Even as the stock market has boomed over the last decade, a new report finds that these foolish pension fund managers have managed to lose Americans at least $600 billion. This is an amount that’s about equal to $4200 per family.
The costs associated mean that there’s less money to be spent on public goods such as healthcare, libraries, and infrastructure. It would obviously have been much better if these public funds were simply put into low cost index funds (instead of hedge funds and private equity firms) that tried to match the market instead of beating it. (That’s usually a better course of action for most people anyway.) Reducing the pay going to those high-income fund managers would have been a clear economic gain for everyone else.
The financial industry though is mainly an intermediate resource, similar to the trucking industry. This means that unlike housing, education, and healthcare, it isn’t really valuable for its own sake. Similar to the trucking industry, which derives its value from its ability to transport goods efficiently, the financial industry derives its value to the general public by being as benevolently efficient at allocating capital as possible.
There is undeniable evidence that overall, the financial industry has become far less efficient and far more predatory for most people over the last four decades. There’s good reason to think that the financial sector is currently at least three to four times larger than it should be. Back in the 1970s, the industry accounted for about 0.5 percent of GDP, and it now accounts for about 2.3 percent of GDP. The draining difference — diverting money out of the pockets of average workers in wasteful or harmful ways — amounts to at least a few hundred billion dollars of space in the modern economy.
The parallel to this would be if the trucking industry was (all else equal) three to four times too large — there would be way more trucks than necessary to transport goods, there would be costs of heavier pollution and maintaining more salaries than necessary, and people employed as a part of the inefficient trucking industry could instead be working on something with more productive value. To prevent those two industries from becoming corrupted due to excess power, as few resources (labor, oversight, and capital) should be allocated towards them as possible.
The S&L crisis of the 1980s, the stock bubble of the 1990s, and the housing bubble of the 2000s are clear examples of the financial industry allocating capital in ways that are not only inefficient but destructive as well. All of those three events lead to severe economic recessions, with the worst being the housing bubble that caused the Great Recession and global economic turmoil. Comparing this to the two decades before the 1970s, when stronger New Deal financial regulation was in place and there were no serious crashes, there’s clearly a major difference in efficiency.
In sum, it’s clear that the financial system needs to be seriously reorganized around priorities different than making the wealthiest better off at the expense of everyone else. Even moderate measures such as implementing a relatively minor financial transaction tax, limiting the size of the now oligopolistic private banks, and expanding cooperative or public banking would be helpful. Until measures like those happen though, the damage will continue, and the world risks that damage eventually compiling yet again into another major disaster.