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"A Sustainable Level of Bank Profits Appears to be About 1% of GDP". Higher Bank Profits Lead to a Ponzi Economy and a Depression
I've previously noted that concentration of all the poker chips in a couple of hands ends the poker game.
And I've repeatedly pointed out that when banks get too big, it hurts the economy.
I've also noted that the government actually encouraged the big banks to get bigger and bigger (and see this, this and this). As just one example, the Treasury Department encouraged banks to use the bailout money to buy their competitors, and pushed through an amendment to the tax laws which rewards mergers in the banking industry.
The government has also given the big banks many tens of trillions of dollars.
In
that light, Phd economist and leading economic modeller Steve Keen
makes an important new contribution to our understanding of the banking
sector.
Specifically, Keen's new model shows that bank profits above 1% of GDP are unsustainable, and lead to a Ponzi economy and - eventually - a depression:
The
record $6 billion profit that the Commonwealth Bank [Australia's
largest bank] is expected to announce today is a sign of an economy
that has been taken over by Ponzi finance. Fundamentally, banks make
money by creating debt, and the amount of debt we’ve been enticed into
taking on is the sign of a sick economy rather than a healthy one. The
level of private debt that is actually needed to support business and
maintain home ownership at historic levels (ownership levels have
fallen over recent years!) is possibly as little as one sixth the
current level.
Because
of that debt level, bank profits have gone through the roof as a share
of GDP. Back before we had a financial crisis—when debt levels were
far lower than today—so too were bank profits as a share of GDP. A sustainable level of bank profits appears to be about 1% of GDP.
***
As
readers of this blog know, I build models of financial instability,
and in my models, one symptom of an economy that is headed for a
Depression is a rise in bankers share of income at the expense of
workers and capitalists. The model below has yet to be calibrated to the
data, but the similarities with the actual data are still ominous.
One
empirical reality illustrated by the model as well is that even if
firms are the ones taking on the debt (as they are in this model—it
does not include household borrowing), workers are the ones that pay for
this in terms of a declining share of national income: rising debt is
associated with a constant profit share of GDP but a falling workers
share.
When the crisis really hits, both workers and capitalists
suffer as bank income goes through the roof—leading to a Depression.
The only way out of this is to abolish large slabs of the debt, and
coincidentally to drive bankers share of income back down to levels
that reflect is supportive role as a provider of working capital for
firms—rather than a parasitic role as the financier of Ponzi schemes.
This
is the real debt story of our economy right now. As the first chart
above indicates, private debt is far higher than Government debt, even
after the increase last year due to Rudd’s stimulus package. Government
debt is currently 5.5% of GDP, whereas private debt—even though it has
fallen slightly due to business deleveraging—is over 150% of GDP: 27
times the size of Government debt. The so-called debate that the major
parties are having over the size of Government debt is an
embarrassment.
Given that giant, super-profitable banks
lead to a Ponzi economy and a depression, we must break up the too big
to fails, which would allow smaller banks to thrive and to lend out more money to Main Street.
Either that, or let's just replace the entire private banking system with state public banking. See this, this and this.
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Just checking Steve's figures:
Banks' profit for 12 months to 31st December 2009 is $17.8 Billion for all Australian banks.
With GDP for 12 months to 31st December 2009 being $1,258 Billion (source Reserve Bank).
That makes the bank profit as a % of GDP 1.42%, nearly the lowest in 5 years. High point was 2.04% in December 2007.
Steve's graph is suggesting nearly 6% of GDP, which is over $72 Billion. That's about 30% of market cap.
http://www.youtube.com/watch?v=RBW6nwbfsUc&feature=player_embedded#!
Banks little by little take money out of the system. Thru Trading profits. Who lost that profit for them to gain? The average American thru their Retirement or 401K. Systemic theft. Little by little day by day. From your Bank account fees, your Credit Card interest, the loss in value in your Stocks, 401K's and your Retirement Account.
Slowly very slowly they take everything until the Middle Class is broke. Then they want Government Stimulus to try to revive a Heart Attack patient that has had a Corinary with their Theft.
Then they wonder why it does not work after they took everyones Principal and they do not have anything left and they refuse to put more Money into the Croked system.
What do they not understand?
karma
If utilities make large profits they reduce capital - simple but true.
I'm with Ned Zeppelin....bet your own money and lose it, fine...you shouldn't be able to lose highly leveraged investor/depositor money guaranteed by the US guvment. Eat the Banksters!
Great catch George.....thx
Keen is da bomb. His "Debunking Economics" ought to be required reading for anyone who studies or talks about it.
In the event anyone under MSM capture questions the validity of this, just show them this fun graph, straight from the Federal Reserve:
http://research.stlouisfed.org/fred2/series/FREQ?cid=93
Another fun Fed graph, in the event that anyone thinks that even the financial sector has recovered, let alone the rest of the economy:
http://research.stlouisfed.org/fred2/series/LLRNPT?cid=93
Wait, hang on, why is their net interest margin going up?
http://research.stlouisfed.org/fred2/series/USNIM?cid=93
Despite a gigantic ramp in loan loss reserves?
http://research.stlouisfed.org/fred2/series/USLLRTL?cid=93
To cover a gigantic ramp in net loan losses?
http://research.stlouisfed.org/fred2/series/USLSTL?cid=93
Fishy stuff, banks. Fishy stuff. Here we all were thinking that the trillions of dollars in direct bailouts and other "special instruments" would have fixed everything by now.
Fixed like my cat.
zh is on a roll today....the policy prescription - sans state banking - is superb....tbtf is the litmus test of anti-trust....anti-trust or die...destroy fascism now
"I've also noted that the government actually encouraged the big banks to get bigger and bigger"
Almost as if they were in on it.
Banksters & Co.
http://www.youtube.com/watch?v=JjoczVQzrpI&feature=player_embedded
From JSMineset
Now that is a fucking useful piece of information
Ponzi Bitchez!
I refuse to click through to any link listed after a "state public banking". Sounds yucky.
The idea is that banking should be more like a utility. If you want to bet the ranch, go use your own money and be the biggest hedge fund you can be, but you cannot be a bank that enjoys FDIC insurance.
This is not hard. It's that the the TBTFs have captured the regulators, our CONgress, and our law enforcement.
The number one reason that the national "champion" banks (now TBTF) were allowed or even encouraged to grow bigger was to take advantage of the USD's role as a lynchpin of the global trading system with USD gradually becoming our primary "export" (closeness to the source of USD provides a huge competitive advantage in global banking). It was believed that the national champions would crack open foreign markets (with coercive help from IMF, etc.) and allow the US banks to benefit from growth in other markets. They did achieve that goal to an extent in smaller economies but have faced push back in larger economies such as China and India. The TBTFs can, in a way, be considered as strategic weapons.
Once they had exhausted those avenues to the max, it was only a matter of time before the predatory banks turned on their sponsors and started exploiting other participants in US economy. Ultimately resulting in the great crash!
+1 magic.
the banks also serve as legal money laundering entities for recycling US Treasuries which is working out quite well with the Fed in collusion providing 0% interest rates to its cabal of crooks.
with a little naked shorting on the side, as per jim willie's latest.
I agree with traditional banking with deposit insurance. Let's call it something different than, more catchy like - traditional community banking.
Was that not the purpose of the now repealed Glass-Steagall Act?
I thought the initial purpose of that was to keep banks from buying stocks on margin like everyone else was doing at the time.
the crucial part that was repealed in 1999 prevented bank holding companies from owning other types of financial institutions such as investment banks. the repeal allows such as goldman sachs to claim they are a bank holding company for purposes of accessing the u.s. treasury. phil gramm headed up the repeal effort but he had bipartisan help.