These services grew enormously from the 1980s onwards as successive governments were seduced by their apparent profitability into widespread deregulation. I say 'apparent' because there was very little new wealth created, in spite of well-publicised claims about their being wealth creators. Indeed these services are not in the business of creating new wealth. What they do is create money, and manage money and financial assets. Banks make loans available for people to spend on wealth, and financial traders attempt to increase wealth entitlement for their customers. It is in these senses that they claim to create wealth. They also charge a great deal in interest and fees for their services. It is the fact that these charges count towards GDP that gives the appearance of new wealth and that pleases governments, but counting towards GDP is misleading in two ways. Firstly they are wealth extractors, and when added to GDP wealth extraction represents double counting, secondly at best banking charges represent overheads, and as already argued in chapter 27 interpreting growth in GDP as economic growth is inappropriate when GDP includes overheads. Financial trading services don't even represent overheads; they represent 'investment services', which at best only increase the wealth of the well served at the expense of the poorly served. This sort of service doesn't facilitate the creation of new wealth; it only moves existing wealth entitlement from one person to another. It's like giving racing tips, if they're good then people will pay for them, but all they do - if they work - is transfer money from non-tipped to tipped, overall no-one is any better off because of them.
Whereas financial trading largely extracts wealth by exploiting people's ignorance of the charging structure, banking does so both by exploiting ignorance of how banks work and by having interwoven itself deeply into the fabric of society as its biggest ratchet service.
An example will hopefully help to illustrate the problem. If a barber offers you a haircut and charges £10 for it, that service represents wealth, and you are better off for having it and have received £10 worth of value directly. That service is an end in itself, it represents a consumer service and it has made you a better-looking person - hopefully. However banking and financial trading services aren't like that. They aren't ends in themselves, you aren't better looking, better fed or better clothed directly as a result of these services. What they do - if they succeed in their aim - is to provide the means to those ends. You generally accept these services in the hope that they will make you financially better off in the course of time, and being better off you can then become better looking or whatever you want. Take the case of bank loans. These might be taken out to buy something for immediate benefit such as a house, car or holiday, or for deferred benefit such as starting or expanding a business. The loan provides the means to buy whatever you want, and in the case of loans for immediate benefit that benefit is the end that you seek, or in the case of deferred benefit the new or expanded business is a means to a yet further end, the end in that case being what the business repays in due course. The loan provides money, but the benefit comes from what the money is spent on. Banks also consider themselves job creators, but it is people who borrow to set up and expand wealth-creating businesses that create genuinely productive jobs.
Wealth extraction by exploitation is a major part of the deregulated banking and financial trading sector, which explains why it expanded so much after 1980. Governments favour it because of its effect on GDP, which they think is economic growth but in reality is largely double counting.[156]
It would be very revealing to see how GDP without double counting had behaved since the massive growth in banking and financial trading after 1980. I feel sure that it would be very significantly less.
Some might argue that a lot of UK banking and financial trading business is brought in from abroad, because these services represent major exports, so that justifies them. I would argue that exploitation can't be justified whether it is from UK or foreign residents. Exploitation of foreigners by the UK is hardly something to celebrate.
Paul Volcker (Chairman of the US Federal Reserve from August 1979 to August 1987) expressed the situation well in a speech he gave in 2009.[157] Here are some excerpts:
....I wish that somebody would give me some shred of neutral evidence about the relationship between financial innovation recently and the growth of the economy, just one shred of information.
....I found myself sitting next to one of the inventors of financial engineering who I did not know, but I knew who he was and that he had won a Nobel Prize, and I nudged him and asked what all the financial engineering does for the economy and what it does for productivity. Much to my surprise he leaned over and whispered in my ear that it does nothing. I asked him what it did do and he said that it moves around the rents in the financial system and besides that it was a lot of intellectual fun.
The most important financial innovation that I have seen the past 20 years is the automatic teller machine, that really helps people and prevents visits to the bank and it is a real convenience. How many other innovations can you tell me of that have been as important to the individual as the automatic teller machine, which is more of a mechanical innovation than a financial one?
I have found very little evidence that vast amounts of innovation in financial markets in recent years has had a visible effect on the productivity of the economy, maybe you can show me that I am wrong. All I know is that the economy was rising very nicely in the 1950s and 1960s without all of these innovations. Indeed, it was quite good in the 1980s without Credit Default Swaps or CDOs. I do not know if something happened that suddenly made these innovations essential for growth. In fact, we had greater speed of growth in the 1960s and more importantly it did not put the whole economy at risk of collapse.
Banking and financial trading form part of financial services, which also includes insurance, accountancy, financial advice, managing large-scale transactions, and associated supporting services. Banking and financial trading have been separated out because they predominantly involve the creation and manipulation of money and financial assets, and these activities provide great scope for wealth extraction.
Much of the business that bankers and financial traders undertake is on behalf of other financial companies and other branches of the same companies. In this respect they are very inward-looking, and from the public's point of view much of their business is shrouded in mystery. They very much prefer it that way because the less public scrutiny they attract the more they are able to carry on their business to their own advantage.
The banking and financial trading sectors like to be thought of and are often referred to as industries. In public, political and economic minds this builds an association with traditional industries - productive, industrious, bringing together raw materials and labour and creating useful products for society. This very nicely hides the truth of the matter, which is that these so called 'industries' feed off real industries and people, extracting a significant part of what they produce for themselves.
John Kay hit the nail on the head when he said:
'Why does [the finance sector] appear so profitable?' The common sense that suggests that the activity of exchanging bits of paper cannot make profits for everyone may be a clue that much of this profit is illusory: much of the growth of the finance sector represents not the creation of new wealth but the sector's appropriation of wealth created elsewhere in the economy, mostly for the benefit of some of the people who work in the financial sector. (Kay 2015 p6)
Having said all that we do need banking and financial trading services, indeed a modern industrialised economy can't function without them. At issue are the unjustified charges that are being made and the size and stranglehold that they currently have over the economy as a whole . The industrial revolution in Britain is well known to be associated with the development of civil and mechanical engineering, but just as important was the ability to raise large amounts of money and to trade shares in the new industries in an active market. It was banking and financial trading that facilitated those developments. The services need to remain, but they should be made to serve industry and society rather than being allowed to make industry and society serve them.
Other ratchet and straightforward exploitation services won't be discussed further because they are relatively easy to understand, though the wealth they extract is considerable. More difficult to understand are banking and financial trading, so these are discussed in much more detail.