The Finance Curse. Nicholas Shaxson
this has happened, bankers and other financial players, cheered on by the Clinton, Bush, Obama, and now Trump administrations, have hoovered up companies across the economy and assembled the pieces together in anticompetitive mergers or cartel-like arrangements, or run their financial affairs more aggressively through tax havens to sidestep tax bills or irritating regulations. Each move flushes more wealth out at the top, while the other parts of the economy that are being extracted from grow weaker and find it ever harder to compete with the giants. All this increases the top-down flows of money and power, generating the core fact of economic discrimination that underpins all those better-understood forms: racial, gender, sexual, and geographical discrimination. Our financial sector should serve our economy, but it’s increasingly the other way around.4
The costs of the finance curse are staggering. Since around 2010 a diverse range of academics at the International Monetary Fund (IMF) and elsewhere have begun putting together a new strand of research now known as “Too Much Finance,” which shows a remarkably consistent pattern across the world over time. As a country’s financial sector develops, it tends to contribute to the development of the economy—but only up to a point, after which it starts to reduce economic growth and inflict all sorts of other damage. The graph of the relationship between the size of a financial sector and economic growth is an inverted U shape, with a “sweet spot” of maximum, ideal size in the middle. It turns out that the United States, Britain, and many other Western economies passed this optimal point long ago. According to a 2016 estimate by Professor Gerald Epstein and Juan Antonio Montecino of the University of Massachusetts at Amherst, the excess bloat in the United States’ financial sector will have cost the US economy a cumulative $12.9 to $22.7 trillion between 1990 and 2023. That calculation, a first approximation of the costs of the finance curse, is equivalent to a net $105,000 to $184,000 loss for the average American family. Had the financial sector been at its optimal size and performing its traditional useful roles, and had this lost wealth been spread equitably among the people, the typical US household would have doubled its wealth at retirement.5 The US economy would be stronger today if the US government had paid its highest-paying financiers their full salaries, then sent them off to live in luxurious gated communities to play golf all day.
The great financial crisis that first erupted in 2007 was a part of this damage. But the finance curse has multiple layers. Once you know what to look for, you’ll find its distortions, schemes, and abuses all over the place. For instance, the five largest US technology behemoths spent around $150 billion in 2018 just on buying their own stock, instead of investing in improving their businesses. Since 1995 IBM has spent well over $160 billion buying back its own stock—yet at the time of this writing, the company was worth little more than $100 billion. IBM stockholders got rich, while company investment stagnated. More broadly, the S&P 500 firms spent $720 billion on share buybacks just in the twelve months before September 2018, a gigantic “anti-stimulus,” sucking money out of the productive economy, that is comparable in size to Obama’s economic stimulus package approved in 2009 to respond to the financial crisis. If you add dividends to these buybacks, the total rises to $1.2 trillion, which is 1.3 times the size of the US defense budget in 2018. When oil companies spend their money on financial games like buybacks instead of investing in oil rigs, it’s called “drilling on Wall Street.” Across the Atlantic, a study of 298 companies in the S&P Europe 350 share index found something similar: they spent €350 billion—equivalent to 110 percent of their net income—on shareholder dividends and stock buybacks in 2015. The comparable figure for the UK was 150 percent. This is what Bank of England economist Andrew Haldane meant when he said firms were “eating themselves.”6
What on earth is going on? A simple, crude answer is that when a company buys its own shares or pays bumper dividends it boosts its share price and, with it, corporate executives’ short-term stock options and bonuses. With over a third of all stocks and other financial assets owned by the richest 1 percent of Americans (and around 80 percent held by the top 10 percent), share buybacks and bloated dividends are syringes jammed into the veins of the real economy, sending torrents of wealth skyward.7 But a more interesting answer lies in a word that finance academics now use: “financialization.” This is a process that first properly emerged in the 1970s and has slowly, silently, crept up on us all. Financialization involves two main trends: first, a massive growth in the size and power of the financial, insurance, and real estate (FIRE) sectors; and second, the penetration of financial techniques, markets, motives, and ways of thinking into the economy, society, and even culture. In this era the bosses of companies that create real wealth in the economy—making widgets and sprockets, finding cures for cancer, or selling mass-market holidays—have been turning their attention away from the hard slog of trying to boost entrepreneurship, productivity, and genuine efficiency toward the more profitable sugar rush of financial engineering, monopolization, and unproductive “tax efficiency” to tease out more profits for the companies’ owners, always at somebody else’s expense. As this has happened, the rate at which new job-creating businesses are formed has halved since 2006, just before the global financial crisis.8 Private equity titans buy up healthy companies, load them up with debt, and drive them into the corporate graveyard—yet get ridiculously rich in the process. Airlines often make more money speculating on fuel derivatives than on selling you tickets to Atlanta. Banks buy and sell trillions of dollars’ worth of derivatives and other exotic financial instruments to each other—and they, too, mysteriously get richer. Are they creating wealth inside this closed circle? Or are they extracting it from others elsewhere?
Half a century ago it was widely accepted that the job of a corporate CEO was to generate wealth to serve several goals: to produce profits, to create and maintain good jobs, to contribute taxes to support roads and schools, and so on. All these things enriched healthy communities and made a stronger nation—and this formula ultimately made for stronger corporations too. Back then, CEOs at big firms earned twenty to thirty times what the average worker did. But financialization has whittled down the purpose of business to little more than a single-minded focus on maximizing the wealth of shareholders, the owners of those companies, often at the expense of employees, suppliers, or the wider community. This shift has unleashed gushers of profits for owners—and for CEOs, who now earn two to three hundred times the average worker’s paycheck. And as the bosses’ rewards have soared, the underlying economy—the place where most of us live and work—has stagnated. When adjusted for inflation, Americans’ real hourly earnings have barely budged since the 1970s. The profits and the stagnation are two sides of the same coin: wealth extraction by those at the top from the rest. “It is not short term versus long term; that is not the distinction,” says William Lazonick of the University of Massachusetts at Lowell, one of America’s best-known experts on corporate strategy. “It is value creation versus value extraction.” Financialization is a central part of the finance curse. Its consequences include lower economic growth, steeper inequality, less efficient and more distorted markets, eroded public services, greater corruption, the hollowing out of small towns and small businesses, and widespread damage to democracy and society.
To compensate for this economic sluggishness, and to escape from politically difficult choices, successive governments have filled the holes with policies of financial loosening, which have unleashed oceans of credit into the economy in the past forty years, puffing up finance. You’d expect a larger financial sector to be a fountain of investment capital for other sectors in our economy, but in fact the opposite has happened. As recently as 1995 over half of bank lending went to small businesses, which are the economy’s lifeblood, creating two out of three jobs. Now the share is less than a quarter. Most of the credit now unleashed on the economy has been circulating inside the financial sector, unmoored, disconnected from the real economy and from the people it is supposed to serve. This book will show how these self-serving parts of finance have increasingly overshadowed and even preyed on other parts of the economy, which must struggle to survive, like seedlings starved of light and water under the canopy of a giant, deep-rooted, and invasive tree.
And there’s another whole dimension to this, which the academics have hardly measured in any useful way: the rise in global organized crime and abusive quasi-legal activities that spew out of modern finance. It’s impossible to convey the scale of this, but one approach can be found in a list entitled “Robert Jenkins’ partial list of bank misdeeds,”