Tuesday, September 2, 2008

Private Banking and Trickle-down Economics

My previous post on private banking focused on it as a career option. Thinking about private banking led me to consider the wider effect of private banking, and more broadly, finance on the economy.

Singapore has aggressively pursued the finance hub idea for the past decade or so to boost economic growth, but with decidedly mixed success. Just a simple glance at IPO figures and you’ll see that Hong Kong and Tokyo are leagues ahead, particularly Hong Kong. With the size of the larger Chinese companies listing on the Hong Kong exchange, it’s New York and London that are starting to feel the heat of the competition. Competition from Singapore is a non-issue for Hong Kong.

But in the area of private banking, we are doing much better. This is thanks mainly to the strong banking secrecy laws here (stronger than Switzerland, which has to comply with EU directives) and the Singapore government, which is, how shall we put it, politically stable and open to foreign investment.

While private banking does create a number of high paying jobs, it’s interesting to consider what the high-flying banking industry means to the ordinary population. This is especially so since doubt has been cast on trickle-down economics in the US of A.

Mainstream economics would contend that any industry doing well would lead to trickle-down effects. For example, a private banker needs teams of assistants and analysts (which means jobs), and their consumption would in turn benefit providers of other services (such as restaurants, real estate agents and nannies). This goes for the private banking clients as well, assuming they reside in Singapore at least some of the time.

But as a thought experiment, sometimes I do wonder how much the wider economy benefits from banking and finance as an industry. For example, while New York City does derive a large chunk of its tax revenues from Wall Street and spends this on public services, it’s undeniable that the greatest beneficiaries from Wall Street’s largesse, aside from the bankers themselves, are the luxury car dealerships, real estate agents, jewellers, luxury retailers and the like. We can include the $400 dollar a head restaurants, $300 a cut hair stylists, the highly paid Mandarin-speaking nannies, the couturiers, furriers and spa therapists.

It’s less than clear how much the general city population benefits from such an industry that consumes mainly high-end goods and services no one else can afford.

This is especially so when we consider the damaging effects of income inequality. The obscenely wealthy tend to bid up the prices of goods that they desire, and this causes knock-on effects on all sorts of goods. Real estate is a good example. We have had whole floors of condos purchased by foreign money in Singapore in the last two years for investment purposes, at the peak of the real estate boom. This surely influenced the affordability of HDB flats.

The economist Robert Frank has written on some of the pernicious effects of income inequality, and it’s worth thinking about whether gains from economic growth that encourage income inequality are worth their detriments.

What exacerbates problems in the case of private banking is that in general, wealth is not created through these activities. While many private banking clients that conduct their business through Singapore are nouveau riche, they didn’t create their wealth here. They created it in China, India, Indonesia…anywhere the pan-Asian and commodity boom touched. Singapore is merely a convenient place to park their funds.

Private bankers are essentially paid to push money around, and with the influx of foreign money into Singapore, it’s difficult not to suspect that at least some of the recent price increases in Singapore have been due to demand-pull inflation resulting from very large capital flows. Certainly, we saw it with real estate.

And with the rising cost (some say value) of real estate, we have escalating rents, higher business costs, and invariably … higher prices. Who knows how much of inflation something like private banking is responsible for?

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