Corporations currently earn their money through a myriad of paper transactions rather than by producing an actual product – this is Financialization and its negative effects on the economy continue to expose themselves.
In a newly publish Forbes article, contributor Steve Denning gives us some disconcerting statistics and a singular solution. “Wall Street Costs The Economy 2% of the GDP Each Year” or $320 Billion a year. Mr. Denning suggests that a certain degree of Financialization is good for the economy, things like insurance, credit, and mortgages allow for expansion, too much is unhealthy and as most economists agree, unsustainable. Here’s what Mr. Denning says:
“How big is too big? An IMF study in 2012 showed that “once the [financial] sector becomes too large—when private-sector credit reaches 80% to 100% of GDP— it actually inhibits growth and increases volatility. In the United States in 2012, private-sector credit was 184% of GDP.” So the U.S. financial sector is already way too big.”
A behemoth financial sector is problematic in many ways. It keeps economic growth at anemic levels. It encourages plutocracy – the infamous HB83 law includes verbatim verbiage written and submitted by Citigroup. It creates an unhealthy wealth gap.
There are solutions, Mr. Denning points out. Besides just enforcing and restructuring financial sector regulations (I’ve said before, I’ll say it again: We humans have a tendency to be selfish bastards, it is okay to set boundaries for ourselves), Mr. Denning points out that what we really need is a perspective change and the leader who ushers that change in will be adamant about actually punishing CEO’s for outright defying the laws rather than issuing a fine that amounts to a ineffective time-out. China is setting a good example for such discipline as I wrote here.
Financialization is costing us over three hundred billion dollars a year. It is hijacking our economy for the short-term profit of just a few people. There are solutions. They will be hard fought. They must begin with an individual willing enough to change the rules and enforce real discipline as Mr. Denning states. They begin with us voters making intelligent, informed decisions.
Let’s hope we’re up for it.