It is purely extractive

Yves Smith has a must-read post responding to some ridiculous comments by Barclays’ CEO Bob Diamond. Smith highlights the dynamic the banks have set up, namely “Heads We Win, Tails You Lose”:

Diamond’s presentation was yet another reminder of the banking industry’s continued extortion game, namely, that they can take outsized, leveraged risks and when they work out, pay themselves handsome rewards, and when they don’t, dump them on the taxpayer.

But this passage stands out particularly clear:

As we have noted often in the past, the very idea that employees of major banks are entitled to even as much as average wages is a stretch. If the true cost of their operations was priced in, they’d all be out of business. By any standards, they should be paying all the rest of us to be allowed to do so much damage with so little interference.

Andrew Haldane of the Bank of England goes through the math. In a March 2010 paper, he compared the banking industry to the auto industry, in that they both produced pollutants: for cars, exhaust fumes; for bank, systemic risk. While economists were claiming that the losses to the US government on various rescues would be $100 billion (ahem, must have left out Freddie and Fannie in that tally), it ignores the broader costs (unemployment, business failures, reduced government services, particularly at the state and municipal level). His calculation of the world wide costs:

….these losses are multiples of the static costs, lying anywhere between one and
five times annual GDP. Put in money terms, that is an output loss equivalent to between $60 trillion and $200 trillion for the world economy and between £1.8 trillion and £7.4 trillion for the UK. As Nobel-prize winning physicist Richard Feynman observed, to call these numbers “astronomical” would be to do astronomy a disservice: there are only hundreds of billions of stars in the galaxy. “Economical” might be a better description.

It is clear that banks would not have deep enough pockets to foot this bill. Assuming that a crisis occurs every 20 years, the systemic levy needed to recoup these crisis costs would be in excess of $1.5 trillion per year. The total market capitalisation of the largest global banks is currently only around $1.2 trillion. Fully internalising the output costs of financial crises would risk putting banks on the same trajectory as the dinosaurs, with the levy playing the role of the meteorite.

Yves here. So a banking industry that creates global crises is negative value added from a societal standpoint. It is purely extractive.

Smith concludes:

Diamond’s candy-coated defiance shows that three years after the crisis, nothing has changed.

And this is the point. If after a crisis of this magnitude, policy makers in Washington of both parties have decided that there is no need to fundamentally change the role banking plays in the global economy, then the odds of it happening now are basically nil, at least without a fundamental restructuring of politics that includes at least one political party believing in accountability for Wall Street. Most importantly, there must be some cohort in politics and policy making that stands in opposition to a “purely extractive” industry, let alone one that has already wrecked our economy once in recent memory.

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