The financial crisis of 2008, along with the Great Recession it triggered, has defined the course of the 21st century. Yet, despite the political agitation and economic hardship that ensued, everything appears to be back to the right track. The major stock market indices have reached new highs: In November, the Dow Jones surpassed 28,000 for the first time in history. US household debt just broke the $14 trillion mark. In the era of Dodd-Frank, the financial sector seems more regulated and stable. Compared to the turmoil in the political sphere, the US economy appears to be smooth sailing.
But what does this “right track” mean?
Our new book, Divested: Inequality in the Age of Finance, shows that the most damaging consequence of the contemporary financial system is not simply recurrent financial crises but the social divide it has generated between the haves and have-nots over the past 40 years.
We argue that the rise of finance represents a paradigmatic, regressive shift in how American society organizes economic resources. In this process, finance reshapes the economy in three principal ways.
First, it creates excessive intermediaries that extract resources from society without providing commensurate economic benefit. These intermediaries include the formation of mega banks, the financial arms of corporations, and the less-regulated shadow banking industry such as hedge funds. With these intermediaries have come new financial instruments invented to serve “unmet” demands from client investors, but most of these instruments only serve to profit financial institutions.
Second, the rise of finance loosens the codependence between capital and labor. When companies shift their attention from their core business functions to providing financial services and speculative trading, ever more resources are put into the hands of a smaller number of higher-paid executives and shareholders. As such, overall employment growth slows and wages stagnate, particularly for mid- and low-level workers.
Third, the heightened economic insecurities for average workers, in turn, elevate the need for financial services, such as credit cards and payday loans. An increasing number of American families come to rely on consumer debt to get by and stock market investments to secure retirement. These financial products not only channel more resources into the financial sector but are invariably regressive: poor households pay the highest interests and fees, while rich households make the largest gains from financial markets.
While existing studies tend to focus on only one aspect of this development, Divested brings together scholarship in sociology, economics, finance, management, and history to argue that the rise of finance is one fundamental cause of the heightened inequality in the contemporary United States. We begin the story at the conclusion of World War II and draw a wide range of historical data at the economy, firm, and household level to document how the nation became increasingly entangled in the web of finance. The analysis also shows that many misbeliefs and ideologies survived the financial crisis and remain deeply held by the public and policy makers.
We demonstrate that the grip of big banks on the US government and economy has only tightened since the financial crisis. These days, much of the earnings made by corporations goes straight to the stock market, eighty percent of which is owned by only ten percent of Americans. The most affluent American families used to be business owners but there are now more investors.
Debt is the new opium for the poor. While it is still difficult for low-income households to borrow. When they do, they have to pay twice as much for the same amount. The price is even higher for Black or Hispanic families. A fifth of low-income households use more than a quarter of their paychecks to service debt.
The financial disaster that ensues is often attributed to their lack of financial literacy. Yet, all the blaming does is set a lower standard for financial products. We hold the manufacturers of food, medicine, vehicle, or furniture responsible when their products are harmful. When it comes to finance, we want the consumers to take individual responsibility.
While the regulatory and monetary policies steered the US economy away from a catastrophic collapse, they did more to restore than to reform a financial system that channels the economic resources from the bottom to the top up for decades.
As such, the economic recovery in the United States has been highly uneven.
Financial profits resurged at a faster pace than non-financial profits. Capital’s share of national income continued to rise. Instead of leveling the distribution of wealth, as in previous crises, the Great Recession made it even more concentrated at the top. Overall, the median US household wealth remains a quarter below what it was before the financial crisis. And the racial wealth gap has widened, in part due to a higher level of indebtedness among Black families. The massive corporate tax cut of 2017 only fueled these trends and did little to stimulate real investment.
The social harm produced by the current financial system goes far beyond wrongdoing on Wall Street. Financial reform should not be limited to stabilizing the financial sector. Washington needs to recognize that finance has fundamentally reorganized the uneven distribution of economic resources. Contemporary inequality cannot be reversed without addressing the financial system that created it. Comprehensive financial reform should prioritize the interest of society over that of finance.
What steps can we take to disentangle the society from the dense web of finance?
Immediately, policymakers must stop promoting financial products to achieve policy goals, such as promoting higher education and fueling economic growth. Both the collapse of mortgage market and the student loan crisis show how private credit is a tempting but dangerous tool to implement public policies. The financial sector, after all, looks only after its own interests, not those of the public.
The second step is to create public options that prevent the financial sector from draining resources from all types of economic activities. A “central bank for all” that provides a public bank account and debit card to all adult citizens is one attractive possibility. It would drastically reduce the number of households that are excluded from and discriminated by the current financial system. The federal government could also directly lend to and borrow from its citizens without a middleman charging fees and interests.
Lastly, the retirement system needs to be detached from the stock market. The 2008 crisis has made it clear that the stock market is simply too volatile for ordinary households to plan their retirement. The Social Security system needs to be expanded. The federal government could also issue new types of governmental securities that pay dividends according to the federal tax revenue, which is less risky and much more stable than even indexed funds.
In the age of finance, we have to distinguish value extraction from value creation. We need to start questioning to what extent “the market knows best.” We must reject the equation between profitability and legitimacy, between price and value, and between wealth and moral superiority.
Ken-Hou Lin and Megan Tobias Neely. Divested: Inequality in the Age of Finance. Oxford University Press. 2020.