13. The Bloated Financial Sector

You may have noticed that the popularity of the activities listed in the chapters on pseudo-investments has grown enormously since the late seventies / early eighties. This corresponds to a period in which the financial sector as a percentage of the whole economy has grown on a similar scale. This is no coincidence. From the bank’s perspective pseudo-investments are every bit as profitable as true investments, and so an expansion of these activities will cause the financial sector to grow. As it grows it will inevitably make more profit and accordingly will pay more in tax to the government. Sadly this fact has led politicians to believe that a large financial sector is good for the economy. The government will see that the financial sector is contributing ever greater sums to the total tax revenue. The politicians have said to themselves, “Look at how successful our financial sector is. Whatever they’re up to, let’s encourage it!” This is poor logic. By that same argument, if the mafia paid taxes the government should also say, “These tax revenues are massive... this must be an excellent business. Whatever it is they’re doing, let’s encourage it!”

The problem with the profits from pseudo-investments is that they come from “the rest of us”. Pseudo-investments are worse than useless but due to a variety of illusions, hopefully now revealed, governments and the population at large have been deceived into believing that they are all of great benefit. We have been giving an ever larger fraction of our wealth to the financial sector since the early eighties, and until perhaps the crash of 2007/8 we’ve scarcely even noticed anything was going wrong.

One way to visualise our new state of financial affairs is to consider the following representation of money flows in our economy today:

The flow of money.

On the left we have ordinary trade, which is people earning money and spending it: I make stuff in my factory, I sell it to other people, they give me money for it, I use that money to buy stuff that they make in their factories etc. The two back and forth arrows represent the flow of money involved in this part of the economy. You will notice a slim arrow leading to the banking sector. This represents the very small amounts of money that banks make from these transactions. Clearly if the transactions are carried out with cash then exactly zero goes to the banks. If cheques or debit cards (not credit cards) are used then a very small processing fee may be payable.

The middle block in the diagram represents money flows involved in real investments: I borrow money from the bank to buy a new machine for my factory so that I can make goods more efficiently, I pay back interest on these loans. This sector is smaller than the “ordinary trade” sector but the flow of money to banks is higher. Banks quite justifiably seek interest payments on these loans and so there is a fatter arrow drawn leading from this part of the economy to the banking sector. The bankers involved in these flows are essential. These are the “good” bankers. They need to be highly skilled and will deservedly be well paid.

In a healthy economy the diagram would now be complete. There is no great need for anything else. But sadly our economy has grown an enormous third sector, the pseudo-investment sector. Non-productive investments, private tailgating, government tailgating, mortgages, short-term secondary share dealing, the list goes on. The size of these transactions has grown like a cancer on society since the late seventies / early eighties and all require a continuous stream of interest to be paid to banks. The arrow is the biggest of the three by far. This is why the banking sector is so large. This is why bankers are so rich. It’s nothing short of a disaster for the economy.

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