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:
- 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.
- 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.
- 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
- 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
Commenting on these headings in turn:
- 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.
- 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”.
- 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.
- 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.