How Financialization is Destroying the REAL Economy

There are countless metrics you can use to present the notion that our economy, the real economy, the one that almost all of us live in, is broken and not working for the great majority of Americans. Since we began our recovery from the ‘Great Recession’, wage growth is flat, GDP growth is below average and both public and private debt are at record levels. 6 of the top 10 fastest growing jobs pay $15 or less. Income inequality is soaring and middle-class Americans are struggling to afford a basic home, healthcare, education or retirement. All the while, Americans are working longer hours, and despite the fact that their productivity has increased, they have seen no real gains.

Meanwhile, Wall Street and ‘Big Banks’ are doing better than even before the ‘Great Recession’. The top 5 banks (JP Morgan Chase, Bank of America, Citibank, Wells Fargo and US Bank) continue to rake in enormous profits and increase their share of total banking assets. These top 5 banks now control 44% of the $16 trillion in banking assets, up from their 2007 percentage of 35%.

How can it be that Main Street struggles while Wall Street grows?

Wall Street has created its own economy that is almost completely detached from the main street small businesses. The growth of the financial industry has come at the detriment of the real economy.

Pressure for Short Term Profits

Wall Street has created a business dynamic that demands publicly traded corporations focus on short term profiting and shareholder enrichment over long term company competitiveness. Companies are now spending 95% of their net income on dividends and share buybacks rather than investing those resources in research and development, which, in the long run, would put a company in a more competitive position. In fact, the total amount US companies are expected to spend on dividends and stock buybacks in 2017 is more than $1 trillion. That is more than the amount the US Federal government will collect or pay out in Social Security taxes and benefits in the same year. 

Up until 1982 share buybacks were ILLEGAL. They were, and still are, a means to manipulate share prices and boost earnings per share (EPS). Share prices and EPS are used regularly as the metric at which CEO’s compensation structures are driven. When a CEO has a choice between investing in a new business opportunity that might grow the company ten years down the road or buying back company stock to boost EPS, they elect to buy back shares and reap the enormous compensation packages. This market manipulation is great for CEO’s and Wall Street shareholders, but in the long run it is bad for their company, it is bad for their employees and it is bad for the overall economy. It is a very shallow and shortsighted way to increase the wealth of select few elite members of society while offering no benefits to the rest of us living in the main street economy.

This cannibalization of a company’s resources for short term enrichment leads to less money for employee wages or retirement programs and stifles a company’s future growth, competitiveness and innovation. It also accelerates the gross and dangerous income inequality in this country as nearly 70% of capital gains and dividend income go to the top 1%, while the bottom 90% of Americans receive practically nothing. Short term cannibalization has also led to less companies deciding to go public. The number of new IPO’s is about a third of what it was 20 years ago. An IPO now marks the end of an innovative company, as a Stanford Study shows innovation in tech companies’ tale off by 40% after going public due to pressure from Wall Street to pay off investors and increase stock prices.

‘Big Banks’ have changed the role of the financier

Traditionally, the role of banks has been to fuel small businesses and innovators by giving them the financing and liquidity they needed. The way lending has worked historically is as such: a motivated individual would put together a business plan and present it to a bank. That bank would review the plan, review the individuals credit and if everything looked promising, the bank would finance the idea. This was the primary role of banking, the role that small and new businesses depended on and this was the intersection where main street and banking would functionally connect. That relationship is all but lost, as banks look to more speculative risky short-term investments. Today, big banks use their resources to issue massive amounts of debt on already existing assets and securitize that debt to turn it into a tradeable product. As a result of that shift in resources, just 15% of banking capital goes into traditional lending in the real economy. A mere 15% goes to funding the ideas and projects of the innovators and entrepreneurs who, historically, helped build this country, invest in communities and serve the larger society as a whole. This shift in focus from lending to speculation has hurt small businesses and potential new business particularly hard. In the 1980’s new companies made up half of all US businesses. New business now makeup just one third. Additionally, small businesses are America’s primary source of job creation and GDP growth, so of course when you dramatically cut lending to small business you create a less vibrant economy.

Big banks are not interested in lending to small business any longer. Despite that it is essential to the overall economy, it takes too long to turn a profit to serve their short-term desires. The financial services industry has created their own economy, inoculated from the real one, that only serves the interests of top corporate managers and wall street investors all to the detriment of main street. The finance sector creates just 4% of jobs, but receives almost one third of all corporate profits, up from the 10% it was taking 25 years ago.

Our Future

This path we are on is threatening our economy and our future. Prior to the 1980’s we invested in our small companies and when the prosperity of those companies improved, so did the fortunes of their employees. Those relationships that had worked so well for middle class Americans have been broken.

We must reform the finance industry so that it works for all of us and not just a handful of financiers.



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