Bank Profits a sign of economic sickness, not health

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The record $6 billion profit that the Commonwealth 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. The blowout from this level to virtually six times as much began when bank deregulation began under Hawke and Keating, and then took off as Howard and Costello encouraged everyone to become “Mum and Dad Investors”, which meant borrowing money from the bank and gambling on share and house prices.

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.

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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155 Responses to Bank Profits a sign of economic sickness, not health

  1. RogerGLewis says:

    I have been participating in a Discussion in the Linked in group for the Economist and just linked to this excellent article.Last time I visited I didn’t register but have now Its nice to find dialectic seekers of truth in cyberspace and the real world , Thank you Steve for this great site.
    I have also really enjoyed reading the comments thanks for all of those too.

  2. Steve Keen says:

    Thanks Roger,

    Nice to know there’s some feedback from my analysis to The Economist too. I expect there’ll be more progress in the popular press treatment of economics than in academic economics for some time to come.

  3. Pingback: Aussie banks safety if GFC redux? - Page 2

  4. Steve Roth says:

    Not sure if you see comments on old posts, but:

    Wondering if you’ve found any confirmation using Minsky about the 1% bank profits idea.

  5. Pingback: “A Sustainable Level of Bank Profits Appears to be About 1% of GDP”. ” Wall St. Sector Selector

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