Monday, November 28, 2011

Debt of The Financial Sector

Here's a scary chart, one that I believe explains why the current Debt Crisis merits capitalization, and why it won't go away easily - certainly not by merely "printing" money and giving it to the FIRE sector (finance, insurance, real estate).

 USA:  Financial Sector Debt Soared Sixteen-fold Between 1952 and 2008

In a most dramatic way, the chart shows that in the United States debt issued and owed by the financial sector (banks, insurers, brokers, etc.) soared to nearly one third of all debt outstanding.  A similar pattern is observable across the entire Western economy.

The process gathered steam between 1995 and 2005 because of:

(a)  financial speculation (leverage, derivatives, etc) and,
(b) securitization of all manner of bona fide and financially engineered loans, from mortgage debt and credit card receivables, to CDS hybrids (CMO's, CDO's, CPDO's, etc).

The end result was the financial/debt/monetary bubble that burst spectacularly in 2008 - and is still bursting, since the shadow-banking bubble machine has not been shut down.
It is, therefore, highly ironic that the Debt Crisis caused by a virulent out-of-control financial sector has now infected the once safest haven of them all: government debt.  Bankers, brokers, money managers and rating agencies - whose inter-connected behinds were collectively rescued from self-immolation three years ago - now lash out at the very governments whose deep pockets (a.k.a. taxpayers) saved their bacon.

Italian Government 10-Year Bond Yield

Putting it another way, the massive expansion of finance and its subsequent collapse is suffocating the world's real economy.  We need hundreds of billions of fresh capital to invest in productive projects like energy and network infrastructure, but the FIRE sector is demanding (blackmailing?) that governments continue to dump good money after bad down a bottomless pit, one dug by their own greed and perfidy.

Of course, governments are not innocent babes in this operatic auto-da-fe.  First, they foolishly deregulated finance, a notoriously self-serving, risk-loving and cyclical business (for example, by abolishing the Glass-Steagall Act).  And then, they kept looking the other way while finance mutated and morphed into a menacing giant, albeit one with extremely weak legs.

It is high time that governments act decisively and forcefully to reverse the "financialization" of the real global economy.  We cannot survive, never mind thrive, on the "free-markets" mantras of  Wall Street and City alone.    The FIRE sector must be forced to de-leverage.

There are many ways to do this: higher capital requirements, strictures on own-account trading, transaction taxes, regulating off-balance sheet derivatives.  In my opinion all of them, and more, must be implemented.  The purpose is as simple as it is difficult: Kill the beast before it kills us.


  1. UK - Bank bailout costs 70 bn. Most of that because of politicians agreeing to rent seeking by the failed banks.

    Government debts, 7,000 bn when you include the pensions. Bernie Maddoffed off the books.

    There is no comparison when it comes to scale

  2. I fear Mises had it correct in regard to credit driven expansion and collapse.

  3. Take a look at what the public sector have accumulated in debt:

  4. @Lordblagger
    There is no comparison when it comes to scale

    With number skills like those I'd imagine you are a conservative who works in finance! :)

    There is no comparison when it comes to comparing 30+ years worth of future obligations to a large population of people and businesses (now sadly being reneged, re-rolled) with one years worth of bailout to a parasitic tertiary industry we could bureaucratise back to the 1950s (or stone age?) ... Not exactly apples and oranges you are comparing, more apples and apple trees.

    To paraphrase Elliot our bankers know nothing, see nothing, remember nothing! They create a Waste Land and call it financialisation, or could that be fictionalisation?

    NB: Love the fact that my captcha to post is "Coase"

  5. This is quite scary stuff. Thanks for sharing.

  6. You will not believe this stuff. Indeed, what we all suspected about these banksters is painfully true.

  7. Very interesting report: "Throughout history, he says, total debt-to-GDP only ever breached 200% when nations were spending on war. Today we're at 310%."

  8. @Lord Blagger - clearly a troll banking poster from the City. Let's just leave it at that.

    FTAlphaville - the Head of Investment Banking at the largest Bank in the world by assets did not understand what a CDO was that he was in charge of trading.

    Regardless of whether there was any intent (aside from greed and ignorance), such incompetence will literally costs 100's if not 1000's of lives indirectly. Fewer hospitals, kidney machines, doctors and nurses, longer waiting lists. More suicicdes by the financially pressed...etc etc etc.

    So this white collar crime, this incompetence is not without victims and we must demand redress. Literally hundreds of bankers should be tried for this 'accident' as though it contravened Health and Safety legislation.

    Hundreds of bankers need to be sent to jail. Otherwise the take by everyone in society is just going to be 'do whatever you can get away with'.

    The costs for the few are worth it for the benefit to broader society and its morals.

  9. Re: spam.

    Taken care of, thanks Camabron.


  10. Thanks, for this post "Debt of The Financial Sector". Good knowledge about what is debt consolidation

  11. Yuo're right Lord Blagger,I fear Mises had it correct in regard to credit.

  12. Dear Hallasious,

    We hope all is well with you in 2021. We are fans of your research and cite this very blog post in our current study titled “Hero or Villain? The Financial System in the 21st Century”. In particular, we incorporate and discuss the top figure (financial sector debt). The paper is currently at the Revise/Resubmit stage at the Journal of Economic Surveys and we would like to kindly ask you whether you could share the data with us to be able to re-create the figure (either with the original or updated data), as one of our reviewers has requested this. Naturally, we would still acknowledge your contribution as well as your kind assistance in providing the data.

    Thank you very much in advance, with best wishes
    Liam (

    1. Dear Liam, thank you very much for your interest. The chart on my post was taken from a site that unfortunately no longer exists. It was maintained by a professor at the U. of Alabama. The raw data is found at the FRED site of the Federal Reserve of St. Louis

      Financial sector debt for the US
      Debt of all sectors

      The FRED site is very extensive and detailed, you can find a huge amount of relevant data. I hope I have helped and once again thank you for your interest.