25 September 2009

Banking as it Should Be: Cheap and Stupid

There was an article in yesterday's NYT talking about Adair Turner, who heads the Financial Services Authority (I've no idea what if anything that corresponds to here). Mr. Turner's thesis, which has crossed my mind on occasion and which I've also read elsewhere, boils down to this: the purpose of banks (defined as broadly or narrowly as you wish) is to be the Yenta.

The Yenta match makes. In the banking case, savers and spenders. That's it. That's all there is to it. And until the last decade or two, that was all there was to it. But then the banking industry, often called Financial Services, since it really encompasses lots of other actors, decided that just Yenta-ing was boring, and there could be ways to extract more funds from the match making exercise.

And thus was born the fiasco we are now living through. The only effect, and purpose, of LBOs and CDOs and MBSs ad nauseum is to increase the cost of matching savers with spenders. There is no more money available to spenders than savers can supply. The financial services players only extract greater amounts to gain all those profits.

Mr. Turner is only the latest, and I suppose most public and non academic, to broach the notion that banking functions should be cheap and stupid. Because they are. The so-called "innovations" perpetrated by the financial services industry serve only to line their pockets, not build a stronger more broad based economy and society. They serve only to narrow the base of growth recipients, and thus weaken the economy and society.

There is a reason that China has been able to come out of the dive better and faster than the USofA: since China makes stuff with their labor, it can consume its production in a broad swath of the economy and society. The USofA, on the other hand, has so narrowed the scope of its economy, that few gain anything from growth. That this was allowed, promoted even, by the Right Wingnuts should be used to string them up by a painful appendage.

For precedent, read up on Uruguay in the 1960's and 1970's. I've mentioned this before, but it remains a canary in the coal mine for the result of financialization/de-industrialization of an economy. Too bad that the Obamanauts won't listen to me.

1 comment:

Anonymous said...

Here's how China manufactures growth (quoting from: China - Bogus Boom, writen by a real economist).

China's 8 percent output growth target will be met because China's economic statistics are based on recorded production activity, rather than being a measure of expenditure growth--defined as the sum of consumption, investment, government spending, and net exports--as U.S. data are. The U.S. stimulus package, for example, attempts to boost GDP by undertaking measures that will boost consumption, investment, and government spending. China, however, decrees measures that will generate recorded increases in production spending. Part of the Chinese stimulus package involves large transfers of funds from the central-government planners directly to state-owned enterprises and to fixed-asset investment projects that are aimed at public works spending largely under its control.

Once China had announced its 8 percent growth target, it began to disburse funds directed at a sharp increase in public works spending. It is important to understand that the disbursal of funds is recorded as GDP growth. So the government can easily control the pace of growth by the pace at which it releases funds that have already been allocated in the stimulus package to the creation of higher production or growth numbers. Funds disbursed for fixed-asset investment by state-owned enterprises or provincial governments are counted as having been spent when they are disbursed. In fact, the funds go out to the state-owned enterprises and provincial governments and may be held until actual projects are identified and undertaken.

The same convention, counting production and shipments as de facto outlays by end-users, is employed with respect to retail sales data in China. Shipments to retailers are counted as retail sales on the apparent assumption that ultimately all goods shipped will be sold at some point in the future. China's nominal retail sales have been rising at a rate of about 15 percent year-over-year during the first half of 2009 because that is the rate at which shipments to retailers have been occurring. There is very little direct data available to measure actual sales by recipients of the retail shipments to ultimate consumers.

The problem with China's approach to the economic data, counting shipments as sales and funding of projects as projects undertaken, is that there may be substantial lags in the real impact of government programs as well as substantial lags in actual spending on goods shipped to retailers. China's policymakers can monitor the potential gap between demand growth and the production numbers recorded as GDP growth by watching the progress of infrastructure projects being funded and by monitoring inventories of unsold goods. Unfortunately, outside obser-vers cannot monitor such progress since the information on inventories and the progress of actual outlays on infrastructure projects is not publicly available.

It is possible, however, to make inferences about the pace of demand growth relative to production or supply growth in the Chinese economy by watching the behavior of the central bank and its control over the growth of money and credit. If policymakers observe that demand growth and progress on infrastructure projects is lagging behind announced production-side GDP data, they can attempt to boost demand growth by increasing the growth of money and credit. Such growth has accelerated sharply during the second quarter in China, indicating that while the measured pace of China's increase in production is rising, the public works projects and actual spending already recorded are falling behind schedule.