Tag Archives: Financialization

Finance is Destroying the Economy

“In recent years, annual trading in stocks — necessarily creating, by reason of the transaction costs involved, negative value for traders — averaged some $33 trillion. But capital formation — that is, directing fresh investment capital to its highest and best uses, such as new businesses, new technology, medical breakthroughs, and modern plant and equipment for existing business — averaged some $250 billion. Put another way, speculation represented about 99.2% of the activities of our equity market system, with capital formation accounting for 0.8%.” – John Bogle, founder of The Vanguard Group

What this means is that the financial sector (banks, hedge funds, brokers, etc) does not do it’s job and it has a very basic job: to productively invest the nation’s savings, our savings, to create wealth. Instead it speculates, creates bubbles, and causes financial crises like the one that caused the Great Recession. As a reward for so poorly managing our savings and recking our economy, the financial sector takes home something like 25% of all corporate profits while representing something like 4% of employment. This is a sector that produces nothing, extracts wealth, and employs very few yet it is sucking up all the profits.

Worse yet is what the financial sector has done to the rest of the economy. Obsessed with the mantra of maximizing shareholder value (which somehow has translated into raising the immediate stock price even if it kills the company 5 years later), finance has taken hold of American industry. Our largest businesses no longer invest in research and development to remain competitive, they no longer invest in their workers, they no longer invest in capacity and efficiency.

Instead wages are stagnant, we have mass layoffs, off-shoring, extensive lobbying to accrue government handouts, selling off assets to temporarily boost profit margins, assuming massive debts to fund stock buybacks, all to raise the stock prices in the short term (so CEO’s and corporate raiders can sell off their stocks at the artificially created high and leave the company to flounder). It’s not just limited to those who work for a living though, all consumers suffer at the hands of an out of control financial sector, the financial sector was responsible for the spike in the cost of food around the time of the 2008 financial crisis for example (which partially led to the Arab Spring and the crisis in Syria and rise of ISIS, demonstrating how ludicrously connected the modern global economy is).

And most egregious of all is that we’ve been made complicit in our own destruction. Many people have a 401(k) or pension or other savings plans. These are typically invested with some hedge fund or other that manages your savings. Your savings gives these fund managers additional clout to buy larger percentages of shares, to become “activist investors”. And they’ll use this clout to demand the companies act to provide better returns and I’ve already mentioned what that means (layoffs, downsizing, off-shoring). Theoretically your retirement savings could be used to put you and people you know out of a job, in fact they most certainly have.

When the inevitable fallout comes, when the speculation and bubbles and deconstruction of the American economy becomes too much, we have recession and financial crisis like in 2008. But then what happens? Millions of regular people lost their jobs, millions of people had their savings wiped out, houses were foreclosed, small businesses shut down, factories closed their doors, immense wealth was wiped out in a matter of days. And then the United States government and the Federal Reserve bailed out the banks, they bailed out the financial sector with trillions of dollars (yes, TRILLIONS, it sounds absurd, but horrifyingly true), and everyone else who suffered at the hands of the financial sector’s gross negligence got NOTHING.

Is this how we want our country and our economy to be run? Is this what we believe to be right as a society? Fifty years ago this behavior was not tolerated but were we any less successful as a country, were our markets any less free, was our economy any weaker? Finance is not the economy, finance is meant to keep the economy running smoothly. It is time we took our country and economy back from the financial sector, back from the corporate raiders, back from absurdity of neoclassical economic theory! We survived the last crash but fixed nothing, every aspect of financial sector resilience is now worse than it was in 2008, can we survive the next one?

This is a disaster waiting to happen or more likely in the process of unfolding before our very eyes. My intent is not to fear monger or to drum up votes but to raise awareness of the serious problems we face as a state and a country, I care not at all if I win so long as someone is doing something to fix this. I believe Mark Romanchuk and Lane J. Winters will act when the seriousness of this issue becomes apparent but someone needs to make this clear to them now. If you care about Ohio, if you care about your neighbors, go tell your preferred candidates and your representatives in whatever district you live to act now! We need reform, we need alternatives, we need action, and yes, there are solutions we can take at the state and local level because we all know the federal government won’t do anything about it. The Ohio Investment Bank might not be the best solution but it’s the best I’ve got, what do you have? Seriously, I’m asking, everyone reading this, let’s figure something out to save Ohio.

The Next Recession

It is unusual for a bull market to last much longer than ten years. Increasing instability would suggest that this one is nearing its end. This has some important implication for the coming decade.
Since the financial collapse and the Great Recession we’ve seen little action by the government or anyone to fix the problems that caused the collapse. In many ways these problems have gotten worse; the Too Big to Fail banks are larger than ever, the shadow banking sector has expanded, private equity firms have caused housing prices to rise while homeownership has fallen, major US corporations have taken on considerable debt to fund stock buybacks (arguably stock market manipulation) rather than invest in R&D. Meanwhile government debt has skyrocketed and the Fed has held interest rates low for a decade. This means the government has little fiscal or monetary tools to counteract the effects of a financial crisis and ensuring recession.
Many households are in such a precarious economic position with debt and mortgages that the next economic downturn will lead to mass foreclosures and inability to cover both debt and living expenses. Considering rather stagnant wages the last decade, rising household debt, and the loss of wealth in 2008, most Americans are in a worse position than they were in 2007 meaning another recession has the potential to be considerably worse. Debt is dragging down growth and it has the potential to strangle the economy when the next recession hits. 
I am not fear mongering here, I am trying to properly express the urgency of the situation so that appropriate action can be taken while we still have the opportunity. Remember folks, before the Great Depression we used to call the depression of 1873 the Great Depression. It is a mistake to think the course of history is perfectly linear, that the present is a good indicator of the future. History has a way of taking sudden, unexpected turns.
tl;dr: The economy is going to slow down, the government and households aren’t prepared for it.