Financial Intermediation in the National Accounts: Asset Valuation, Intermediation, and Tobin′s q

Where in the statistics on national economic activity would one look to see a major financial crisis approaching, or to track its progress as it unfolds? Our answer is that the financial intermediation sector would seem the natural place to look first, because it was the epicenter of the recent crisis that originated in the mortgage market and spread throughout the financial sector and then on to the real economy. This raises the further question of where this sector is actually located in the current national accounting system and how well it is connected to the rest of the economy. We approach this second question by placing financial intermediation at the center of a modified circular flow model in which nonfinancial businesses and households are linked by financial intermediaries, rather than treating these intermediaries as just another resource-using industry. Treating intermediation in this way helps explain how shocks that affect even small parts of the economy can propagate rapidly and widely. Our accounting framework also allows us to treat asset bubbles and their consequences as disequilibrium phenomena, rather than imposing a priori the assumption of asset market equilibrium on the collection and organization of macro data. We use this framework to measure Tobin's average q ratio over the period 1960 to 2012, as well as the degree of financial leverage.