Saving Capitalism

While sitting in my doctor’s office last week I ran across a Time magazine article from May of this year entitled Saving Capitalism. Because I enjoy articles about finance that round out my understanding of money, I picked it up.

The point of the article is that banks used to loan money to businesses to expand their ability to sell products, perform research, manufacture goods or whatever. And that lending approach created jobs. Since about 1980 the shift has been to loan money against existing assets to create profits. And companies that made money through selling products they manufactured now make more money by loaning money, from Sears to General Motors and General Electric.

This shift leads to a loss of jobs, and it is a global issue not limited to the United States. It shows up from the growth of the financial industry and debt-fueled speculation to how shareholder value is determined based on short term planning for profits instead of long term viability of companies.

The question to ask is whether or not financial institutions are lending money in ways that provide a true and measurable benefit to the society at large? Or, are they lending money primarily to enrich themselves?

The following are a few  paragraphs from the article, and you can read the whole thing >>here<<.

Over the past few decades, finance has turned away from this traditional role. Academic research shows that only a fraction of all the money washing around the financial markets these days actually makes it to Main Street businesses. “The intermediation of household savings for productive investment in the business sector—the textbook description of the financial sector—constitutes only a minor share of the business of banking today,” according to academics Oscar Jorda, Alan Taylor and Moritz Schularick, who’ve studied the issue in detail. By their estimates and others, 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.

To get a sense of the size of this shift, consider that the financial sector now represents around 7% of the U.S. economy, up from about 4% in 1980. Despite currently taking around 25% of all corporate profits, it creates a mere 4% of all jobs. Trouble is, research by numerous academics as well as institutions like the Bank for International Settlements and the International Monetary Fund shows that when finance gets that big, it starts to suck the economic air out of the room.

It’s even the reason companies in industries from autos to airlines are trying to move into the business of finance themselves. 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. Traditional hedging by energy and transport firms, for example, has been overtaken by profit-boosting speculation in oil futures, a shift that actually undermines their core business by creating more price volatility. Big tech companies have begun underwriting corporate bonds the way Goldman Sachs does. And top M.B.A. programs would likely encourage them to do just that; finance has become the center of all business education.

 

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