How the Financial Industry Robs You
In recent years there has been talk about the financeliazation of the economy. It is a process where the financial industry is grown much faster than the rest of the economy, and where the finance industry has pursued short term profit over long term. Focus has been on making money from money rather from investing in companies making new and better products and services.
What you realize when getting into this topic, is that lot of people making a lot of money, not doing anything useful. The financial industry is becoming a big parasite on the real economy, growing every larger and making a minority filthy rich while in particular in the US, regular wages have hardly increased since the late 70s, despite massive productivity gains in the real economy.
The question is how did we end up in an arrangement where people who do the actual work gets a tiny piece of the pie while those doing useless work get such a big chunk of it?
I think we can all agree nobody agrees to that voluntarily, so why does it happen in a democracy? Analyzing the problem may seem difficult because what finance does is so complicated. Yet the fundamental principles of what they do is quite simple.
People who have a surplus and save, give their money to the financial industry in some way. Either by buying stocks or lending money. In return they get interest rates or dividends. The financial industry then given this money to companies or individuals who have a need of money. Either to buy a house or buy machinery for their factory.
So in its basic form, the financial industry is very useful. It handles allocating scarce resources to where they are most useful/profitable.
That is in the idealized world though. In reality, there are many distortions to this simple picture.
Fractional reserve banking and the existence of central banks just printing money means lots of money being lent out isn’t somebody else’s savings. It is just printed out of thin air.
But they can’t just spend this money because there is an interest to pay. They have to lend that money out to people in some manner.
If the financial industry wants to grab a larger share of the real economy they have to get people to borrow more money.
The secret is to create asset bubbles. You are not going to get people interested buying ever more smart phones or food. At some point your demand is satisfied. Nobody wants to hoard products they don’t use. Secondly we know that food or smart phones don’t appriciate in value if we hoard it.
Properties and stocks are different though. Because property is in limited supply. You can’t produce more prime real estate. It is in limited supply. Thus finance gets people to engage in a financial arms race. Like gold because of its limited supply, we can expect the value to appreciate thus making it suitable as a long term investment.
People start outbidding each other, and on the side stands the banks cheering you on by offering bigger and bigger loans to each side. House buyers aren’t really benefitting from these cheap loans, because everybody is getting them and it is just causing house prices to increase.
What this is, is a way for the banks to siphon of ever more money from everybody who buys house. We buy into this and thing we are doing great because the value of our houses are increasing so much. But that is just a mirage. The banks are creating a bubble, and that bubble will burst sooner or later, and all the money you thought you had gained would be lost.
It is like a Ponzi scheme. Those entering the race last, have to pay for those who got in earlier.
The rest of the industry is the same. The value of stocks are heavily inflated. It grows much faster than the rest of the economy creating a bubble. And as with the housing market, it will burst eventually.
In both cases some people will win big time, those who got in early and got out early. While some will be big losers, those who got in late and existed late.
The fundamental nature of this game of finance is no different from a Casino. Why do people enter the Casino when they know the house always wins? They know that on average people leave with less money than they came with. It is the Casino who makes all the money.
People still do it because they hope to be among the luck ones that get allocated more money at the expense of everybody else. It is as a weakness of human psychology. We all think we will win but most of us loose.
The finance industry plays the role of the Casino. It is the ones making the money while the rest of us are on average loosing money. However there are always a few with big wins, which keeps alive the illusion that the housing market and stock market is something you can win on.
The problem compared to a Casino is that the game runs for so much longer. You spend 20 years thinking you have won big time only to realize you lost big time.
How to Make the Financial Industry Grab Even More Money?
Of course we don’t want them to take more money but it is worth exploring what a government might want to do to give more money to the financial industry.
It is all about getting people to borrow more money. This can be done by relaxing regulations. Allow finance to advertise more to get more people to get loans.
It can be done by lowering restrictions on borrowing getting more people who really should not be borrowing to borrow.
It can be done by enticing us all that we can win big in the big housing market lottery. By hyping up what a good investment housing is and how rich it is making people, people are going to take the plunge and borrow more to not be left out of big potential profits.
The central bank can lower interests to entice more people to borrow money.
With stock trading, finance can make more money by emphasizing short term interest. If you invest for the long term then they can’t give charging fees for you jumping around buying different financial instruments and stocks.
They also have an interest together with new hyped products and industries to grossly overvalue to potential. Look at how high dinky little smart phone apps are valued compared to real world tangible products.
How to We Reduce the Share of the Economy Taken by the Finance Industry
We need to stop the factors that contribute to asset bubble growth. One problem is that asset bubble growth is usually not including in inflation numbers. But essentially that it what it is doing.
Massive housing bubbles have an inflationary effect. When inflation goes up, central banks are supposed to raise interests but they often don’t. Often because the economy may be sluggish in other ways. So to push up the real economy, interest rates are kept low, but all the cheap money available is often used for buying inflated assets rather than expanding production.
One needs regulation that discourages massive lending. Restrictions on ads for consumer loans. The requirements for getting a loan has to be stricter. Governments subsidizing mortgages through tax deductions encourages further borrowing.
Aggressive ads for borrowing should be restricted or banned altogether.
One should also consider taxes on stock trading to discourage lots of short term trading and instead encourage long term investment.