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November 03, 2017

Comments

acarraro

I don't think you can reach such a sweeping conclusion from a single paper to be honest. Spreads in all financial markets have compressed significantly. You cannot argue that index funds are a great invention and then state that intermediation costs have not gone down.

IMHO the paper conclusions are questionable since the US is a world financial center and looking at the US domestic economy in isolation will produce all kinds of distortions.

I don't really believe we had any significant technological improvement in our ability to predict the future or to judge the viability of a business (which is the only technology that could affect borrowing spreads). Maybe big data will change that, but so far I don't see anything on the horizon.

Plus for someone that claims managers don't know enough to correctly manage a business, assuming that a central state could correctly identify what goods need producing seems contradictory. Given that you argued against central planning, I am not really sure I see any concrete alternative to finance. Should we just give up on collaboration and go back to villages where we can base credit on our direct knowledge of the borrower?

Peter K.

Well said. You find many young people on the left coming to similar reasonable conclusions. Meanwhile as capitalism fails to deliver rising livings standards or peace and prosperity, we're seeing the rise of the nationalist right which scapegoats immigrants and foreigners.

Blissex

«Spreads in all financial markets have compressed significantly.»

That's a funny claim considering that the amount of GDP consumed by finance has gone from 2% to 8% in many countries over the past few decades. What has a quadrupling of the percentage cost of finance bought in those decades?

* Have GDP growth rates increased significantly? Apparently they have gone down.
* Has the amount of capital quadrupled, at the very least? Well, most capital is long term, and the number of buildings and factories and equipment has certainly not quadrupled.

What has nearly trebled is the amount of debt, but then this suggests that the cost of finance is (more than) proportional to the amount of debt, that is finance takes an increasing cut out of ballooning debt, e.g. figures 1 and 2 here:

https://www.opendemocracy.net/neweconomics/the-ten-graphs-which-show-how-britain-became-a-wholly-owned-subsiduary-of-the-city-of-london-and-what-we-can-do-about-it/

Finance in 1980 cost 2% of GDP, and private debt was 60% of GDP, that is finance's cut was 3.3% of debt annually, and now finance takes 8% of GDP and private debt is 160% of GDP, that is the cut is 5% of debt (not interest, of the principal) annually.
Note: 80% of private debt is mortgages, hardly a novelty :-).

Even hedge funds grab just 2% of the principal annually...

That sounds like finance *in the aggregate* is becoming a lot less efficient over time. How comes?

Blissex

For a totally funny (or rather not) graph consider "Chart 2" in this BoE report on the "contribution" of the finance sector:

www.bankofengland.co.uk/publications/Documents/quarterlybulletin/qb110304.pdf

by major country and between 1998 and 2008.

Striking that "contribution" in France and Germany has barely oscillated around 4%, while in Australia, Eire, UK, USA, it has ballooned from 6-8% to 8-10%.

As we know between 1998 and 2008 and up to this day the french and german economies have been failing, because of such a dire shortage of financial services, while the anglo-american economies have been galloping ahead thanks to the massive contribution of their financial services to productivity and production across the whole economy. We need more Wongas!
:-)

Blissex

«consider "Chart 2" in this BoE report on the "contribution" of the finance sector:»

Here a bit enlarged for better legibility:

https://imgur.com/a/0GkrZ

Blissex

«while in Australia, ... it has ballooned»

Never mind the UĶ, but how is it possible that in Australia, a small remote country with a commodity based economy, financial services ended up consuming nearly 12% of GDP, a GDP already massively increased by huge demand for those commodities?

Luis Enrique

anybody know what disaggregated finance data looks like? i.e. % insurance, retail banking, pension management, other asset management, corporate finance etc. etc. And how much is for domestic versus export - if for instance foreigners are making more use of UK financial services, that'll inflate any ratio of finance versus domestic indicators (and certainly shouldn't be interpreted as finance 'consuming' GDP, tsk Blissex)

Also be interested in regulatory and other compliance (i.e. AML) costs. Things like "doing less money laundering" should really count as being more productive, but data won't show it.

Blissex

If you don't trust the City fluffers at the BoE, you might be amused to read this piece of "blogging from a marxit economist":

https://thenextrecession.wordpress.com/2014/05/07/britain-is-booming/

especially figures 17 and 11:

https://thenextrecession.files.wordpress.com/2014/05/uk-capital-formation.png
https://thenextrecession.files.wordpress.com/2014/05/financial-services.png

They shows that 1980-2012 gross capital formation has oscillated, with a definite downward trend, in the 15-20% of GDP band, but financial services have been mostly in the 6-10% (of GVA) band in 1997-2013, that is the finance sector has consumed a chunk of GDP almost half of the level of *gross* capital formation. A truly stunning achievement.

Mietzsche

Since you've mentioned centrality of finance, a question presents itself: is ownership of assets at this stage concentrated enought that capitalism might plausibly be described as centrally planned?

Blissex

«if for instance foreigners are making more use of UK financial services, that'll inflate any ratio of finance versus domestic indicators (and certainly shouldn't be interpreted as finance 'consuming' GDP, tsk Blissex)»

The numbers are easily available, and don't show the City consuming the GDP of foreigners, but overwhelmingly consuming that of patriotic englishfolk; and the percentage of UK finance *net* consumed by foreigners has not grown a lot from the times when finance consumed only 2% of GDP.

For the extreme case consider again Australia, famous for their commodity, not finance, exports, where finance has been consuming nearly 12% of GDP (finance *gross* exports from Australia are less than 0.2% of GDP).

Marc

One of the key reason why costs for consumers are not coming down is that costs for banks are not coming down. And in large parts this is due to regulations. If you still need to sign pieces of paper and mail them back, it is because e-signatures are not accepted in the legal system. Besides, don’t forget that costs have recently been piling up on banks with KYC, AML, suitablitily, etc. I do work in a bank, and the costs of compliance are just staggering. Maybe it is a cost worth bearing (less money laundering, terror finance, etc) but this is not a trivial cost and in this space, governments have outsourced policing to banks but banks (and therefore the consumers) have to foot the bill.

Blissex

«costs for banks are not coming down. And in large parts this is due to regulations. If you still need to sign pieces of paper and mail them back, it is because e-signatures are not accepted in the legal system»

That is a rather disagreeable argument because it would be valid if the the costs of finance were related to the number of transactions rather than their total amount.

Maybe the costs *to* the finance sector of their back-offices are proportional to the number of transactions, and are falling, but the costs *of* the finance sector to the rest of the economy seems proportional the amounts handled, and are rising:

* For the very large number of personal small transactions cheques and deposit slips have been replaced by online transfers and (now contactless) credit cards, making them enormously cheaper and easier.

* For the smaller number of larger transactions the cost of finance is proportional not to the number but the amount, as it turns out that the costs of finance are more than proportional to GDP (that is, finance consumes more GDP the bigger GDP is) and in particular the costs of finance seem to be proportional to the amounts of debt and to the size of payment flows.

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