In 1990 it was a grand total of $56 trillion. That’s a lot of money for sure. But by 2007 it was $206 trillion. What exactly is being referred to? Why, none other than the total value of global stock of debt and equity outstanding.
That is extraordinary growth. There is one big snag. This is how McKinsey put it: “Several unsustainable trends—most notably the growing size and leverage of the financial sector itself—propelled much of the financial deepening that occurred before the crisis. Financing for households and corporations accounted for just over one-fourth of the rise in global financial depth from 1995 to 2007—an astonishingly small share, since providing credit to these sectors is the fundamental purpose of finance.” See: Financial globalization: Retreat or reset?
So repeat that: “Financing for households and corporations accounted for just over one-fourth of the rise in global financial depth from 1995 to 2007.”
Now let’s turn to banks. Two reports have been published in the last few days. One unveils a series of sins at Barclays that are so bad, it is a wonder the report’s author, Anthony Salz, didn’t feel queasy when he was preparing it. The other report however, this time looking at HBOS, seems even worse.
The Salz Report says that Barclays was “too clever by half,” that “Barclays was sometimes perceived as being within the letter of the law but not within its spirit,” and finally that it had a “winning at all costs culture.”
The report into HBOS concluded that three of the men at the very top of the bank during the days of excess – former Chairman Lord Stevenson, and the former Chief Executives Sir James Crosby and Andy Hornby – were not fit to work in the financial sector again, and that the bank was so badly run that even if the banking crisis of 2008 had not occurred the bank would have gone bust.
So banking excess occurred during a period when a very small chunk of the growth in debt and equity ended up as finance for business. Was that not the real problem?
Banks make mistakes: they mess up, that is inevitable. But if the money they lose is used to fund investment it may not matter too much. Too much money was thrown at US railroads in the 18th century, and bankruptcies followed, but at least a legacy of railroad infrastructure was left.
If, instead, banks’ erroneous ways had meant too many reckless loans to business, today we might be reading about their foolishness, but we would be doing so from within an economy that was altogether richer.
Maybe that is what is forgotten. It’s good when wealth is generated, but when it is not spent or invested, it is then that we get into a very deep crisis.
© Investment & Business News 2013