My friend, Rana Foroohar, economics editor for TIME and contributor at CNN, has just written a book sharply critical of the financial industry. Her central thesis of an all too powerful banking business is being challenged by the dean of Harvard Business School in the editorial pages of The Wall Street Journal, a sure sign that the debate will be joined through the election in November. I hosted Rana yesterday at the Executives’ Club of Chicago luncheon.
Here is the key argument expressed in the introduction to the book. “Our financial system has stopped serving the real economy and now mainly serves itself… Our system of market capitalism is sick… Our economic illness has a name: financialization… Makers, the people, companies and ideas that create real economic growth, have come to be servants to Takers including financiers and financial institutions as well as misguided leaders in both public and private sectors including CEOs who don’t seem to realize how this undermines economic growth, social stability and even democracy.”
She goes on to cite a number of eye-popping statistics, including the estimate from former UK banking regulator Adair Turner that only 15 percent of financial flows are funding projects that create jobs and raise wages, with the rest securitizing existing assets such as homes or stocks and converting them into tradable products. The returns in finance are also outsized; the sector accounts for 4 percent of the jobs, 7 percent of the GNP and a quarter of the total profits in the economy, up from 10 percent only 25 years ago. Ninety percent of the trading on Wall Street is done through algorithms, with an aim of short-term profit-taking.
To explain the incursion of financiers into the broader economy, Foroohar follows Blackstone’s investment in the rental housing business after the Great Recession of 2008. The firm has become the largest landlord in the nation, with 46,000 homes, generating $1.9 billion in profit in 2014. Her critique is that the rebound in housing prices is outpacing the economic fundamentals and making home ownership a dream for middle class Americans. Rising rent costs are having a dramatic impact, with the share of moderately to severely cost-burdened renters – those who spend at least 30 percent of income on rent – having gone up from 38 percent in 2000 to 50 percent today.
Foroohar worries deeply about the large amount of debt that has been piled into the global economy since the Great Recession, about $4 trillion by the Federal Reserve bank, about $30 trillion overall. She argues for a revision of the tax code to take away the deductibility of interest, to do away with carried interest that gives a lower tax rate to those in private equity, to empower the Makers again.
The financial services industry has done much to fix both its reality and its reputation since the Great Recession. Compensation has been restructured to emphasize long run contribution. Risk adjusted models have been implemented for capital adequacy. Bankers are monitored for excessive hours and incentivized to spend time on social causes. Philanthropic efforts, such as Citi’s* Citi for Cities or Goldman Sachs’* 10,000 Women, have made important change in local communities. As a result, trust in the sector has risen substantially since the low point of 2009, according to our most recent 2016 Edelman Trust Barometer. The continued assault by politicians such as Bernie Sanders on the sector shows that there is still more to do. The key to success is to tell stories on a peer-to-peer basis, to arm the employees of financial institutions with the means to communicate and the license to do so.
Richard Edelman is president and CEO.
*Edelman Client
