Thursday, October 20, 2011

Finance’s Five Fatal Flaws - William Black, from The Archives

When USA elites become willing to hold Wall Street accountable for its many crimes, they will turn to William Black and give him the power to clean up the mess. Perhaps as Attorney General, to replace that simpering corporatist lapdog, Eric Holder, who in over two years has signally failed to take down a single top executive of the predatory financial and banking systems. Not really a surprise - Holder was, after all, a corporate lawyer before Obama tapped him as AG. Only a few people, including myself, warned, before the inauguration, that it was a bad choice. Corporations are running roughshod over our democracy, and the guy who's supposed to reign them in is - a corporate lawyer?

Anyway, if truth and honesty and prescience were actually rewarded in this society, Bill Black would be a very, very rich man. He has bravely, repeatedly, and consistently given the public the details of the "crimonegenic" septic pit our banking and financial systems have become the past 30 years. Put Bill Black in charge, and all the big cheeses on Wall Street will finally be treated as what they really are, sociopathic criminals and financial terrorists.

Two years ago this month, Black posted How the Servant Became a Predator: Finance’s Five Fatal Flaws, describing how the financial system actually loots the real economy, instead of serving its ostensible role of allocating credit and capital to individuals and firms most likely to create new wealth producing enterprises. While Wall Street trades some six trillion dollars a day in stocks, bonds, futures, and derivatives, entrepreneurs with new ideas for clean energy and other thins we really need are begging for mere millions. Millions of dollars are mere table scraps compared to the cyclone of daily trading of trillions of dollars.

And as Black notes in his Point 3, The financial sector’s predation is so extraordinary that it now drives the upper one percent of our nation’s income distribution and has driven much of the increase in our grotesque income inequality.

What exactly is the function of the financial sector in our society? Simply this: Its sole function is supplying capital efficiently to aid the real economy. The financial sector is a tool to help those that make real tools, not an end in itself. But five fatal flaws in the financial sector's current structure have created a monster that drains the real economy, promotes fraud and corruption, threatens democracy, and causes recurrent, intensifying crises. 

1. The financial sector harms the real economy.

Even when not in crisis, the financial sector harms the real economy. First, it is vastly too large. The finance sector is an intermediary -- essentially a "middleman". Like all middlemen, it should be as small as possible, while still being capable of accomplishing its mission. Otherwise it is inherently parasitical. Unfortunately, it is now vastly larger than necessary, dwarfing the real economy it is supposed to serve. Forty years ago, our real economy grew better with a financial sector that received one-twentieth as large a percentage of total profits (2%) than does the current financial sector (40%). The minimum measure of how much damage the bloated, grossly over-compensated finance sector causes to the real economy is this massive increase in the share of total national income wasted through the finance sector's parasitism.
Second, the finance sector is worse than parasitic. more.

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