The banks’ contribution to the economy has been overstated

Original source: SimoleonSense.com .

Introduction (Via The economist)

THE huge sums earned by banks and their employees over the past 30 years is a recurring puzzle. How has finance done so well for itself and why haven’t its returns been competed away?

Andrew Haldane, the executive director for financial stability at the Bank of England, has co-authored another incisive contribution to this debate in a chapter of a new book* published by the London School of Economics on July 14th. Analysing the recent performance of the banking industry, he concludes that it has been “as much mirage as miracle”.

Mr Haldane and his colleagues start with a statistical oddity. The fourth quarter of 2008 almost saw the meltdown of the global financial system, with banks’ share prices falling by an average of 50%. Yet according to the British national accounts, the same quarter witnessed the fastest-ever increase in the contribution of the financial sector to the country’s economic growth.

That suggests there is something wrong with the calculations. The standard measure is gross value-added—the output of an industry minus the costs of production. That is a pretty easy sum to calculate when it comes to manufacturing. In finance, however, a lot of the gross value-added comes from making loans. Economists calculate this by measuring the difference between the rate charged on loans and a “reference rate”, which is pretty much the risk-free rate.

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