un­clear — pos­sibly in­sur­ance in­come, which re­calls the re­cent pay­ment pro­tec­tion in­sur­ance scandal, and tax struc­turing, which has helped US$21 tril­lion be stashed away offshore.
  4. FISIM. This 40% is per­haps the most galling, for, as the BoE Paper makes clear, it is the profit each bank makes simply from oli­go­pol­ising the money mar­kets. To borrow the Paper’s ex­ample, if the Bank of England lends to the banks at Base Rate 0.25%, the banks will lend to Joe Bloggs at 2.5%. The 2.25% dif­fer­ence is the banks’ cut for the priv­ilege of linking Joe Bloggs to cap­ital. It has all the char­acter of a mono­pol­isa­tion of a nat­ural re­source — the profit simply arises from the banks having cornered the re­source to the ex­clu­sion of the 99%. Broadly put, 40% of the banks’ pro­ductive ef­fort arises from, er, simply being banks. If British chimney sweeps were sud­denly granted sole ac­cess to the London money mar­kets, they would be providing c.4% of UK GDP (as­suming they would hap­pily whack a 2% cost of funds on top of base rate). But the thing is, this is not a nat­ural re­source — it is the state which has or­dained that money cre­ation should op­erate in this way.

As the paper makes clear5, ac­tu­ally meas­uring the product under these heads is very dif­fi­cult and could vary widely from final fig­ures. Part of this must surely arise from the sheer lack of any real product in the above activ­ities. We have here spec­u­la­tion; non-​productive la­bour that is para­sitic on pro­ductive la­bour (the mup­pets) for 60% of the con­tri­bu­tion, and oli­go­pol­istic with re­spect to the re­maining 40%.

Readers of G. Arrighi, and Robin Blackburn, will im­me­di­ately un­der­stand why GDP has been anchored in what amounts to a sleight of hand. The col­lapse of pro­ductive cap­it­alism in the West has led to government-​promoted policies which seek to re­place this short­fall with information-​based cap­it­alism, fun­da­ment­ally “grounded” on nothing other than be­lief in the value of the in­form­a­tion being moved around, be it money, data, or con­sumer signs. Bankers know this: when the crunch happened they dumped all this in­form­a­tion on the gull­ible and bought heavily in land, com­mod­ities, and the still con­sidered “safe-​haven” gold. This is the real sleight of hand — the “ma­gickal” art of con­vin­cing people to swap as­sets of real human value for mere sym­bols and fet­ishes. This is where the cur­rent in­equal­ities have been accelerating.

10% of GDP? Only for so long as people keep be­lieving it.

Show 5 foot­notes

  1. out­side eco­nomics at least
  2. http://​www​.bankofeng​land​.co​.uk/​p​u​b​l​i​c​a​t​i​o​n​s​/​D​o​c​u​m​e​n​t​s​/​q​u​a​r​t​e​r​l​y​b​u​l​l​e​t​i​n​/​q​b​1​1​0​3​0​4​.​pdf
  3. p.234
  4. p.240
  5. p.240 and passim

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