BillBrasky
#PSF
https://medium.com/@teamwarren/end-wall-streets-stranglehold-on-our-economy-70cf038bac76
Here’s the problem with the belief that helping Wall Street always helps the economy: it isn’t true. In recent decades, Wall Street has grown bigger and financial sector profits have gone from 10% to 25% of total corporate profits, but everyone else in America has lived through a generation of stagnant wages and sluggish economic growth. Even today, big banks are making record profits and handing out huge bonuses as average wages barely budge.
The purpose of the financial sector is to connect savers with borrowers as efficiently as possible and to spread risk. A growing financial sector can help the rest of the economy if it helps connect more people more efficiently and spreads risk more effectively. But, as several studies have shown, past a certain point, the growth of the financial sector undermines the rest of the economy by extracting money from it without producing any real value.
America is well past that point. For example, a recent study found that “when private credit grows to the point where it exceeds GDP, it becomes a drag on productivity growth.” Private credit in America has exploded past that benchmark — it’s been between 160% and 210% of GDP for the last twenty years. The study also found that “when the financial sector represents more than 3.5% of total employment, further increases in financial sector size tend to be detrimental to growth.” We’ve blown past that one, too — in 2016, the financial sector represented more than 5% of total employment.
Past these tipping points, the growth of the financial sector hurts the economy for a few reasons:
- It generates more of its profits from “non-interest income” — another word for fees that extract money from the rest of the economy.
- It tends to lead to over-investment in companies that are lower-productivity but have lots of collateral to lend against — like construction and property development — luring more businesspeople into those fields.
- It leads to under-investment in high-productivity manufacturing companies — like those in aerospace or computing — that are particularly reliant on research and development.
It lures talented people away from other more productive ventures, like starting businesses. For example, the year before the 2008 financial crisis, nearly half of Harvard’s graduating class took jobs in finance.
- To make matters worse, America’s financial sector is doing a poor job at performing its actual role in the economy. A good financial sector should give people a place to put their money, but an astonishing 25% of American households don’t have adequate access to a simple bank account. A good financial sector should move money quickly and cheaply, but it costs more today to “produce loans, bonds, and stocks” than it did a century ago, despite huge advances in technology. And a good financial sector should allocate capital efficiently, but since the mid-1990s, America’s financial sector has failed to provide capital to the companies with the most growth potential.
We should start by transforming the private equity industry — the poster child for financial firms that suck value out of the economy.
Private equity firms raise money from investors, kick in a little of their own, and then borrow tons more to buy other companies. Sometimes the companies do well. But far too often, the private equity firms are like vampires — bleeding the company dry and walking away enriched even as the company succumbs.
