American Capitalism: Diagnosis and Call To Action

Financial Capitalism


Read this: I have posted several articles on how capitalism in American does/ doesn’t work with democracy. In the following article from Time Magazine, Rana Foroohar tells us that “The U.S. system of market capitalism itself is broken.” It has become a zero-sum game where little or no new wealth is created and the majority of effort focuses on moving money / wealth from one place to another. This has become the leading catalyst of rapidly spreading inequality. As Bernie Sanders says, most of it (wealth)  moves from the poor and middle classes to the 1%. Foroohar concludes that capitalism is truly sick, “What is required now is lifesaving intervention.” Below I borrow a lot from Faroohar’s article and of course add my little touch of sarcasm.

Aren’t we Americans all capitalists? Actually “only 19% of Americans ages 18 to 29 identified themselves as ‘capitalists.’ In the richest and most market-oriented country in the world, only 42% of that group said they ‘supported capitalism’.” So in this country whose “economic foundation—a system that over hundreds of years turned a fledgling society of farmers and prospectors into the most prosperous nation in human history”, most of us don’t really identify as capitalists and more often feel we have no say and that we are more often than not the victims of capitalism itself.

Then who is capitalism working for and who is it working against? “From the creation of a unified national bond and banking system in the U.S. in the late 1790s to the early 1970s, finance took individual and corporate savings and funneled them into productive enterprises, creating new jobs, new wealth and, ultimately, economic growth.” Most of the time we were at least moving in the right direction, but today not so much. Today, “only a fraction of all the money washing around the financial markets … actually makes it to Main Street businesses … around 15% of capital coming from financial institutions today is used to fund business investments whereas it would have been the majority of what banks did earlier in the 20th century”. Foroohar tells us that today, while “taking around 25% of all corporate profits, it creates a mere 4% of all jobs.” The status of the markets imply that things are going rather well, but most Americans don’t share that sentiment. They feel threatened as their incomes flatline or decline and their piece of the big pie shrinks and shrinks. Like walking on dissolving chunks of icebergs they feel threatened and unstable. Money and wealth is constantly moving but “not to them”. As former Goldman Sachs banker Wallace Turbeville says, “our economy is gradually becoming a zero-sum game between financial wealth holders and the rest of America.” And we are not alone, as Foroohar saya, “most of the world’s leading market economies are grappling with aspects of the same disease” and yes it is a disease. Many in the know “have started to speak out publicly about the need for a new and more inclusive type of capitalism, one that also helps businesses make better long-term decisions rather than focusing only on the next quarter.”

So what is the actual problem? What ails our capitalism? According to Foroohar, “America’s economic illness has a name: financialization.” Stated more simply, “Wall Street and its methods have come to reign supreme in America, permeating not just the financial industry, but also much of American business.” They have become the universal bible. That which shall not be questioned. It is obvious because capitalism says so. “University of Michigan professor Gerald Davis, one of the pre-eminent scholars of the trend, likens financialization to a ‘Copernican revolution’ in which business has reoriented its orbit around the financial sector.” Somehow I always thought (or hoped) we (America) revolved around democracy, not capitalism’. Stupid, gullible me!

How did we get to this point? This is complicated but there were definitely many shifts that sure did not help (except for the 1%). According to Greta Krippner, (University of Michigan scholar), … (one) shift encompasses Reagan-era deregulation, the unleashing of Wall Street and the rise of the so-called ownership society that promoted owning property and further tied individual health care and retirement to the stock market.” Generally, change happened as “politicians decided to pass that responsibility to the financial markets’.” After all who could we trust more? “Little by little, the Depression-era regulation that had served America so well was rolled back, and finance grew to become the dominant force that it is today.” And remember, it ain’t over yet.

Some of the specific political changes that occurred and made capitalism susceptible:

  • “The Carter-era deregulation of interest rates … opened the door to a spate of financial “innovations” and a shift in bank function from lending to trading.
  • Reaganomics famously led to a number of other economic policies that favored Wall Street.
  • Clinton-era deregulation, which seemed a path out of the economic doldrums of the late 1980s, continued the trend.
  • Loose monetary policy from the Alan Greenspan era onward created an environment in which easy money papered over underlying problems in the economy”
  • we can’t forget the demise of organized labor.

These changes manifest themselves in myriad ways complicating the infection:

  • “a housing market that is bifurcated and dependent on government life support,
  • a retirement system that has left millions insecure in their old age,
  • a tax code that favors debt over equity.”

Financialization has become the only game to play. Foroohar says “Debt-fueled finance has become a saccharine substitute for the real thing, an addiction that just gets worse.” And everybody wants to get in this short term game. If one game doesn’t work, heck they invent a new one and guess who will be writing the rules? “American companies across every sector today earn five times the revenue from financial activities—investing, hedging, tax optimizing and offering financial services, for example—that they did before 1980”. To sustain this, the religion must be taught and today “finance has become the center of all business education.” No surprise there and the pupils enthusiastically spread the word.

In politics “six of the 10 biggest individual political donors this year (2016) are hedge-fund barons”. Evidently they think they will have some influence. But what about the rest of us? Foroohar asks “why more stakeholders aside from bankers hadn’t been consulted about crafting the particulars of Dodd-Frank financial reform (93% of consultation on the Volcker Rule, for example, was taken with the financial industry itself).” Sadly, the answer from an Obama administration Treasury official was, “Who else should we have talked to?” Yet there is little real search for the cause of problems. The “single biggest unexplored reason for long-term slower growth is that the financial system has stopped serving the real economy and now serves mainly itself.” Mission accomplished as this has “resulted in record stock prices (which enrich mainly the wealthiest 10% of the population that owns more than 80% of all stocks) but also a lackluster 2% economy with almost no income growth.” Wealth abounds, depending on your team of course, but “America’s ability to offer up even the appearance of growth … is at an end.”

The new financial procedures resulting from all this are striking, but not necessarily surprising:

  • “Lending to small business has fallen particularly sharply, as has the number of startup firms. From 1978 to 2012 it declined by 44% … (as Buffet said) You’ve now got a body of people who’ve decided they’d rather go to the casino than the restaurant” of capitalism.
  • finance is also largely responsible for the drastic cutback in research-and-development outlays in corporate America, investments that are seed corn for future prosperity.
  • the number of new initial public offerings (IPOs) is about a third of what it was 20 years ago … This may show investors want to make only the surest of bets, which is not necessarily the sign of a vibrant market. But there’s another, more disturbing reason: firms simply don’t want to go public, lest their work become dominated by playing by Wall Street’s rules rather than creating real value. An IPO—a mechanism that once meant raising capital to fund new investment—is likely today to mark not the beginning of a new company’s greatness, but the end of it. According to a Stanford University study, innovation tails off by 40% at tech companies after they go public,
  • Executives who receive as much as 82% of their compensation in stock naturally make shorter-term business decisions that might undermine growth in their companies even as they raise the value of their own options.
  • Why borrow? In part because it’s cheaper than repatriating cash and paying U.S. taxes.
  • In the bizarre order that finance has created, they (corporations) are also taking on record amounts of debt to buy back their own stock, creating what may be the next debt bubble to burst.
  • The people who manage our retirement money—fund managers working for asset-management firms—are typically compensated for delivering returns over a year or less. That means they use their financial clout (which is really our financial clout in aggregate) to push companies to produce quick-hit results rather than execute long-term strategies. Sometimes pension funds even invest with the activists who are buying up the companies we might work for—and those same activists look for quick cost cuts and potentially demand layoffs.

Foroohar spends some time looking at what can be done.  This is the tough part. As she says “Opportunities right now: a rare second chance to do the work of refocusing and right-sizing the financial sector … there’s a growing push to put the financial system back in its rightful place, as a servant of business rather than its master.” Key to really reforming “the U.S. system is comprehending why it isn’t working.” It won’t be easy and there are no sure fire fixes. Her strategy emphasizes:

  • it “isn’t as simple as splitting up the biggest banks (although that would be a good start).
  • it is about dismantling the hold of financial-oriented thinking in every corner of corporate America.
  • it’s about reforming business education, which is still permeated with academics who resist challenges to the gospel of efficient markets in the same way that medieval clergy dismissed scientific evidence that might challenge the existence of God.
  • it’s about changing a tax system that treats one-year investment gains the same as longer-term ones, and induces financial institutions to push overconsumption and speculation rather than healthy lending to small businesses and job creators.
  • it’s about rethinking retirement, crafting smarter housing policy and restraining a money culture filled with lobbyists who violate America’s essential economic principles.

In conclusion Foroohar cautions that “capitalism’s legacy is too long, and the well-being of too many people is at stake, to do nothing in the face of our broken status quo. Neatly packaged technocratic tweaks cannot fix it. What is required now is lifesaving intervention.  In order to accomplish this “the right question here is in fact the simplest one: Are financial institutions doing things that provide a clear, measurable benefit to the real economy? Sadly, the answer at the moment is mostly no.”  Faroohar remains positive through all this saying “but we can change things. Our system of market capitalism wasn’t handed down, in perfect form, on stone tablets. We wrote the rules. We broke them. And we can fix them.” Now this is a point our politicians need to memorize and be tested on frequently.


American Capitalism’s Great Crisis | TIME

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