We're Told The City Contibutes Billions To The Economy?

[TheEngineer]

Seemingly every day I hear on the radio some bankster, or their agent, claiming that the City contributes huge sums to the economy. Telling us that it’s some engine of enterprise. The former point is usually met by the presenter with a silence of acceptance.

Well I'm confused! I see that the City is operating a very profitable business, if that's what it is, but where does all its profit come from? Where does the money trace back to? Despite their puzzling assertion that they create 'products', to this engineer they don't actually seem to make anything at all. I'm not sure they even lubricate the gears either. More that they jam a spanner in the works and charge a healthy fee for its 'expert' removal.

How, in any claim to create 'products' do they add value in any way.

What are you, City?

[interestrateripoff]

Parasite skimming off the top.

That's all they do.

I would probably also add there net effect over the past decade will have been negative on the UK economy, although the finally effect won't be known for some time.

From this thread

Considering the amount of money this country is borrowing I would hardly consider the effects of the City positive. It would appear they have finally killed the host.

http://mises.org/books/inflationinfrance.pdf

Just as dependent on the law of cause and effect was the moral development. Out of the inflation of prices grew a speculating class; and, in the complete uncertainty as to the future, all business became a game of chance, and all business men, gamblers. In city centers came a quick growth of stock-jobbers and speculators; and these set a debasing fashion in business which spread to the remotest parts of the country. Instead of satisfaction with legitimate profits, came a passion for inordinate gains. Then, too, as values became more and more uncertain, there was no longer any motive for care or economy, but every motive for immediate expenditure and present enjoyment. So came upon the nation the obliteration of thrift. In this mania for yielding to present enjoyment rather than providing for future comfort were the seeds of new growths of wretchedness: luxury, senseless and extravagant, set in: this, too, spread as a fashion. To feed it, there came cheatery in the nation at large and corruption among officials and persons holding trusts. While men set such fashions in private and official business, women set fashions of extravagance in dress and living that added to the incentives to corruption. Faith in moral considerations, or even in good impulses, yielded to general distrust. National honor was thought a fiction cherished only by hypocrites. Patriotism was eaten out by cynicism.

[erranta]

Seemingly every day I hear on the radio some bankster, or their agent, claiming that the City contributes huge sums to the economy. Telling us that it's some engine of enterprise. The former point is usually met by the presenter with a silence of acceptance.

Well I'm confused! I see that the City is operating a very profitable business, if that's what it is, but where does all its profit come from? Where does the money trace back to? Despite their puzzling assertion that they create 'products', to this engineer they don't actually seem to make anything at all. I'm not sure they even lubricate the gears either. More that they jam a spanner in the works and charge a healthy fee for its 'expert' removal.

How, in any claim to create 'products' do they add value in any way.

What are you, City?

They MAKE - 'it up' - as they go along!

[stoobs]

Banks have a parasitic relationship with the rest of the economy. They manage and control how money flows around the system and siphon off a portion of that flow that is much higher than their administrative costs of providing the pipes and valves. That is their profit.

I believe the argument regarding banks being good for the UK is based upon our banks being very successful at not only sucking the blood of the UK economy but also of many other economies around the world. Whether the net gain is positive when you take into account the massive transfusion we've had to inject to keep them on life support I haven't yet seen clear figures for.

[FreeTrader]

In case you missed it, here's a piece that appeared in the FT earlier this week, written by Martin Taylor, former chief exec of Barclays. This commentary echoes my own views on banks and the bonus structure, but I'm sure many in the City would argue that Taylor merely has sour grapes because of his ultimately unsuccessful tenure.

Apologies for the long quote, but it's worth reading in full.

The late Eddie George was very fond of a little joke that went as follows. “There are three types of bankers: those that can count, and those that can’t.”

Sometimes jokes capture profound truths. In all the fuss about bank bonuses, we have heard about labour market “realities” (from the bankers), and moral and political philosophy (from everybody else). We need to think more about simple arithmetic.

All business people know that you can carry on for a while if you make no profits, but that if you run out of cash you are toast. Bankers, as providers of cash to others, understand this well. They just do not believe it applies to their own business.

In general, banks have no measures of cash flow that work for banking. They do think about liquidity – can you borrow from other market participants, can you get money from the central bank? Being turned down in the market means curtains – it happened to Northern Rock in 2007 and Midland Bank a quarter of a century before, and forced its sale to HSBC.

That means they are not conscious of making cash decisions, of the sort that other businesses face daily. Even a dividend cut – one of the ultimate cash choices – will usually be discussed in terms of capital preservation and ratio management. But of course they frequently make decisions with cash consequences, and about five years ago they began to spray cash around like drunken sailors. The recipients were employees, in the form of bonuses, and to a lesser but still significant extent shareholders, in the form of dividends.

The existence of bonuses reflected the nature of financial businesses, where labour always represented a major cost, while revenues were volatile. It therefore became essential to make labour costs variable, and bonuses were the mechanism used to do this. In a year like 1974 partners in London stockbroking firms got no money, and something similar happened in 1994 to senior investment bankers in fixed income businesses.

City people have always been paid well relative to others, but megabonuses are quite new. From my own experience, in the mid-1990s no more than four or five employees of Barclays’ then investment bank were paid more than £1m, and no one got near £2m. Around the turn of the millennium across the market things began to take off, and accelerated rapidly – after a pause in 2001-03 – so that exceptionally high remuneration, not just individually, but in total, was paid out between 2004 and 2007.

Observers of financial services saw unbelievable prosperity and apparently immense value added. Yet two years later the whole industry was bankrupt. A simple reason underlies this: any industry that pays out in cash colossal accounting profits that are largely imaginary will go bust quickly. Not only has the industry – and by extension societies that depend on it – been spending money that is no longer there, it has been giving away money that it only imagined it had in the first place. Worse, it seems to want to do it all again.

What were the sources of this imaginary wealth? First, spreads on credit that took no account of default probabilities (bankers have been doing this for centuries, but not on this scale). Second, unrealised mark-to-market profits on the trading book, especially in illiquid instruments. Third, profits conjured up by taking the net present value of streams of income stretching into the future, on derivative issuance for example. In the last two of these the bank was not receiving any income, merely “booking revenues”. How could they pay this non-existent wealth out in cash to their employees? Because they had no measure of cash flow to tell them they were idiots, and because everyone else was doing it. Paying out 50 per cent of revenues to staff had become the rule, even when the “revenues” did not actually consist of money.

How did the shareholders let them get away with this? They were sitting on the gravy train too, enjoying the views from the observation car. How did the directors let it happen? Innumeracy, and inability to understand accounts that have become misleading to the point of treachery. How depressing the shame and folly of it all is, when one considers that the system was brought down not because risk management was deficient (though it was), nor because greed was rampant (though it was), but because bankers could not count. Merry Christmas.

Financial Times

It's also noteworthy that Andrew Haldane, executive director of financial stability at the BoE, had this to say in a BBC interview today:

“...some of the downsides of carrying around a big financial system are now evident to all.

“If some of that were to migrate overseas that would be unfortunate but given the costs of carrying that financial system around, it may be a price worth paying”.

Telegraph

Edit: removed redundant words.

Edited December 18, 2009 by FreeTrader

[Flatdog]

It is all utter nonsense, just a bunch of figures on a screen.

'Money from thin air' and all that stuff, ludicrous really but millions of people fell into the trap of taking on unsustainable debt.

The City undoubtably contributed revenue, but to whom?

Thieving swines, the lot of them, clever tho'.

[Patfig]

Seemingly every day I hear on the radio some bankster, or their agent, claiming that the City contributes huge sums to the economy. Telling us that it’s some engine of enterprise. The former point is usually met by the presenter with a silence of acceptance.

Well I'm confused! I see that the City is operating a very profitable business, if that's what it is, but where does all its profit come from? Where does the money trace back to? Despite their puzzling assertion that they create 'products', to this engineer they don't actually seem to make anything at all. I'm not sure they even lubricate the gears either. More that they jam a spanner in the works and charge a healthy fee for its 'expert' removal.

How, in any claim to create 'products' do they add value in any way.

What are you, City?

This kind of reminds how often I hear that the Royal family too are an absolute asset to the country. I think yes a bunch of unelected scroungers who suck the blood of the country and who have a very very comfortable life. I don't buy it at all!!

[The Masked Tulip]

The City makes most of its profits from mergers and accquistions so, for example, you run down M&S, say it is a lousey company, get the share price falling and then you get Tesco in to buy it.

You then closed down most of the M&S stores, fire most of their staff, cut back on supplier costs as you now dominate the market more and, in time, you raise yoru prices a bit. You are hailed a genius for halving costs and driving up profits and you make a big bonus...

But no onw takes into account the social and economic cost to the country of all the fired M&S workers. Who cares about them.

You can repeat this again and again and again... include lots of outsourcing of jobs... and before you know it the entire country is dependent upon the city because the city is basically all there is left... and the only companies still in the FTSE 100 are commodities' firms.

You have made yourself super-rich and have destroyed a country in doing so. Heck, the need to outsource, merge and accquire becomes so strong that you end up doing the same thing to even the state of the art industries such as information technology... Hey, you can even wangle billions from the Govt for an IT project, bill the client - the Government - at UK rates for IT workers and then, cunningly, actually employ Indian IT workers instead... paying the Indian IT workers a fraction of what you are billing per person per hour... and when it all goes pear-shaped you can blame the British IT worker because everyone actually thinks that UK IT workers are doing the jobs... which gives you more ammo for further outsourcing, merging and accquiring...

And oneday you wake up and discover that, as Manny Shinwell once warned, that once you sell the family silver there is nothing left. The economy becomes dependent upon debt and house prices and a real need for never-ending house price rises in order for people to remove cash from their homes to buy things...

Eventually, it will all collapse in on itself but, if you are really clever, instead of being lynched you will be given a huge bonus.

[cells]

Seemingly every day I hear on the radio some bankster, or their agent, claiming that the City contributes huge sums to the economy. Telling us that it’s some engine of enterprise. The former point is usually met by the presenter with a silence of acceptance.

Well I'm confused! I see that the City is operating a very profitable business, if that's what it is, but where does all its profit come from? Where does the money trace back to? Despite their puzzling assertion that they create 'products', to this engineer they don't actually seem to make anything at all. I'm not sure they even lubricate the gears either. More that they jam a spanner in the works and charge a healthy fee for its 'expert' removal.

How, in any claim to create 'products' do they add value in any way.

What are you, City?

they don’t create wealth themselves but allow others to create it more efficiently.

Just like an engineer who designs a more efficient engine. The more efficient engine isn’t wealth but the business using the engine can go for longer and create more wealth.

What most bankers/investors/traders do is allocate capital efficiently. As engineers try to allocate resources efficiently.

[Mikhail Liebenstein]

The City makes most of its profits from mergers and accquistions so, for example, you run down M&S, say it is a lousey company, get the share price falling and then you get Tesco in to buy it.

You then closed down most of the M&S stores, fire most of their staff, cut back on supplier costs as you now dominate the market more and, in time, you raise yoru prices a bit. You are hailed a genius for halving costs and driving up profits and you make a big bonus...

But no onw takes into account the social and economic cost to the country of all the fired M&S workers. Who cares about them.

You can repeat this again and again and again... include lots of outsourcing of jobs... and before you know it the entire country is dependent upon the city because the city is basically all there is left... and the only companies still in the FTSE 100 are commodities' firms.

<SNIP>

The other very key point is that the City produces nothing, it just has a Government sponsored license and oligopoly to deal in the currency we are forced to use. It gets first dibs on the cash, and then extracts rent.

[cells]

The other very key point is that the City produces nothing, it just has a Government sponsored license and oligopoly to deal in the currency we are forced to use. It gets first dibs on the cash, and then extracts rent.

[_w_]

We're Told The City Contibutes Billions To The Economy? How? Where from, how does it add value?

Very simple, they buy houses which pushes their prices up so you are forced to enjoy the opportunity of renting from them.

You also get the chance to polish their shoes if you're a hard worker.

[_w_]

they don't create wealth themselves but allow others to create it more efficiently.

Ahah, that nice myth. Try to prove it if you think you know more than say, Paul Volcker.

[tomwatkins]

The other very key point is that the City produces nothing, it just has a Government sponsored license and oligopoly to deal in the currency we are forced to use. It gets first dibs on the cash, and then extracts rent.

Ten out of ten. Brilliant synpopsis Sir.

[XswampyX]

They only add billions of tomorrows money, today.

Trouble is who knows what tomorrows going to be like. It looks pretty shitty from where I'm sitting.

They only dilute the money of today, if they were running a pub then they would be breaking the law.

Imagine if I'm sitting in a pub with a full pint, a banker walks in and orders a half of beer and a half of water. He then comes over to me and takes a half of my pint but then refills my glass with the free water, he then continues to do this for the rest of my life. At what point do I stop ordering any more beer?

Even if it isn't my beer, is it still ok?

[enrieb]

Seemingly every day I hear on the radio some bankster, or their agent, claiming that the City contributes huge sums to the economy. Telling us that it’s some engine of enterprise. The former point is usually met by the presenter with a silence of acceptance.

Well I'm confused! I see that the City is operating a very profitable business, if that's what it is, but where does all its profit come from? Where does the money trace back to? Despite their puzzling assertion that they create 'products', to this engineer they don't actually seem to make anything at all. I'm not sure they even lubricate the gears either. More that they jam a spanner in the works and charge a healthy fee for its 'expert' removal.

How, in any claim to create 'products' do they add value in any way.

What are you, City?

Banks make bad loans

House prices rise

loans go bad

government bails out banks

tax payer bails out government

Whats the problem? are you some sort of Communist? get with the program or we will have to send you to a re-education plant. Shouldn't you be more obedient to the ruling power structure.Whats wrong with you, didn't you make it through the filtering system at uni and find a profitable public sector job?

[cells]

Ahah, that nice myth. Try to prove it if you think you know more than say, Paul Volcker.

Ok, one method is high frequency trading algorithms which lower the spread on shares which allows capital to flow more easily and be allocated to where it is needed most.

Another would be market makers. Hated by nearly all but they allow large positions to be bought and sold in a relatively illiquid stock. Without them those stocks would be largely uninvestable and a source of capital for small/medium companies wouldn’t exist.

Another is lower interest rates due to efficient capital allocation. Lower interest rates allow the best use of resources. For example if real interest rates were 15% it would be nearly impossible to build any capital intensive infrastructure like nuclear power plants but with real interest rates at a few percent (partly due to “bankers”) capital intensive projects are more feasible.

[cells]

Banks make bad loans

House prices rise

loans go bad

government bails out banks

tax payer bails out government

Whats the problem? are you some sort of Communist? get with the program or we will have to send you to a re-education plant. Shouldn't you be more obedient to the ruling power structure.Whats wrong with you, didn't you make it through the filtering system at uni and find a profitable public sector job?

no bank was bailed out

those waiting in this photo for their life savings were bailed out

[Mikhail Liebenstein]

Ahah, that nice myth. Try to prove it if you think you know more than say, Paul Volcker.

Indeed, its the old load of b0llax spoken by the City. Where this falls down is that that City has just pushed the prices of everything up.

Here is an example.

Without city

Really good innovative R&D firm with a new product. Owner has £50k in cash and wants to invest in marketing, he spends the money on marketing and new product sells, though he got close to going bust at one point at he ran his £50k down, but returns come in and all is well.

With city

R&D firm has been forced to pay stupidly high rent from its office as every sod is borrowed to high heaven, so owner doesn't have £50k for marketing. Instead he borrows it, and this costs him £60k all. Before he gets to generate decent return from marketing he goes bust as he has lost an extra £10k and actually was £50k worse off to start with.

The moral of this is that the basel II restrictions and GS Act need to get put in place. The reason banks are lending now is because there are no good returns, and why are there no good returns, oh that will be because property is inflated to high heaven. The only way out is to inflate everything else and leave property static or else deflate property.

Suddenly after saying that, Fred Harrison is even more of a god.

Edited December 18, 2009 by mikelivingstone

[cells]

Ok, one method is high frequency trading algorithms which lower the spread on shares which allows capital to flow more easily and be allocated to where it is needed most.

Another would be market makers. Hated by nearly all but they allow large positions to be bought and sold in a relatively illiquid stock. Without them those stocks would be largely uninvestable and a source of capital for small/medium companies wouldn’t exist.

Another is lower interest rates due to efficient capital allocation. Lower interest rates allow the best use of resources. For example if real interest rates were 15% it would be nearly impossible to build any capital intensive infrastructure like nuclear power plants but with real interest rates at a few percent (partly due to “bankers”) capital intensive projects are more feasible.

To add, speculators (or investors, the same thing really) greatly help the world.

Lets take an example.

Speculator thinks the world is going to run out of oil.

Speculator buys futures which pushes up the price of oil today.

This higher oil price allows new fields to be opened and more R&D devoted to oil and new sources like tar sands get investment.

Speculator has allowed transition smoothly instead of a sudden shock.

If the speculator was correct, he makes money and helped the world.

If the speculator was wrong, the world didn’t need more oil, the speculators acts increase the price of oil today, more well dug, surplus oil, oil crashes, the speculator loses lots of money and potentially goes bust.

A investor/speculator (which are the same thing) only makes money if they help the world.

[_w_]

Ok, one method is high frequency trading algorithms which lower the spread on shares which allows capital to flow more easily and be allocated to where it is needed most.

Another would be market makers. Hated by nearly all but they allow large positions to be bought and sold in a relatively illiquid stock. Without them those stocks would be largely uninvestable and a source of capital for small/medium companies wouldn't exist.

Another is lower interest rates due to efficient capital allocation. Lower interest rates allow the best use of resources. For example if real interest rates were 15% it would be nearly impossible to build any capital intensive infrastructure like nuclear power plants but with real interest rates at a few percent (partly due to "bankers") capital intensive projects are more feasible.

I agree with you on the last two points but these were true in the 60s as much as now. What the City has become now is a big money sucking machine. Methods such as HFT which I'm not familiar enough with to intelligently comment on seem to be more designed to generate revenue than to enhance liquidity: from personal experience though I can see the market is more illiquid now than it was ten years ago: I am constantly being screwed by bots of one form or another trying to stop me from making trades at good prices, and it's frustrating and very costly to say the least. The only purpose these programs fulfill is to force you to accept ginormous spreads if you want to make the trade; they cost you money and reduce liquidity.

But I think Volcker's remarks on the cash machine being the only productivity enahcing innovation since the 70s is more compelling. Electronic transfers, market making, heding derivatives, they were all there 40 years ago when the industry was half its current size.

[cells]

Indeed, its the old load of b0llax spoken by the City. Where this falls down is that that City has just pushed the prices of everything up.

Here is an example.

Without city

Really good innovative R&D firm with a new product. Owner has £50k in cash and wants to invest in marketing, he spends the money on marketing and new product sells, though he got close to going bust at one point at he ran his £50k down, but returns come in and all is well.

With city

R&D firm has been forced to pay stupidly high rent from its office as every sod is borrowed to high heaven, so owner doesn't have £50k for marketing. Instead he borrows it, and this costs him £60k all. Before he gets to generate decent return from marketing he goes bust as he has lost an extra £10k and actually was £50k worse off to start with.

The moral of this is that the basel II restrictions and GS Act need to get put in place. The reason banks are lending now is because there are no good returns, and why are there no good returns, oh that will be because property is inflated to high heaven. The only way out is to inflate everything else and leave property static or else deflate property.

Suddenly after saying that, Fred Harrison is even more of a god.

Planning regulations and laws more than anything dictate the price of property and thus the price of rent. Not the city.

There is plenty of land for sale that we can build decent homes on but it is artificially restricted by your politicians.

[Mikhail Liebenstein]

To add, speculators (or investors, the same thing really) greatly help the world.

Lets take an example.

Speculator thinks the world is going to run out of oil.

Speculator buys futures which pushes up the price of oil today.

This higher oil price allows new fields to be opened and more R&D devoted to oil and new sources like tar sands get investment.

Speculator has allowed transition smoothly instead of a sudden shock.

If the speculator was correct, he makes money and helped the world.

If the speculator was wrong, the world didn’t need more oil, the speculators acts increase the price of oil today, more well dug, surplus oil, oil crashes, the speculator loses lots of money and potentially goes bust.

A investor/speculator (which are the same thing) only makes money if they help the world.

Flawed argument Cells - clearly you have an IQ lower than Waterloo's Northern line tube platform

It is not clear how you tally the short terms speculator wins is good for the world argument with any short term negative impacts that might happen outside of that speculators own immediate sphere. For example, a high oil price , even in the short term might reduce investment in alternative technologies, as resources would be diverted to oil instead.

You clearly don't actually work in the City, as you are not displaying any rare and unique talent.

[Mikhail Liebenstein]

Planning regulations and laws more than anything dictate the price of property and thus the price of rent. Not the city.

There is plenty of land for sale that we can build decent homes on but it is artificially restricted by your politicians.

Oh dear.

Without mortgages, property would be considerably cheaper.

[cells]

I agree with you on the last two points but these were true in the 60s as much as now. What the City has become now is a big money sucking machine. Methods such as HFT which I'm not familiar enough with to intelligently comment on seem to be more designed to generate revenue than to enhance liquidity: from personal experience though I can see the market is more illiquid now than it was ten years ago: I am constantly being screwed by bots of one form or another trying to stop me from making trades at good prices, and it's frustrating and very costly to say the least. The only purpose these programs fulfill is to force you to accept ginormous spreads if you want to make the trade; they cost you money and reduce liquidity.

But I think Volcker's remarks on the cash machine being the only productivity enahcing innovation since the 70s is more compelling. Electronic transfers, market making, heding derivatives, they were all there 40 years ago when the industry was half its current size.

Like any industry there are scams or dodgy going ons. Market makers be it someone on a screen or a algorithm can be set to search for stop losses and take profits and play that. however that is part of “the game”. If your holding out for a fast buck and buying on margin your asking to be fooked.

However the vast majority of banking trading and investment is for the benefit of society. All fairly earned profit be it via coal mining or a cafe or banking helps society as a whole. The problem is that most people don’t even understand the very basics of banking and people hate what they don’t understand.

The whole purpose of the financial sector is to allocate capital efficiently. If they do that, they make money. If they don’t do that they lose money. Efficient capital allocation is positive for all of us.

Admittedly sometimes they allocate capital inefficiently just like an engineer sometimes designs a shit nuclear station that explodes in your face. However on net they allocate capital well just like on net engineers do a decent job of allocating resources.

Just remember, banks don’t force anyone to pay them. They get their money “fairly”. If no one wants their services they will go away however we do want their services.

We nearly all use their services directly or indirectly. If they are so bad or so useless just don’t use any of their services and they will go away.