The following is an excellent excerpt from the book “MAKERS AND TAKERS: The Rise of Finance and The Fall of American Business” by Rana Foroohar from the Introduction on page 17 and I quote: “The Root Causes – It didn’t have to be this way. In the period following the Great Depression, banking was a cornerstone of American prosperity. Back then, banks built the companies that created the products that kept the economy going. If you had some initiative and a great idea, you went to a bank, and the bank checked out your business plan, tracked your credit record, and, with any luck, helped you build your dream. Banks funded America–that’s what we grew up to believe. And that’s what we were told in 2008, when our government pledged some $700 billion of taxpayer money (enough to rebuild the entire Interstate Highway System from scratch and then some) to bail out the American financial system. The resultant Troubled Asset Relief Program, or TARP, was meant to quell the subprime mortgage crisis, brought on, of course, by colossal malfeasance by some of the very banks being saved. But, no surprise, that hasn’t fixed the problem. Wall Street is not only back, but bigger than it was before. The ten largest banks in the country now make up a greater percentage of the financial industry and hold more assets than they did in 2007, nearly two-thirds as much as the entire $18-trillion US economy itself. Main Street, meanwhile, continues to struggle.
Pundits and politicians will give many superficial reasons for this: we have suffered from a lack of business confidence; we are dragged down by the continuing debt crisis in Europe; we are paralyzed by the slowdown in China; we are victims of Washington’s political dysfunction; we are hurt by increased federal regulation and its attendant red tape. While these issues have some peripheral effect, they don’t explain the fact that productivity and growth in our underlying economy have been slowing since the 1990s, regardless of which political party was in power, what policies were in place, or which countries were doing well or poorly on the global stage.
There are more serious conversations to be had about the effects that things like globalization and technology-driven job destruction have had on growth. It is true that jobs have been outsourced to places where labor is cheaper, that increasingly even middle-class work is being done by software, and that these factors have played a role in our slowed recovery. But the financialization of the American economy is the third major, unacknowledged factor in slower growth, and it engages with the other two in myriad destructive ways. Finance loves outsourcing, for example, since pushing labor to emerging markets reduces costs. But financiers rarely think about the risks that offshoring adds to supply chains–risks tragically evidenced in events like the 2013 collapse of the Rana Plaza textile manufacturing center in Bangladesh, which killed more than a thousand garment workers who spent their days stitching T-shirts and jeans for companies like Walmart, Children’s Place, and JCPenney in buildings that weren’t up to code. Finance also loves the cost savings inherent in technology. Yet high-tech financial applications like flash trading and computer-generated algorithms used in complex securities have resulted in repeated market crashes, wiping out trillions of dollars of wealth.
Passing the Buck – The hugely complex process of financialization is often aided and abetted by government leaders, policy makers, and regulators–the very people who are supposed to be in charge of keeping market crashes from happening. Greta Krippner, the University of Michigan scholar who has written one of the most comprehensive books on financialization, believes this was the case in the run-up to the 1980s, when financialization began its fastest growth–a period often called the “age of greed.” According to Krippner, that shift, which would come to encompass Reagan-era deregulation, the unleashing of Wall Street, the rise of the ownership society, and the launch of the 401(k) system, actually began in the late 1960s and early 1970s. It was during that period that the growth that America had enjoyed following World War II began to slow, inflation began to rise, and government was forced to confront the challenge of how to allocate resources that were becoming more scarce (the “guns versus butter” debate). Rather than make the tough decisions themselves, politicians decided to pass the buck to finance under the guise of a “markets know best” approach. Little by little, from the 1970s onward, the Depression-era regulation that had served America so well was rolled back, and finance grew to become the dominant force that it is today. The key point is that the public policy decisions that aided financialization didn’t happen all at once, but were taken incrementally, creating a dysfunctional web of changes in areas like tax, trade, regulatory policy, corporate governance, and law. It’s a web that will take time and tremendous effort to dismantle.
Financialization is behind the shifts in our retirement system and tax code that have given banks ever more money to play with, and the rise of high-speed trading that has allowed more and more risk and leverage in the system to serve up huge profits to a privileged few. It is behind the destructive deregulation of the 1980s and 1990s, and the failure to reregulate the banking sector properly after the financial crisis of 2008. Individuals from J.P. Morgan and Goldman Sachs may (or, more often, may not) go to jail for reckless trading, but the system that permitted their malfeasance remains in place. The problems are so blatant, in fact, that even a number of Too Big to Fail bankers themselves, including former Citigroup chairman Sandy Weill, have admitted that the system is unsafe, that finance needs much stricter reregulation, and that big banks should be broken up.
It won’t happen anytime soon. Even now, finance continues to grow as a percentage of our economy. Leverage ratios are barely down from where they were in 2007–it’s still status quo for big banks to conduct daily business with 95 percent borrowed money. Assets of the informal lending sector, which includes shadow banking, grew globally by $13 trillion since 2007, to a whopping $80 trillion in 2014. Less than half of all derivatives, those financial weapons of mass destruction that poured gasoline on the crisis, are regulated, even after the passing of the Dodd-Frank financial reform legislation in 2010. We may have gotten past the crisis of 2008, but we have not fixed our financial system.
What’s more, regulators are ill-equipped to handle future crises (and history shows they are happening more and more frequently) when they come. Bankers exert immense soft power via the revolving door between Wall Street and Washington. Just look at how many top positions in the Treasury Department, the Securities and Exchange Commission (SEC), and other regulatory bodies are filled by former executives from Goldman Sachs and other major financial institutions. These are the people who’ve advocated for tax and regulatory “reforms” that have, since the early 1980s, decreased capital gains taxes, prevented risky securities from being regulated, and allowed for the boom in share buybacks. Not only are many regulators disinclined to police the industry, but they are also woefully underpaid, understaffed, and underfunded. Consider the Commodity Futures Trading Commission (CFTC), which has about the same staff size today as it did in the 1990s, despite the fact that the swaps market it oversees has ballooned to more than $400 trillion. It’s not easy for regulators on five-figure salaries, with modest research budgets and enforcement assets, to stay ahead of the algorithmic misdeeds of traders making seven figures. And that’s a shame, because a 2015 survey of hundreds of high-level financial professionals found that more than a third had witnessed instances of malfeasance at their own firms and 38 percent disagreed that the industry puts a client’s best interests first.
The Theater of Financialization – Of course, there are other theories about why financialization occurs. Nobel Prize winner Robert Schiller has described the “irrational exuberance” that he believes is a natural human tendency. The fact that we go repeatedly from boom to bust throughout history, moving like lemmings toward the New New Thing–be it tulips or collateralized debt obligations (CDOs)–points to the idea that there are strong psychological forces at work. (The neuroscience of traders’ brains, which respond to deal making similarly to how addicts’ brains respond to cocaine, is in itself a fascinating area of scholarly inquiry.) Other academics, like University of Michigan scholar Gerald Davis, focus on the importance of new management theories such as our notion of shareholder value that puts the investor before everyone and everything else in society, including customers, employees, and the public good.
The changes in the financial system have gone hand in hand with changes in business culture. Apple is hardly alone in its financial maneuvering. Companies as diverse as Sony, Intel, Kodak, Microsoft, General Electric, Cisco, AT&T, Pfizer, and Hewlett-Packard have been worked over by the ambassadors of finance, sacrificing their long-term interest for short-term gains. This may happen by choice, by force, or even unconsciously. As I will explore in this book, Wall Street’s values and culture have been so fully imbibed by business leaders that the Street’s idea about what’s good for the economy has come to be the conventional wisdom within business, and even society at large. To that point, much of the corrosive effect of Wall Street on corporate America can be measured not in terms of raw malfeasance but in the new dominance of short-term thinking. The culture of finance looks for growth now, starting this morning, in time to show results for the next quarterly profit filings. That pressure leads companies into all sorts of bad decisions, such as hasty mergers and acquisitions that look great on PowerPoint before the headaches set in and the layoffs start. (And they usually do–studies show that up to 70 percent of the mergers pushed by Wall Street end in disappointment.)
Davis likens financialization to a “Copernican revolution” in which business has reoriented its orbit around the financial sector. There’s also an entire body of anthropological research that explores the way in which Wall Street culture has come to dominate society and the economy, providing yet another theater for financialization. The anthropologist Karen Ho’s book Liquidated: An Ethnography of Wall Street, for example, looks at how Wall Street’s own labor practices, characterized by volatility and insecurity, have become status quo for the rest of the country. “In many ways investment bankers and how they approach work became a model for how work should be conducted. Wall Street shapes not just the stock market but also the very nature of employment and what kinds of workers are valued,” says Ho, who worked in banking before becoming an academic. “What [Wall Street values] is not worker stability but constant market simultaneity. If mortgages aren’t the best thing, it’s, ‘Let’s get rid of the mortgage desk and we’ll hire them back in a year.’ People [in finance are] working a hundred hours a week, but constantly talking about job insecurity. Wall Street bankers understand that they are liquid people.” Now, as a consequence, so do we all.
Moreover, financialization has bred a business culture built around MBSs rather than engineers and entrepreneurs. Because Wall Street salaries are 70 percent higher on average than in any other industry, many of the best minds are drawn into its ranks and away from anything more useful to society.
Collateral Damage – The deep political economy of financialization was first outlined by Karl Marx, who considered it to be the last stage of capitalism, one in which a system based primarily on greed would eventually collapse. The fact that it hasn’t yet done so is not necessarily an indictment of Marx. As academics like Piketty as well as the famous Marxist scholar and Harvard economist Paul Sweezy have noted, our financialized system creates its own momentum, ensuring that the dysfunctional relationship between finance and the real economy can last a very long time.
The truth is that all of these theories tell us something important about financialization; you can find elements of each in play during nearly every period of financial boom and bust in American history. Flawed incentives, dysfunctional political economy, and simple bad management and poor regulation were all part of the market crash of 1929 and the Great Depression, just as they were part of the crisis of 2008 and the Great Recession. There are the causes of the problem, of course, and then there are the symptoms, which are sometimes equally pernicious. Financialization has resulted not only in big-picture, destructive trends like slower growth, inequality, and market fragility, but also in any number of secondary symptoms that are part of the core illness. We need to treat them now, before it’s too late. This book intends to be a road map for how.”
(THE FOLLOWING IS FROM THE INSIDE JACKET COVER AND I QUOTE:
“Policy makers get caught up in the details of regulating “Too Big to Fail’ banks, but the problems in our market system are much broader and deeper than that. Consider that:
- Thanks to forty years of policy changes and bad decisions, only about 15 percent of all the money in our market system actually ends up in the real economy–the rest stays within the closed loop of finance itself.
- The financial sector takes a quarter of all corporate profits in this country while creating only 4 percent of American jobs.
- The tax code continues to favor debt over equity, making it easier for companies to hoard cash overseas rather than reinvest it on our shores.
- Our biggest and most profitable corporations are investing more money in stock buybacks than in research and innovation.
- And, still, the majority of the financial reforms promised after the 2008 meltdown have yet to come to pass, thanks to cozy relationships between our lawmakers and the country’s wealthiest financiers.
Exploring these forces, which have led American businesses to favor balance-sheet engineering over the actual kind and the pursuit of short-term corporate profits over job creation, Foroohar shows how financialization has so gravely harmed our society, and why reversing this trend is of such importance to us all. Through colorful stories of both “Makers and Takers,” she reveals how we can change the system for a better and more sustainable shared economic future.”
LaVern Isely, Progressive, Overtaxed, Independent Middle Class Taxpayer and Public Citizen Member and USAF Veteran