Are Swiss Banks Socially Useless?

May 12, 2011

by Chidem Kurdas

That’s a daft question, but it is suggested by what became conventional political wisdom in the aftermath of the financial crisis. Finance was vilified and  financial activity widely described as socially useless, a term coined by British regulator Adair Turner. Yet the developed economy that has boomed in post-crisis years is Switzerland, a world financial hub.

Here is Paul Krugman in 2009: “there’s broad agreement – I’m tempted to say, agreement on the part of almost everyone not on the financial industry’s payroll – with Mr. Turner’s assertion that a lot of what Wall Street and the City do is socially useless.”  One could find many other quotes to similar effect from Mr. Krugman and hordes of pundits.

This notion of social uselessness harks back to the Marxian idea of unproductive labor. Planners in the old Soviet Union gave short shrift to services, in particular trade and finance.   They devoted resources to making things like cement and steel, believed to be the basis of a strong national economy.

The Swiss, notably, have not subscribed to that view.  About 20% of their national income comes from the financial industry. The percentage is smaller for gross national product and employment, but still significant—-banking and insurance account for 5% of all employees.

Swiss banks have their problems, of course. But right now the country’s main economic issue is that its currency has gone up too much, making its exports expensive.  Seen as a safe haven by investors, the Swiss franc has been on the rise against the euro and other currencies since the crisis. While every other politician and his cousin loudly declaimed against the evils of finance, a long-time financial center quietly continued its business.

Despite the threat to exports from the highly valued franc, a recent survey by the Swiss Institute of Business Research predicts robust growth.  The Swiss unemployment rate is enviably low, around 3% compared to 9% in theUnited States. Government debt as a percentage of GDP is also low and has been steady or declining, in contrast to the explosive growth inUS government borrowing.

You may not likeSwitzerland’s neutral stance and generally hands-off approach to the wealthy of the world who move their money to the country. But there’s no question that the Swiss enjoy great affluence and freedom. The relatively large financial sector is one reason – not the only one, certainly – for the affluence. Zurich’s Bahnhofstrasse and Geneva’s financial district are very useful forSwitzerland.

The joke is on those who subscribe to the counter view once put into practice by Soviet planners, with consequences that should be a lesson for everybody but are apparently forgotten by many.

20 Responses to “Are Swiss Banks Socially Useless?”

  1. Glen Says:

    I don’t think the commentators are saying the financial sector is *totally* useless. I think they’re saying that a *big chunk* of what it does is socially useless — and they might have a pretty good case. Just as government involvement in the healthcare has generated much activity in that sector that’s arguably wasteful or useless, perhaps the same thing has happened as a result of interventions in the financial sector. A good deal of what they do is finding ways to arbitrage regulations so as to maximize their implicit subsidies from the government and the Fed (especially the promise of creditor bail-outs).


  2. I like this post. The importance of financial intermediaries is ‘what is not seen’ by some.

    @Glen

    Argued like this, I would agree. But I do not think they mean it this way. Usually these kind of arguments are made when politicians are urged to ‘tame markets’ via regulation. So they cannot do all this useless stuff. This is quite the opposite.


  3. The Swiss comparative advantage has been to manage wealth. That is certainly socially useful.

    Paul Volcker quipped that the only useful financial innovation in recent years was the invention of the ATM machine. It was obviously said tongue-in-cheek, but to make a broader point.

    Much of financial innovation involves dodges on taxes and regulation. At least some of the latter involves saftey-and-soundness issues. Much of what is going on in the derivatives market is constructively wagering, and certainly doe not belong in a bank.

    The so-called innovation is being done under the cover of gov’t. guarantees, implicit and explicit. It is underwritten by taxpayers, and would not occur otherwise (or would be done with less risk). That is not socially useful.

    I’d say the presumption that an innovation in manufacturing is producing a useful product. Given public policies and institutions, I don’t think the modern financial system is entitled to that presumption.

  4. N. Joseph Potts Says:

    Rap music is socially useless, too (isn’t it?).

    Do Turner/Krugman propose to abolish or prohibit it somehow?

    If not, their name-calling is of no concern to me.

    I’m socially useless, myself, in fact.

  5. chidemkurdas Says:

    Glen–
    Yes, they do not claim the entire industry is useless. As Jerry mentions here, even critics note that the ATM is a useful innovation, for instance. But as Andreas points out, the “socially useless” argument is used to justify more intervention, not less. Regulation to reduce “socially useless” activity can then create more socially useless activity, which in turn leads to more regulation, and so on in an infinite regress. That raises the question of the social usefulness of government involvement in industry.

  6. chidemkurdas Says:

    Andreas Hoffman–
    ‘what is not seen’ is an excellent description. As long as financial intermediaries function smoothly, what they contribute is not that apparent.

  7. chidemkurdas Says:

    Jerry O’Driscoll –
    Re “The so-called innovation is being done under the cover of gov’t. guarantees, implicit and explicit.” That is certainly an argument for getting rid of government guarantees. Until that happens, we won’t know what’s useful and what’s not.

  8. Mario Rizzo Says:

    I think it is “socially useful” (clearly a value judgment)to provide a means to avoid paying taxes in one’s home country. I assume Swiss bank accounts still enable this.I am of course *not* saying it is “socially useful” for all manner of tyrants and murderers to have a place to hide their money.


  9. Chidem — That’s my point.

  10. chidemkurdas Says:

    Mario-
    Places that are hosts to money generally do very well–like Switzerland. Places from which capital moves away, whether because of high taxes, intrusive government or some other reason, generally do less well. As for tyrants, the money is the least of the problems, I would guess. Countries that get rid of their tyrant can sue to recover the money.

  11. chidemkurdas Says:

    Jerry, well, if we don’t know what’s useful and what’s not, it is nonsense for governments to claim to regulate or tax the useless activities. It is just as possible that what’s being discouraged is the useful part.

  12. chidemkurdas Says:

    N. Joseph Potts-
    As Mario says, this notion is a value judgment. But it is also a political tool.


  13. Yes, Chidem. But, equally so, economists do not know what are the useful, productive parts. So they should stop defending financials ervices as though the activities were taking place on free markets.

  14. Andreas Hoffmann Says:

    @ Jerry

    I agree. But often this is only possible due the expectations of being bailed out in case of default and so on.

    But then the argument would call for more market, more real banking and less regulation. In contrast, the ‘socially useless’ argument seems to be used mainly to propose more ‘funny’ regulation.

    I guess one should call the moral hazard creating mechanisms socially useless. They are well-intended but have too many negative side effects as banks know how to make use of them.

  15. bill butos Says:

    A “socially usefyl” post, Chidem! Swiss banks were once a safe tax haven. Last year, as I recall, the IRS arm twisted the Swiss to open their books for “tax evaders.” Was that a one time concession or is that now a SOP?

    Bill.


  16. It is axiomatic that anything which exists in society is socially useful.

    You might not like it – rap music was mentioned here – but obviously more than one person must want something for it to exist socially.

    That still leaves unaddressed the questions of “Useful to whom?” and “Useful for what?” The net effects may be negative. War and crime are examples. Other axioms of human action point to the fact that those are destructive because they operate by coercion, not agreement. To the extent that “Wall Street” i.e., the markets for capital risk, is meshed with political power, the bottom line is in parentheses … or red, the color of blood and socialism.

    As an aside, I was disappointed to read:
    … its currency has gone up too much, making its exports expensive.”

    Market thinkers two centuries ago found the fallacy in that mercantilist perspective. Switzerland’s economic health is not measured by the gold coins under the king’s chair, but in the ability of the people there to buy whatever they want. The relative rising of the CHF causes some at home buy imports while others hold currency, even while people elsewhere buy more of them for the future, just as others sell theirs to take their profits now. While Swiss pharma and foods do face price competition, product differentiation stiffens elasticity. In short, human action is (gratefully) more complicated than two curves on a Cartesian grid.

  17. Chris Says:

    I also agree that the commentators are not referring to the finanical sector as being completely socialy useless. Just a large amount of what it does may be considered useless by some people and but we are not aware of what the useful parts are.

  18. chidemkurdas Says:

    Bill Butos–
    Thanks, Bill. The US tax actions against UBS and its clients resulted in a deal that would have required the bank to turn over the names of its clients to the IRS, but last year the Swiss parliament rejected this deal: http://www.marketwatch.com/story/swiss-parliament-rejects-ubs-tax-evasion-deal-2010-06-08

  19. chidemkurdas Says:

    Andreas-
    Re “I guess one should call the moral hazard creating mechanisms socially useless.”
    Good point.

  20. chidemkurdas Says:

    Michael E. Marotta–
    Re your comment on “But right now the country’s main economic issue is that its currency has gone up too much, making its exports expensive. ”
    You’re right. I should have made it clear that this is what one sees discussed as the issue, it is not what I would have picked myself. It is what policy makers and analysts appear to focus on.

    I read several reports on the Swiss economy and they all mentioned the appreciation of the CHF. The Swiss central bank has intervened to weaken the currency.

    In general I agree with your point against the mercantilist perspective.


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