May 3, 2017
By Michael Drohan
Review of Book: Makers and Takers:The Rise of Finance and the Fall of American Business by Rana Foroohar, Crown Business, NY, 2016.
Economic inequality is a growing cancer in the US domestic economy, as also in the global economy. The figures are truly obscene; for instance, the 400 richest individuals in the world own more wealth than the poorest 50 percent of the world’s population. Between 1978 and 2014, average CEO pay in the US increased by 1000%, whereas that of a median worker increased by 11%. Consequently, CEO pay now stands at 303 times that of the average worker. Just these few stats illustrate the enormity of the divide between what the Occupy Movement termed the one percent and the 99 percent.
But we may ask: how did this happen and how does it continue to get worse? The new book Makers and Takers gives an account of one major factor in the process of inequality creation, namely financialization. So what is financialization of the economy and how did it take place? Rana Foroohar explains in her book that financialization is the process by which the banking, insurance, asset management and debt/credit segments of the economy take over and become ends in themselves. “Wealth creation within the financial markets has become an end in itself, rather than a means to the end of shared economic prosperity,” she explains. There was a time when money and banking were the lubricant that helped the economy to grow and prosper but that is no more. Banks were institutions which received the savings and deposits of individuals and then lent them to investors on Main Street to create products and market them. Banking was at the service of the productive economy but now that equation is reversed. Main Street works for and at the behest of the banks and Wall Street and Main Street businesses go under if they do not.
Marx saw the growth and dominance of finance capital as the highest and last stage of capitalism, after which it would collapse and give way to communism. This he wrote in the late 19th century, when the process was taking shape. Marx was nearly right when the entire system collapsed in 1929, as banks went overboard in risky lending ventures with no reserves to pay back their creditors.
In the aftermath of the Great Depression, the US government instituted a number of measures to rein in the banks and curb their exuberance and overweening pursuit of profits. One measure was the Glass-Steagall Act in 1932. This Act of Congress put a firewall between Commercial Banking and Investment Banking. The former accepted deposits of individuals and lent from these deposits to companies and small businesses. Investment Banks, on the other hand, dealt in securities, futures and other risky investments. Another feature of Glass-Steagall was the creation of the Federal Deposit Insurance Corporation (FDIC), which ensured bank depositors for up to $5,000 each, reducing the risk of bank runs. In addition, Regulation Q put a cap on interest rates banks could offer, thus eliminating risky competition between banks.
While the banks accepted the new measures at least temporarily, as order was restored to the economy, they were never happy with them and endeavored to end them right from the beginning. They finally succeeded in their quest under President Bill Clinton, when Glass-Steagall was repealed in 1999. There followed the bubble with sub-prime mortgages in the early 2000s and the mighty collapse of the system in 2007-8. What happened in essence was that the untethered banks underwrote mortgages to clients who had little to no collateral or means of payment. Then these mortgages were bundled, sliced and diced, and resold as mortgage-backed securities. When the collapse came, however, the banks were deemed “too big to fail;” they were bailed out to the tune of trillions of dollars while the homeowners in default were left high and dry.
This risky behavior of the banks is but one aspect of the takeover of the economy by the finance sector and the massive growth in inequality. Another aspect of the phenomenon that Foroohar examines is how corporations were financialized, taken under the control of Wall Street and hollowed out. In industry after industry, leadership in manufacturing companies came from finance rather than individuals interested in producing products. They danced to the tune of Wall Street and were rewarded or punished on the stock numbers. Workers were squeezed or eliminated by corporate flight to low-wage havens and consolidation.
Another area of financialization that Foroohar examines is the invention and proliferation of new financial instruments and funds of every conceivable variety. Through instruments such as hedge funds and their like, the casino phase of finance capital arrived. The end result is that, in large part, the US economy is no longer about producing goods and services that people have need of but about juggling and betting that enriches the lords of Wall Street.
Michael Drohan is a member of the NewPeople editorial collective and the Thomas Merton Center.