Friday, December 18, 2009

Banking in post-industrial economies

In recent months I have blogged and tweeted the question: Do London and NYC over rely on financial services for activities, growth and jobs?
And does the crisis show that NYC and London need a new model for activities, growth and jobs?

Thus it does not surprise me to read, today, in an article at the Guardian that, in view of the recent decisions by the British and French governments to highly tax large bankers' bonuses and the arguments that they could lead to an exodus of bankers from London, Andy Haldane, the head of financial stability at the Bank of England (Britain's central bank) has argued during an interview with BBC World Service that bankers moving overseas to avoid the bonus supertax could be price worth paying to achieve lasting reform of the sector! Plus he also poses some very insightful food for thought re the structure of commercial and investment banking these days and arguing for a potential separation of commercial banking and investment banking activities (and thus benefits and risks).

I am in no way antithetical to the financial services and banking industries. They always had and still have a role to play in an economy. What I am skeptical about though is the weigh that has been placed on this industry or sector. Especially by London and NYC.

In my theory about the causes of the current crisis, I propose that in recent decades, financial services did not adapt to the shrinking of manufacturing in the US and Europe (based on an assumption of mine that it is large manufacturing companies that have high needs for banking and investment banking due to the high fixed costs and capital intensity of manufacturing). The rapid shrinking of the manufacturing base in the US and much of Europe should IMO have led to some shrinking of the financial services and investment banking, which do not seem to have happened before the crisis. The alleged trend for high level bankers to move to Asia, where manufacturing strives in recent years, proves to some extent the validity of my claim that high level banking needs manufacturing (and vice-versa), whereas Services based economies of our times, such as the US, the UK, etc, do not the same volume and type of banking needs that manufacturing did in the peak days of the US and European industrial era.

In addition, it does make sense IMO to pose the question whether it makes more sense for commercial and investment banking to co-exist in an entity and hedge each other or to be separate? Not that the answer is easy. We do after all live in interesting times and to wish someone to live in such times was not a wish but, allegedly, an Ancient Chinese curse.

Listen to an audio presentation, about 10 minutes) of my theory on the causes of the crisis: (October 2008)

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