The recent appearance in parliament of the chief executives of the Big Four banks was notable for its well orchestrated apologies, which were about as convincing as a life insurance ad that promises only to pay out to the immortal.
The strategy was clear enough. Blame the whole thing on a need to improve impersonal ‘processes’, imply that there have been a few bad apples but overall things are fine, and promise to do better in the future. The greatest challenge was probably to hide the smirks.
A royal commission is being held up as an alternative, and no doubt it would be more effective in exposing some of the appalling rorts in the banks’ financial advice and insurance activities. But a royal commission would not address the main issue.
The central problem is not specific misbehaviour by bank employees, or even a ‘culture’ problem in the organisations. The main issue is how the finance sector, especially the banks, are changing and dominating the system we live in. We are entering an era of ‘financialisation’ that is both a form of servility and a symptom of underlying economic stagnation.
In the Australian context, the figures are unambiguous. Australian banks are the most profitable in the developed world (Bank South Pacific in Papua New Guinea is substantially more profitable). Their earnings account for 2.9 per cent of GDP.
The finance sector accounts for 9 per cent of Australia’s GDP and about 25 per cent of the value of all companies listed on the Australian Securities Exchange. The finance sector provides $22 billion in company tax revenue, almost twice the contribution of the mining sector.
The central problem is that what banks do is not productive activity; it is simply shifting money around. When such a large part of a country’s ‘economy’ is banking activity, the genuine economy is, in reality, shrinking. It means the parasites are getting bigger and the host is getting smaller.
For example, the massive lending to the Australian household sector is accounted as part of the economy but it is only a process of weighing down households with debt on an asset, land, that does not produce anything in itself. Australian households now owe 125 per cent of GDP, the highest level in the OECD.
“Because of these circularities of neo-classical economics transactions are considered real and everything else is regarded as only a secondary reality. Instead of money being a servant, everything else serves money.”
A distinction that was used in classical economics — but not by the neo-classical schools of economics that has dominated since WWII — was between ‘rentiers’ and producers. Rentiers are the holders of capital who extract rents. They were thought to be distinct from actual producers of wealth, in effect a drag on the economy not a part of it.
In the neo-classical schools of economics all transactions are considered necessarily the production of wealth. As long as money changes hands, it is assumed wealth is being created. Rentiers are considered as much part of the economy as producers.
One result is that the standard yardstick of economics, GDP, is both meaningless and pernicious. As Robert Kennedy famouslycommented, GDP ‘measures everything except that which is worthwhile’. One economist, when asked to give advice on how to raise the GDP of an American state, responded that the best way would be to burn down the parliament building. He was right. It would raise GDP.
Because of these circularities of neo-classical economics transactions are considered real and everything else is regarded as only a secondary reality. Instead of money being a servant, everything else serves money.
It provides a context in which financiers can justify virtually anything as long as there is money to be made. Michael Hudson, research professor of economics at the University of Missouri, Kansas City, notes that the financial sector does not produce goods or ‘real’ wealth:
The fiction is that all debt is required for investment in the economy’s means of production. But banks monetise debt, and attach it to the economy’s means of production and anticipated future income streams. In other words, banks do not produce goods, services, and wealth, but claims on goods, services, and wealth … (rentier payments) are not investments in the economy’s productive capacity, but extraction from the surplus it produces.
This is the fiction in which our bankers thrive, a fiction that reached the height of absurdity in the global financial crisis when financiers invented all the types of exotic transactions they could, and called it the real economy.
It is hard to see us extracting ourselves from this mire any time soon, although there are signs that in America, where many workers have not received pay rises for four decades, the ‘transaction illusion’ is beginning to be exposed.
But until there is an understanding that the problem is systemic there is little point having parliamentary inquiries or royal commissions. Bankers can continue to pay themselves a fortune for leeching off the rest of the economy, and the only price they have to pay is the occasional well rehearsed apology.
David James is the managing editor of businessadvantagepng.com This article was first posted in Eureka Street on 9 October 2016.