Financial Services Facts and Figures...............

We have heard an awful lot about markets and the finical sector, most recently catapulted back to the front page by the Euro bailout talks and the St Paul’s protest.   This week we saw concerns about FTSE pay rises in excess of 40% and the PM again defending the City of London financial district.  It seems timely to look at the facts and figures behind Financial Services.  Interestingly it is very hard to obtain figures on the value of this sector –perhaps why politicians feel so free to proclaim it as considerable.

If we look at GVA (basically the economic output of a country – about £1.35 trillion in the UK – I’m not going to go into the differences between gross value added and gross domestic product – these are just technicalities) we see that services account for 77% of this!  Clearly an important sector.  But what do we mean by services?  Well basically everything that isn’t the other 23% that is manufacturing and power and goods (manufacturing being 11.6%).  So retail, hotels, cafes, education, health, banks, etc.  What we are interested in is of course finance and banking.  The Telegraph recently quotes a figure of 14% - but it is not clear where this comes from. Business Services in its broadest sense the sector amounts to about 32% of GVA, but this includes everything from bookkeepers and banks to hedge funds and estate agents.  With the greatest respect I wouldn’t image the village bookkeeper considers themselves to be part of ‘City Finance’, nor has much by way of bail out been directed to them.   Looking at financial intermediaries and banking only the percentage comes down to 9%. 

So ‘The City’ amounts to about 9% of GVA (similar to the USA).  A significant amount undeniably.  What is worth considering is the amount this relies on retail banking and the amount that relies on loose regulation, after all this is where the debate lies.  Just as it is difficult to establish sales in the absence of advertising and marketing it is difficult to establish what would happen if the rules were tightened – in both case sales and banking/intermediary activity would continue.   In other words this 9% value includes all finical services and banking – so everything from my daughter’s savings account to the most exotic of hedge funds.   Clearly a significant proportion of this relates to retail banking and the more mundane stock market activity and traditional investment banking.

So, to put some £s to it, we can suggest that this sector contributes approximately 9% of the country’s £1.35 trillion GVA, or about £120 billion per year (this is not the same as asset base which is considerably higher at about 500% GDP).  That’s a considerable amount of course; after all it is 9% of all activity.  The question is though, leaving aside lost revenue linked to a slowdown in demand and recession, what is the cost of the UK bailout to date?  Estimates range from half a trillion to a trillion.  In other words between five and ten years worth of gross activity by that sector, and considerably longer when looked at in terms of tax receipts. Just as a comparison, and an industry I have no special links with, the creative arts industry employs “2 million people in Britain and contribute £60 billion to the economy each year, 7.3 percent of UK GDP” (there is a slight discrepancy between the value of these two industries due to data sources but the order of magnitude is clear enough) (Creative Britain).

With even such conservative papers as the Telegraph accept that this is a recession caused by the financial sector that sector’s activities and costs need to be considered carefully.  For example, it is estimated that about 600 of RBS’ staff were involved in high risk banking.  This is a very small percent of their then 130,000 total.    In other words we can estimate that of this 9% contribution to GVA a small fraction is linked to casino banking (for example in 2005 banking and financial intermediaries accounted for 5.4% of the EU GDP).  This then begs the question as to why we are so scared of regulating these type of activities to prevent reoccurrence.  Or if you prefer a free-market approach, why we are wary of allowing moral hazard to return and forcing banks to take downside risk.  Government money has been used to bail out so-called capitalist businesses instead of allow market forces to act and now we seem unable or unwilling to act to prevent a repeat of the crisis. 

We now seem to be in a situation where considerable effort and capital is deployed caring for a sector that represents at best a couple of percent of GDP (assuming that like every other country in the world we would have a banking and financial sector even if we ceased pandering to the casino side of this industry).  There are clearly two simple choices to be offered: regulation or separation of activities to allow for moral hazard.  After all what is capitalist in handouts or being too big to fail?  I am not sure what Giovanni Medici would make of this and certainly Schumpeter would wonder where the storm has gone.  

I have been enjoying the debates around Occupy Wall Street (OWS) and the rather enterprising global spins offs.  We have heard a fair bit about these so called anti-capitalists and we have ‘enjoyed’ three years of recession.  However I fear we have made little progress.  Watching BBC TV last night I was stirred into writing a short piece on solutions – safe in the knowledge it will be largely ignored.

What has begun to worry me is the misuse of the phrase capitalist.  There was a classic example of this on last night’s ‘Have I Got News For You’ – watch it here if you missed it.  One Louise Mensch MP – who also is keen on fox hunting and brought us the idea of shutting down Facebook and Twitter after the riots - is, it turns out, something to do with the Department of Culture Media and Sports.    The link to the economy is, for those that missed the show, centred on the protestors outside of St Pauls (London’s version of OWS).  Her message was simple.  These people want to end capitalism but they drink coffee in Starbucks therefore are hypocrites as they enjoy all of capitalisms’ gifts. 

Why does this concern me?  Well quite simply we seem to be mixing up what is happening in financial markets with capitalism.  This is not helped by the constant referral to these protestors as anti-capitalist.  They seem to me a rag tagged bunch of mostly well meaning people – I’m sure with a variety of views.   But I don’t represent them and am not here to defend them.  What concerns me is the loss of clarity in the debate.  Let’s jump straight to it.

Capitalism is simply the private ownership of the means of production with an interest in receiving a profit.   Starbucks does that well.  I’m sure the manufactures of the tents the protestors are sleeping in do that ok too.  I’m not so certain that is what is happening in the City’s financial districts though.  I want to look at three things in turn: equity; communities; debt.

The stock market (should) exist to match buyers and sellers.  Companies that need funds are matched with investors.  But is this happening?  It seems more and more that we are focusing on daily movements, on short-termism and on profit taking.  The plan is not to invest but to speculate, to gamble on short-term movements.  There is a really simple cost free solution to this.  Delay all trades by 24 hours, better still 7 days.  When a company does an initial public offering (IPO) it is not disadvantaged by that process taking weeks or even months so why should it be disadvantaged once it floats.  The liquidity of the investment market is not restricted by a gap between decision and action.  The speculators on the other hand are.   The property market already has long periods between decision and exchange and seems unaffected – really why do equity trades have to be instant?

Commodities are much more straightforward.  Again delay would help.  Overall though commodity prices are driven by demand for that good.  Speculators are having an impact but there seems some stability.  Delay here would also produce some stability as would regulation.

Debt is more slippery.  Investors have lent money to countries that may default.  This is the risk investors take – or is it?  It seems now that governments will go out of their way to bail out these miscalculations on the part of investors.  The investors got it wrong.  The government was not that safe a bet; the ratings agencies were not that reliable.   Now these investors are very well paid experts who got it wrong.  There should be a risk side to this risk/reward equation.  Of course governments tell us that if they default they risk higher interest rates – but what of this?  At the moment we are bankrupting ourselves to bail out the banks – what difference would the alternative of slightly higher rates of interest be instead of the expense of providing funds?  Why can’t we restore capitalism to these markets – why are they being subsidised?

So can we have business news back on TV instead of this constant reference to ‘markets’? Can we have a government that stands up and says we are a capitalist democracy and explains to banks that this includes them?  Can we see a government that focuses on growth in the real economy and forwards plans and initiatives to stimulate economic growth instead of making constant reference to the whims of speculators?  We can grow our way out of this – we can’t bet our way out.

Why we should worry about the future of HE...........

I am a very open individual, people are welcome, encouraged even, to wander in and out (only out if they are not ‘in’) of my classes and meetings.  I like managing and lecturing in the open as it were.  But I worry about the new league table approach to HE as exemplified by Which?   

You see it is fine to list results, number of firsts, 2:1s etc.  It is fine to list research ratings.  What worries me is composite rankings and student surveys.  The composite is disturbing as it is weighted and thus influenced by weights.  The student survey is a concern as it represents quantification of the qualitative. 

Let’s look at a few measures and skate around the problems.  Take class size.  What is a reasonable class size?  Are 5,000 fans disappointed at watching a concert live?  Are they cheated in so doing?  Once we move away from, say, one to six mentoring does it make much difference?  I find I can manage interaction up to and including about 70 in a lecture.  Beyond that it goes to pure lecture.  Two points though.  Is a pure lecture necessarily bad? And, and this is a warning, as 70 is the largest class they experience our students report that it is too large, one would expect the same would be true for 35 if that was mixed with 20s elsewhere.  Universities have very, very deep cuts to make here.  As soon as you begin that narrative you end with only sizes of ten or less being acceptable.     

Another interesting measure is support.  What support is required?  If we look to FE here we see nothing short of regular coaching on each assessment.  If you set a task, provide some lectures closely related, provide a guide as to expectations at the various academic levels and consider this education (which in fairness it is) expect criticism.  In a culture accustomed to not thinking anything short of paragraph by paragraph guidance is consider poor.

I didn’t used to like sprouts, I do now.  Likewise my tolerance, enjoyment even, of lectures has increased with age.  Be prepared for you best lecture to be considered dull unless it consists of videos, anecdotes, glib truisms and extreme brevity (avoiding theory and critique at all costs).  Then, when you deliver this brave new style of edutainment, be prepared for the lack of support claim detailed above.

We could go on, but what really worries me is inter-university comparison.  I will guarantee that graduates of Oxbridge and the like will praise their alma matters to the heavens.  Regardless of actual levels of support and interest no one wants to point out the Emperor is naked – especially after you have invested tens of thousands on the privilege.  They have a vested interest that their institutions stay on top.    

I suggest you go back to your staff rooms and prepare for the new term. Study PR, managing expectations, customer satisfaction, managing performance measures (not performance), and if you have time, your subject.

Social Enterprise................

I have been considering the growing phenomena of social enterprise recently.  There was a time things fitted neatly into private, public, charity, co-op and association/club but now we have, partly I thing due to the introduction of CIC, the addition of social enterprise.  Not a charity, not a democratic organisation and not a for profit business.  With this has come a flurry of modules, books, papers, conferences and consultants.  But I’m worried.

I’m worried because for one I think many who have travelled this route do not realise what they have done, they do not realise they are creating an enterprise they cannot sell, cannot cash in on retirement.  I think the general lack of trust in capitalism has seen this as a popular ‘alternative’ but I am concerned as to how alternative it actually is.

Let’s look at the differences (if any):  a private enterprise needs customers, finance, people management and operational skills.  Any profit made belongs to the owner and can be reinvested and capitalised or taken.  Either way there is an increase in personal wealth.  With a social enterprise there is a need for customers, finance, people management and operational skills.  Any profit made belongs to the enterprise and there is no increase in personal wealth except for salary.  Where I am stuck is that the first four are identical to private enterprise, customers, money, people, and organisation.  Skills and knowledge developed in private sector is immediately transferable.    The only difference is the founder has no increase in wealth linked to company success (beyond salary).  What then do the text books, papers, consultant etc teach that is not already in the public domain? 

What also do founders of social enterprise hope to achieve?  If it is access to public money and access to public contracts – restricted to social enterprises – then fair enough – eyes wide open and all that.  It is a way of leveraging money from the public purse – perhaps of offering better value for money than the public sector.  However if these individuals imagine that they are somehow opting out of the pressures of business, of the need to aggressively pursue opportunities, to mange staff effectively and to balance the books they are mistaken.  They are also mistaken if they think that their hard work and re-investment will result in ‘their’ company increasing their wealth.