Monday, June 1, 2015

how to measure the size of finance

From Chapter 2: Indicators of Financial Structure, Development, and Soundness, a PDF at the IMF:

Financial structure is defined in terms of the aggregate size of the financial sector, its sectoral composition, and a range of attributes of individual sectors ...

The aggregate size of the financial sector. Yeah, that's what I'm looking for. ("How to measure the size of finance" was the Google search that turned up the IMF PDF.)

Oh, but I left off the ending of that sentence:

... a range of attributes of individual sectors that determine their effectiveness in meeting users’ requirements.

Ah, yes. Customer satisfaction. That's some bullshit, I think, and that's why I left the ending off. I'm not interested in the financial sector's assessment of their customers' satisfaction. Just the size of finance.

Next page of the PDF:

The overall size of the system could be ascertained by the value of financial assets, both in absolute dollar terms and as a ratio of gross domestic product (GDP). Although identifying the absolute dollar amount of financial assets is informative, normalizing financial assets on GDP facilitates benchmarking of the state of financial development and allows comparison across countries at different stages of development. Other indicators of financial size and depth that could be usefully examined include ratios of broad money to GDP (M2 to GDP), private sector credit to GDP (DCP to GDP), and ratio of bank deposits to GDP (deposits/GDP).

That's exactly what I'm looking for. How to measure the size of finance.

Oh, but I left off the ending of that paragraph:

However, one should be careful in interpreting observed ratios because they are substantially influenced by the state of financial and general economic development in individual countries.

Fair enough. But then, this:

Cross-country comparisons of economies at similar stages of development are, therefore, useful in obtaining reliable benchmarks for “low” or “high” ratios.

What they're saying is that we can best determine whether the ratios are high or low -- whether finance is a large or small part of our economy -- by a comparison of nations.

Source: McKinsey Global Institute, January 2012
In other words, total U.S. public and private debt at 300% of GDP should be considered low, if only we can manage to dig up a few countries with even higher debt. This is serious bullshit. If the ratios for many countries are high, then surely finance is large in all of them.

That's how the U.S. housing sector got in trouble, according to something I read a while back. Instead of using a fixed debt-to-income ratio to determine mortgage affordability, lenders let the ratio creep higher. This was justified by observation that economic fundamentals were still sound. That justification was used, apparently, right up to the moment of crisis.

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