The Need For Economic Reform

It seems to me….

There is a need for financial reform along ethical lines that would produce in its turn an economic reform to benefit everyone. This would nevertheless require a courageous change of attitude on the part of political leaders.” ~ Pope Francis[1].

A recent poll conducted by the Harvard Institute of Politics[2] found that only 19 percent of Americans ages 18 to 29 identified themselves as “capitalists”; apparently a majority of U.S. citizens are uncomfortable with their nation’s economic foundation; a system that over hundreds of years turned a fledgling society of farmers and prospectors into the most prosperous nation in human history. The 2016 presidential campaign raised questions of who exactly the system is working for and against, as well as why eight years and several trillions of dollars of stimulus following the financial crisis, the economy continues to grow so slowly.

Despite politically-motivated nefarious comments to the contrary, the U.S.’s economic problems reach far beyond any simplistic quick-fix solutions being more symptomatic of a condition that threatens in equal measure the wealthy and the poor, the conservative and the liberal. The U.S. system of market capitalism itself is broken.

From the creation of a unified national bond and banking system in the U.S. in the late 1790s until the early 1970s, finance took individual and corporate savings and funneled them into productive enterprises creating new jobs, new wealth, and, ultimately, economic growth. Finance; which today includes everything from banks and hedge funds to mutual funds, insurance firms, trading houses, and similar enterprises; no longer primarily serves business. Over the past few decades finance has turned away from this traditional role. Today only a fraction of all the money circulating through financial markets actually makes it to Main Street businesses.

The textbook description of the financial sector, “the intermediation of household savings for productive investment in the business sector”, constitutes only a minor share of today’s banking business. It is estimated that only around 15 percent of capital coming from financial institutions today is used to fund business investments whereas it would have been the majority of what banks did earlier in the 20th century: the role of the capital markets and the banking sector in funding new investment is decreasing.

The financial sector now represents around 7 percent of the U.S. economy, up from about 4 percent in 1980, currently takes around 25 percent of all corporate profits – but creates only 4 percent of all jobs. When finance becomes that large, the economy gradually becomes a zero-sum game between financial wealth holders and everyone else: the average person is losing.

Finance has long been considered to be at the very pinnacle of the economic hierarchy of an advanced service economy that graduated from agriculture and manufacturing but the unintended consequences of this misguided belief now endangers the very system the U.S. has prided itself on exporting around the world.

This economic illness has a name: financialization. Financialization; a big, unfriendly word with broad disconcerting implications; is an academic term for the trend by which Wall Street and its processes have come to reign supreme in the U.S. permeating not just the financial industry but also much of U.S. business. It includes everything from the growth in size and scope of finance and financial activity in the economy; to the rise of debt-fueled speculation over productive lending; to the ascendancy of shareholder value as the sole model for corporate governance; to the proliferation of risky selfish thinking in both the private and public sectors; to the increasing political power of financiers and the CEOs they enrich; to the way in which a “markets know best” ideology remains the status quo.

While this revolution is often blamed on bankers, it was facilitated by shifts in public policy from both sides of the political aisle and crafted by the government leaders, policymakers, and regulators entrusted with keeping markets operating smoothly. The shifts were bipartisan and, to be fair, often seemed like good ideas at the time but also came with unintended consequences. The shift encompasses Reagan-era deregulation, the unleashing of Wall Street, and the rise of the so-called ownership society that promoted owning property and further tied individual healthcare and retirement to the stock market. It now manifests itself in myriad ways: a housing market that is bifurcated and dependent on government life support, a retirement system that has left millions insecure in their old age, a tax code that favors debt over equity….

Debt is the lifeblood of finance. As finance has captured a greater and greater piece of the national pie, it has, perversely, all but ensured that debt is indispensable to maintaining any growth in an advanced economy such as the U.S. where 70 percent of output is dependent upon consumer spending.

In the early 1980s, new companies made up half of all U.S. businesses but the number of new firms as a share of all businesses declined by 44 percent between 1978 and 2012.

Emphasis on short-term share-boosting management is largely responsible for the drastic cutback in research-and-development outlays in corporate America, investments that are the seed corn for future prosperity.

The system is in need of major restructuring. The U.S. needs tax system reform, for the government to take more direct action on job creation and poverty reduction, and to address inequality in a meaningful way. The largest banks need to be broken up; none should be permitted to become too large to fail. The hold of financial-oriented thinking in every corner of corporate America needs to be dismantled. Business education needs to be reformed. A tax system that treats one-year investment gains the same as longer-term ones and induces financial institutions to push overconsumption and speculation rather than healthy lending to small businesses and job creators needs to be changed. We need to rethink retirement, craft a smarter housing policy, and restrain a money culture filled with lobbyists who violate the U.S.’s essential economic principles.

Financial institutions must provide a clearly measurable benefit to the real economy: they no longer do and that must be changed.

That’s what I think, what about you?

[1] Pope Francis, born Jorge Mario Bergoglio, is the 266th Pope of the Roman Catholic Church.

[2] Foroohar, Rana. American Capitalism’s Great Crisis, Time,, 12 May 2016.

About lewbornmann

Lewis J. Bornmann has his doctorate in Computer Science. He became a volunteer for the American Red Cross following his retirement from teaching Computer Science, Mathematics, and Information Systems, at Mesa State College in Grand Junction, CO. He previously was on the staff at the University of Wisconsin-Madison campus, Stanford University, and several other universities. Dr. Bornmann has provided emergency assistance in areas devastated by hurricanes, floods, and wildfires. He has responded to emergencies on local Disaster Action Teams (DAT), assisted with Services to Armed Forces (SAF), and taught Disaster Services classes and Health & Safety classes. He and his wife, Barb, are certified operators of the American Red Cross Emergency Communications Response Vehicle (ECRV), a self-contained unit capable of providing satellite-based communications and technology-related assistance at disaster sites. He served on the governing board of a large international professional organization (ACM), was chair of a committee overseeing several hundred worldwide volunteer chapters, helped organize large international conferences, served on numerous technical committees, and presented technical papers at numerous symposiums and conferences. He has numerous Who’s Who citations for his technical and professional contributions and many years of management experience with major corporations including General Electric, Boeing, and as an independent contractor. He was a principal contributor on numerous large technology-related development projects, including having written the Systems Concepts for NASA’s largest supercomputing system at the Ames Research Center in Silicon Valley. With over 40 years of experience in scientific and commercial computer systems management and development, he worked on a wide variety of computer-related systems from small single embedded microprocessor based applications to some of the largest distributed heterogeneous supercomputing systems ever planned.
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