Undernews is the online report of the Progressive Review, edited by Sam Smith, who covered Washington during all or part of one quarter of America's presidencies and edited alternative journals since 1964. The Review has been on the web since 1995. See main page for full contents

July 5, 2009


BBC - Some of the most arresting analysis of the causes and consequences of the financial crisis is being made by Andrew Haldane, the executive director of what the Bank of England calls - with no hint of irony - "financial stability".

His latest speech, "Small Lessons from a Big Crisis", is grist for those who believe top bankers are being paid far too much (although this is not a conclusion he draws himself).

Haldane looks at the returns generated by UK banks and financial institutions since 1900, to see whether shares in the financial sector have performed better than the market in general.

What this shows is that from 1900 to 1985, the financial sector produced an average annual return of around 2% a year, relative to other stocks and shares.

So for 85 years investing in bank shares was "close to a break-even strategy" (his words), nothing special.

But in the subsequent 20 years, from 1986 to 2006, returns went through the roof: the average annual return soared to more than 16%, which was the best performance by financial-sector shares in UK financial history.

And it's no coincidence that the pay of top bankers also zoomed up to the stratosphere. Which at the time upset only a few, because the bankers seemed to be enriching the owners of the banks, their shareholders (millions of us through our pension funds).

That, of course, is not the whole story.

The collapse of banks' share prices in the past two years has wiped out most of those gains: to March this year, when the low point was touched, the fall in UK bank share prices was more than 80%, an all-time record plunge.

What this means is that in the full period from 1900 to the end of 2008, the annual average return on financial shares was less than 3%, almost identical to the market as a whole.

Which is what common sense would predict should have happened, since banks are to a large extent a utility, serving the needs of the wider economy, and its difficult to see how banks in general can therefore grow significantly faster than the wider economy.


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