Friday, Apr 18, 2014
Columns

Financial sector has become far too big


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To get the size of the financial sector into perspective, compare it to the auto sector, a part of our economy familiar to us all.

The auto sector accounts for between 4 and 5 percent of the U.S. gross domestic product, employing 716,900 people, with every major foreign manufacturer producing vehicles in the U.S.

According to the Commerce Department, the financial sector accounts for a whopping 8.4 percent of our GDP - about twice as big as auto. (This exceeds the peak it hit in 2006!) For more context, consider: The services sector of our economy accounts for three-quarters of all U.S. employment, and 78 percent of our GNP.

The financial sector is only a small part of the total picture, and yet this subset includes the insurance industry with 2.2 million employees, banks which include retail (savings, checking, and mortgages), commercial, investment (They do not take deposits), and universal banks like Bank of America which does it all, and is a leading commercial bank.

The Great Recession cast the entire financial sector in a bad light; but you can't paint everyone in that sector with the same brush. Over the years Americans voted for liberal administrations and Congresses which decreed that everybody had a right to own a home, and we had a central banker - Alan Greenspan, who didn't see the oncoming bubble/train-wreck - and creative Wall Street investment bankers, whose investment vehicles made it possible for every dishonest person up the food chain to make a killing.

Eight of the largest investment banks in the U.S. have about 166,000 employees; so amazingly, a very small part of the financial sector orchestrated this global crisis.

In 2007 the financial sector accounted for an astonishing 40 percent of corporate profits and in spite of the financial debacle, it is now moving up again, making more than 30 percent of corporate profits.

Ordinary people can visualize millions of autos rolling off assembly lines around the U. S., but not many ordinary folks can visualize millions of derivatives and credit default swaps - mainly because, unlike autos, we don't even know what they are.

But they had it all figured out on Wall Street.

It's no wonder that most Americans are pining for the good old days of manufacturing things - not financial transactions. And the International Monetary Fund agrees. They concluded in a recent study "that "at high levels of financial depth, a larger financial sector is associated with less growth. Our findings show that there can be too much finance." Currently the six largest investment banks hold assets equal to 60 percent of U.S. GDP.

Some of their thoughts are intuitive to even the average person: "A financial sector that is too large increases the odds of a crisis and increases the misallocation of capital to less useful sectors of the economy."

While my view is that capitalism and free markets should be the driving force behind any economy, thoughtful regulation is necessary because of the interdependence of all sectors of a large, multifaceted economy. And while a first-world economy needs a sophisticated financial sector, there comes a point where it can overwhelm sustainable growth.

Conservatives agree that excessive transfer of wealth from one segment of a society to another societal group retards capital investment in the real economy. The same analysis holds true with wealth transfer to the financial sector. On top of this, financial booms become bubbles, which should not be mistaken for real growth.

Experts agree we are at the cusp of real growth in the manufacture of products employing advanced technology. Nanotech, biotech etc. are all seeing increased R&D investment capital.

Entrepreneurs believe the U.S, can be on top again and the future is now. Unfortunately, they will be faced with a tsunami of regulations. (They make an easier target for big government than the finance sector.)

Nanotech has potential for applications in just about every sector of the global economy - any kind of consumer product, health care and energy - an endless list. Educators are responding to lobbying by STEM manufacturers for more highly skilled workers.

Power concentrated in the hands of a very few on Wall Street and Washington is not readily transparent. The big investment banks have always been joined at the hip with the Treasury Department.

Timothy Geithner (mentored by legendary Treasury Secretaries Robert Rubin and Larry Summers, both with Wall Street credentials), was just replaced at Treasury by Jacob Lew, who had been managing director at Citigroup, one of the largest Wall Street banks. The long list of Treasury Department officials who graduated from Wall Street is apolitical. Their fraternity keeps a lock on Washington - including its influential politicians.

Does anyone recall what happened to the congressional insider trading scandal? How many tips do they get from hearings that we never know about?

Democrats are holding the reins of power now in Washington. Chuck Schumer, known as the "Senator from Wall Street," the third ranking Democrat, is a brilliant Harvard graduate who never held a job.

He has been a politician his whole life and is on the banking, finance and rules committees; all of interest to the financial sector. Like most Democrats, he portrays himself as a true liberal Democrat who puts middle-class Americans ahead of Wall Street special interests.

Yet he has raked in millions of dollars in contributions from Wall Street, outstripping any other Democrat or Republican. It would seem that there is a compelling need for honest politicians to reassess the value of the financial sector as compared to the real growth that modern technology offers - with good paying jobs.

When conservatives argue that government should stop their unrelenting regulating (the result of too much zeal from legions of too many bright government regulators), and turn the private sector loose, they are referring to companies that make real things. Investment banks make their profits by moving money around in creative ways and are the fox in the hen house. They go beyond lobbying. Their alumni are inside government.

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