Official figures are important things. We have to have them or we would have little or no basis for discussion. The problem is those who can influence how we decide what gets counted get to control most of the arguments from then on. And of course the powerful lobbies are the ones who have their experts sit on the advisory and expert committees which do the deciding.

This article takes a short critical look at the figures the banks use in order to say how vitally important they are. As we all know it has been, throughout the bank debacle, important to the Banks that they be able to say how central they are to the economy of every nation. It forms the first line of defence in arguments over the bail outs.  So it rather suits the banks for figures to be defined in ways that paint the best possible picture and then have them bandied about uncritically, so they can then form the accepted framework for all further analysis.

I use Peston’s article just as a jumping off point. (Before I start I’d like to say I think Mr Peston is actually better than many.)

Right at the start of his article on proposals for a European banking union Peston sets out the to-be-accepted framework of reality inside which the discussion will take place.

Whether we like it or not (some don’t) the City of London and financial services is important to the UK economy. Depending on what you include in that industry, it represents between 8% and 14% of national output or GDP

In this article I am not interested in the banking union, I am interested in these figures he wishes us to accept uncritically and which he perhaps accepts himself as such right at the outset.

Odd don’t you think, that they very ground for Peston’s argument and incidentally one of the things the banks like to say as frequently as possible, namely how much banking contributes to the economy, should be so vaguely measured:  between 8% and 14%?  One estimate is nearly half the other.  And indeed Mr Peston is glossing over a travel trunk of oddness. To my mind the propaganda job Mr Peston does, perhaps unwittingly, is not whatever he argues in the body of his article but the way he silently ‘suggests’ that the figures he presents are unproblematic and objective. This, is a very valuable service to the banks, even if he did not intend it.

He cites figures for the bank’s contribution to GDP as if he were reporting on how many cars GM sold or how many sparrows were counted in East Anglia.By doing so he helps to legitimate them.

The government compiles figures for what various sectors of the economy contribute. This chart is taken from a Department for Business, Innovation and Skills publication. As you can see it lists Financial services as contributing 9.4%. The lower end of Mr Peston’s vague window of possibilities. You might also notice the chart talks not about contribution to GDP but something called GVA. GVA is Gross Value Added. And is a very useful term for those like the banks.

GVA can sound rather simple. It is just the total value of what a sector produces minus the total cost of all the things used in production. Pretty clear for cars and pencils. But not for banking.

That might seem a rather brusque and categorical statement. It also happens to be true.

To start let’s take a trip down memory lane with a speech given by Andrew Haldane of the Bank of England in July 2010 with the title, ” The Contribution of the Financial Sector – Miracle or Mirage?” .

In September 2008, the collapse of Lehman Brothers precipitated a chain reaction in financial markets. This brought the financial system, and many of the world’s largest institutions, close to the point of collapse. During the fourth quarter of 2008, equity prices of the major global banks fell by around 50% on average, a loss of market value of around $640 billion. As a consequence, world GDP and world trade are estimated to have fallen at an annualised rate of about 6% and 25% respectively in 2008Q4. (My emphasis throughout)

Pretty much as I remember it. However, if we had consulted official figures – those exact same figures Mr Peston quoted – then we would have found that,

According to the National Accounts, the nominal gross value-added (GVA) of the financial sector in the UK grew at the fastest pace on record in 2008Q4.

Pardon ?

As a share of whole economy output, the direct contribution of the UK financial sector rose to 9% in the last quarter of 2008. Financial corporations’ gross operating surplus (GVA less compensation for employees and other taxes on production) increased by £5.0bn to £20bn, also the largest quarterly increase on record [in 2008Q4] .

Something strike you as just a teeny little bit odd? Yeah me too. When the banks were collapsing and destroying the global economy and requiring hundreds of billions in direct and indirect bailouts they were also, according to the same figures which Mr Peston quoted, doing the best and contributing the most to us, they ever had. And those figures are compiled in exactly the same way today as they were in 2008. I suspect there are very few politicians on Capitol Hill or Westminster who are aware of the obvious problem with these official figures and their estimates of what the banks contribute, and those few who are aware, I suspect, are those formerly from or hoping to go to, the financial sector. So no one has said a word, the figures are still used to show how much the banks contribute and the public is unaware.

How the figures are concocted

In 1993 something called the United Nations System of National Accounts (SNA) was updated. SNA is the globally uniform set of accounting ideas for nations compiling statistics. The UN sets global methods so everyone can get it wrong in the same way. Being snide I know. But it helps with sanity. In 1993 a whole new concept was introduced in to the SNA which they called FISIM – Financial Intermediation Services Indirectly Measured. The core of this new concept was that a lot of what banks did was not charged for explicitly (no widget was sold with a price tag on it) and these implicit ‘services’ were not being recognized and the banks were not getting the credit for them. The major thing the banks and their acolytes felt the banks were not getting credit for was the way the banks took on financial risk when they extended a loan. This was an intangible sort of thing but a valuable one – they felt. And so from 1993 onwards the risk the banks took on ‘on our behalf’ (kind creatures that they are) was counted as part of their contribution.

As Mr Haldane puts it in his understated way,

…it is not difficult to construct scenarios where the contribution of the financial sector to the economy could be mis-measured under this approach.

You think so? He goes on to say,

This can lead to some surprising outcomes. For example, assume there is an economy-wide increase in the expected level of defaults on loans or in liquidity risk, as occurred in October 2008. Banks will rationally respond by increasing interest rates to cover the rise in expected losses. FISIM will score this increased compensation for expected losses on lending as a rise in output.

So the more risk the banks charge for and take the more they are contributing. Of course the banks also and at the same time want to claim they are not at any risk and all is fine. Thus we had and have again a situation where the banks take huge risks and make a profit from them, which is counted as their contribution to the nation, but disguise the risks and claim all is risk free when it comes to talking to the regulators. Thus they set up off-balance sheet financial vehicles which house risky stuff which gives great returns, but which is rated AAA by paid-for lubricators from the Rating agencies. Risky when calculating returns and fees but risk free when talking to the regulators.  Nice. And if anyone asks any questions from the floor they are told ‘how dare you question your betters? Just look at how much we contribute to your otherwise miserable little island’.

The game for the banks is to increase the total volume of risk as much as possible, but downplay the risks in any particular deal while still charging for as much risk as their clients will stand for.  The best way of doing this is to make risky loans funded by debt borrowed from other banks doing the same, but hiding it just like they are. This is known by its more usual name of ‘leverage’. Leverage allows one bank’s risk to become another bank’s loan.

Let me give you a concrete example. This chart is from P.29 of a study done by The Bank of Greece (the central bank) published in Novemeber 2008 called “Assessing output and Productivity Growth in the banking indistry”

The pink line measure the rate at which  Greek GDP was increasing. The Blue line is the rate of bank GVA (contribution). Personally I think this is a terrible graph which make little sense. Nevertheless it is what the Bank of Greece believed and still does believe. It shows that as far as The Bank of Greece, The government of Greece, other banks, the Eu and the UN were concerned Greek banks were doing a bang up job and contributing fantastically to the well being and wealth of Greece plc.

As the study  concluded,

The results show that bank output and labor productivity increased considerably during the period under examination, outpacing the respective GDP growth and labor productivity of the Greek economy. Capital productivity and Total Factor Productivity  of the Greek banking industry have also improved remarkably mainly since 1999,..

You really could not make it up. They live in a parallel world called ‘Aren’t we so god-damned wonderful’. I could find similar words in similar studies done in your country and mine if I cared to.

What had increased at Greek banks, as in all others, was the risk being taken in increasing amounts of increasingly risky loans. That too is shown in the paper without the authors appearing to realize.

This graph shows the  bank’s contribution is made up of three services: Payment services, ‘Others’ and intermediation. The first two are high street banking. The last one, ‘intermediation’ is extending loans and taking risks ‘on our behalf’. 

As you can see the pink line is the one which captures all the growth in bank ‘contributions’ to the nation. It also captures the exact size and cause of the financial collapse.

I suggest the difference between the lower two lines and the pink line is better thought of as the gap that opened up between what banks should do, used to do, and which does contribute to our nations, and that part which merely creates the profits for the bond and share holders as well as the bonus pool of the senior bankers. The pink line is not what the banks do for us it is the size of the catastrophe they pile up ready to shove on to our shoulders when it all goes wrong. It is the part which is now killing us but which the bankers are most determined to defend and rebuild.

A subtle but vitally important part of that defence is to have the figures about the bank’s contributions to GDP used without question.

Strip out the risk disaster part of banking from their ‘contribution’ and you find that finance drops way, way down the league table of which sectors contribute and which do not. The truth is the banks as they are currently allowed to operate do not make the huge contribution to the  nation they claim to.

It is imperative therefore that we expose the bankers’ narrative for the strait jacket of self-serving lies it is, and that we have our own.

The bankers’ version has the advantage that it is already accepted and endorsed by all wings of our political class, that the mainstream media lap up anything the super wealthy and their bankers say, and of course that the banking lobby has more heads than a hydra.

What is their version? Let’s look at one of the more recently created lobby groups the Job Creators Alliance.  According to their web site they were set up by ten of America’s present or former CEOs  for ‘…the defence of the free enterprise system…in the court of public opinion.” The web site goes on to say that it is their aim to “educate the public and policy makers…” and “…shape the national agenda….”

What is that agenda? Well its made quite clear on their web site in an article called “Markets don’t fail” in which it is declared that,

…the onset of the financial crisis three or four years ago was largely due in the US and the UK to excessive demand for mortgages from people who couldn’t afford them.

There, simple as that. Nothing to do with the banks or bankers, nothing to do with robo-signing, selling CDOs which were designed to fail so others could profit by betting against them. Nothing to do with banks lying about the worth of their assets or having a fundamentally stupid and unstable funding model. Nothing to do with insane leverage levels or ‘To Big To Fail’ institutions gambling with client’s money. None of that is to be allowed in to the public discussion. The entire discussion must be, from the bankers point of view, carefully managed.  The discussion, in so far as the public are to be allowed to partake at all, must be carefully shaped and steered, and above all, the assumptions from which it starts and by which its eventual outcome will be determined, must be set and controlled by the Bankers.

Thus it’s worth noting that the article I quoted from the Job Creators Alliance, in America, was also posted on the Adam Smith Insititute in the UK. A ‘think tank’ whose aim is, “… to promote libertarian and free market ideas.”   The  Insititute was very influential in the Thatcher Privatizations and has close links with the libertarian and Free Market US think tank, The Heritage Foundation.

The author of the article, Mr Jan Boucek, is not from either The Job Creators Alliance nor the Adam Smith Institute but from a company called  ECD which describes itself as ,

Mr Boucek is described as, “…an expert in international business communication and the finance media. He has extensive experience in message development, editing skills, coaching and personal development.” In other words he is a spin doctor.  Now anyone can write an article for another organization whose aims they share, but it does change how  we read his opinions when we know who he works for. None of this, however,  is mentioned by either The Adam Smith Insitute or the Job Creators Alliance. It seems to me there is a campaign but that those running it would prefer we not see it as such.

So the bank narrative is that the credit crisis was due to people demanding mortgages they couldn’t afford.  However, are ordinary people in a position to ‘demand’ a mortgage from a bank? It’s like that other phrase much used and approved of by the banks, ‘…people took on debts they couldn’t afford’. ‘Demand’ and ‘Took’ both try to make ordinary people the culprits and the banks the vicitms. But can ordinary people ‘demand’ and then ‘take’ a mortgage from a bank?

Al Capone took money from banks. You and I can demand all we like, but we can’t ‘take’ a loan unless the bank offers it. The fact is, the loans people couldn’t afford were  offered, advised and approved by the banks. It is the bank’s line of business to know if someone can afford a loan or not. That is what bankers do for a living. The bankers knew they were offering and ‘extending’ loans to people above what those people could really afford but did so anyway. And the bankers above them in the bonus pyramid approved.  Our guilt and greed was to ‘accept’ loans that were unwise and unstable. But we did not ‘take’ them from innocent bankers against their better judgement and advice.

Nevertheless the Bankers narrative of events is that markets don’t fail only people. Of course there have been some difficult cases of bank failure and even some cases of outright fraud. How to deal with those? Ah, well there we have the “One Bad Apple’ argument, which is usually teamed with the, ‘now under new management’, message development strategy.

One Bad Apple is from the same stable as ‘rogue trader’. Both are important strategies to ensure that any potentially damaging criticism of the system itself is deflected on to a lone or rogue element which we can then be assured, has been replaced.  Phew! Problen identified, corrected and now , if you please ladies and gentlement, just move along quietly.

And the ‘liberal’ press readily swallows both strategies. The New York Times ran an article in October 2011 in which it talked about how Citigroup had been found guilty of fraud and

“.. had to pay a $285 million fine to settle a case in which, with one hand, Citibank sold a package of toxic mortgage-backed securities to unsuspecting customers — securities that it knew were likely to go bust — and, with the other hand, shorted the same securities — that is, bet millions of dollars that they would go bust.”

As the article said, “It doesn’t get any more immoral than this.” But then just one paragraph later the author reassures us not to worry because that that was then but,

“Citigroup is under new and better management now,..”

Of course you might remember Goldman Sachs did almost the same thing and had to pay $550 Million to settle its case. But importantly for the banks and bankers I cannot say Goldman was ‘guilty’ of anything because it was not found guilty. Instead it was allowed to settle the fraud case with a $550 million fine which is far less than it would have made from its trading practices.  Far more importantly, the settlement allowed Goldman to walk away “neither admitting nor denying wrongdoing”. A careful peice of ‘message management’.

Now is Goldman under new and better management? NO. But no one mentions that. Just as they don’t mention that Deutsche Bank is also up on fraud charges. So is Bank of America. All the big four accountant firms were recently or still are under investigation. I could go on.

But instead I’ll just quote US liberal magazine Mother Jones from December 2011 which said,

“…the ‘few bad apples’ argument really is worth acknowledging…”

So the bankers’ sanitized narrative is that markets don’t fail, people do and when a bank or a banker is caught doing something fraudulent or immoral it is just a bad apple which is neatly replaced. Imperative is the message that there is NOTHING intrinsically wrong with the banking/finance system as it is now constituted. THAT is their central concern and version of reality.

The other side of their strategy, which I suggest we”ll see more of in the coming months, is to suggest those who oppose them are suspect or even dangerous. Note how Jamie Dimon, CEO of JP Morgan, took time before flying to Davos to give an interview in which he said, that anti-banking sentiment was,

“…a form of discrimination that should be stopped.”

How to stop it? Well one suggestion came from US lobbying firm, Clark Lytle Geduldig & Cranford in a memo sent to the American Bank’s Association on how to discredit the Occupy Movement. According to Reuters,

The four-page memo outlined how the firm could analyze the source of protesters’ money, as well as their rhetoric and the backgrounds of protest leaders.

“If we can show they have the same cynical motivation as a political opponent, it will undermine their credibility in a profound way,” said the memo,

Now the American Banks Association (ABA) was quick to say the suggestion had not been taken up. The banks have tried to suggest that this was an unsollicted, even perhaps a ‘rogue’ memo. In a word – bollocks.  Clark Lytle Geduldig & Cranford are not fly by night chancers who send off-the-wall suggestions on spec. They are a Washington institution. They are very, very well connected. The ABA are long standing clients. Their business is lobbying. They know their clients. They know what they are thinking, what they need and what they might like to hear. Memo’s don’t get sent out to America’s bank lobby on spec by the work experience intern.

The memo would not exist at all and certainly not suggest what it does if  the partners of Clark Lytle Geduldig & Cranford did not think this was already in their clients minds.

So I think we now have a rough outline of the narrative the bankers want endorsed and promoted. I think we also have an inkling of the measures they are going to deploy against those who oppose them.

That’s ‘Them’. What about ‘Us’ and our narrative?

Well here I find I agree with Jamie Dimon on one thing. He said generalized banker bashing was wrong. I agree. Blunt generalizations are not good enough. What we need are stout reasons that can be sharpened to a fine point and then used to stab (metaphorically only of course) deserving bankers through the heart.  Fortunately there are many such reasons and an almost equal number of thoroughly deserving bankers.

But I will leave that till part 2. Picking up the boys from school now beckons.