Chapter three of Simon Johnson and James Kwak’s new book — “13 Bankers, the Wall Street Takeover and the Next Financial Meltdown” has tons of statistics showing the astonishing growth of Wall Street over the last 30 years.
This growth was the result of the financial industry breaking free from the constraints legislated in the wake of the Great Depression. Johnson and Kwak explain, “The basic principle behind any oligarchy is that economic power yields political power.”
This chapter shows how there was an “explosion of new products created vast new profit-making possibilities for financial institutions.” These “money machines of modern finance” — high yield debt, securitization and arbitrage trading, derivatives market — came from “powerful new computer technology and highly trained mathematicians and scientists from leading research universities.”
Excerpts:
- Of Ronald Reagan’s treasury secretary, Donald Regan, former Merrill Lynch CEO: “It was not unusual for a treasury secretary to come from the banking industry. But it was unusual for a treasury secretary to embrace a deregulatory agenda as broad as the one Regan espoused.
- Between 1980 and 2000, the assets held by commercial banks, securities firms and the securitizations they created grew from 55% of GDP to 95%. Financial sector profits grew even faster, from an average of 13% of all domestic corporate profits from 1978 to 1987 to an average of 30% from 1998 to 2007. The growth was faster still for the largest banks. Between 1990 and 1999, the ten largest bank holding companies’ share of all bank assets grew from 26% to 45%, and their share of all deposits doubles from 17% to 34%.
- In 1978, all commercial banks together held $1.2 trillion in assets, equivalent to 53% of U.S. GDP. By the end of 2007, the commercial banking sector had grown to $11.8 trillion in assets, or 84% of U.S. GDP.
- All told, the debt held by the financial sector grew from $2.9 trillion, or 125% of GDP, in 1978, to over $36 trillion , or 259% of GDP, in 2007.
- Most of the growth in the financial sector was due to the increasing “financialization” of the economy — the transformation of one dollar of lending to the real economy into many dollars of financial transactions. In 1978, the financial sector borrowed $13 in the credit markets for every %100 by the real economy; by 2007, that had grown to $51. … The amount of borrowing by financial institutions had quadrupled.
- From 1980 until 2005, financial sector profits grew by 800%, adjusted for inflation, while nonfinancial sector profits grew by only 250%.
- In 1990, Salomon Brothers paid its top traders then shocking cash bonuses of more than $10 million. In 2009, it emerged that a single executive at Citigroup was due a $100 million bonus.
- In 2007, five hedge fund managers earned at least $1 billion each for themselves, led by John Paulson, who made $3.7 billion successfully betting against the housing market and the mortgage-backed securities built on top of it.
Written by Mike Bock
A couple of interesting issues worth pondering.
1. Are people becoming financiers who should be scientists and engineers designing better products that make the world a better place, keep the US on top of the global economy, or some combination of these? People are also accused of becoming lawyers instead of scientists and engineers. Part of the theory is that these groups are not “productive”.
2. How many products (how much “stuff”) do we really need?
3. A Chinese financier described securitization as a hall of mirrors, creating the appearance of much more wealth than actually exists. Arguably spreading of overvalued “wealth” is responsible for this recession and its depth, as well as the shedding of jobs that it triggered but that business may have done for other reasons. If this is true what should be done. In other words, is financial innovation downright harmful? Does it only become so when it is unregulated and allowed to get away with whatever it wants to?