Saturday, November 05, 2011

Those Awful Banks

It's remarkable the degree to which so many people from vastly different countries, backgrounds, and political inclinations all share a bitter and seething rage against the world's big financial institutions. Everyone hates big banks, and today's Bank Dumping Day is only one of many signs of that deep loathing.

Given this near-universal hatred of banks and bankers, the idea of providing them with taxpayer support is pretty much intolerable to most people. The widespread disgust felt about the US's TARP bailout of banks in 2008 provided fuel for both the Tea Party movement's popularity in 2010 and the Occupy Wall Street movement of this fall. In the eurozone, banks are reviled in the troubled periphery countries, where austerity measures are seen in part as a mechanism devised to shift the pain of the eurozone debt crisis from banks to the people. And in the core eurozone countries like the Germany, the public is understandably angry at the idea of having to provide funds to restore European banks to financial health thanks to the crisis.

The Financial Sector and the 1%

There are plenty of reasons for these intensely negative feelings about financial institutions. One of the most important may be the extraordinary concentration of wealth and power that has accumulated among the world's financiers over the past couple of decades. Income inequality in the US, for example, is almost entirely a story about the richest 1% pulling away from everyone else -- and a substantial portion of that richest 1% have the financial industry to thank for it.

In the US, the compensation paid to employees in finance, together with financial sector corporate profits, added up to close to $200,000 (in constant 2005 dollars) per each person working in the finance industry in 2010, according to BEA data (NIPA, section 6). In real terms this figure has almost doubled since the early 1990s, and more than tripled since 1980. By contrast, inflation-adjusted median household income in the US is unchanged over the past 20 years.

This remarkable rise in the fortunes of people working in the US's financial industry almost perfectly matches the rise in the income share going to the richest 1% of Americans. It's certainly possible that this correlation is spurious. But it's also natural to consider that perhaps this is not just a coincidence.

(Note: data on top 1% from Emmanuel Saez.)

The Story Behind the Numbers

What has driven this impressive concentration of power and wealth into the few hands that control the world's financial system? It's hard to escape being drawn toward the conclusion that the rules of the system have indeed been subtly, slowly changed over the last 30 years, simply because no alternative explanations seem to fit.

To see this, let me make four uncontroversial (I hope) observations:
  1. The US's political system is far more dependent on financial contributions from super-wealthy contributors than it used to be.
  2. Contributors tend to give more money to political actors that will do things that they like.
  3. Since the US is a democracy, the US's political system establishes the rules of the game by which individuals and corporations must play.
  4. Super-wealthy individuals in the US have grown even more super-wealthy over the past two three decades, and thus more able to fund the US's political system. (See point 1.)

Of course, there could be more than one possible explanation for this series of observations; they could be completely unrelated phenomena, for example. However, it's also possible that these phenomena do indeed have something to do with each other. All we need to do is posit some mechanism by which #3 above could have led to #4, and the logical loop is complete. My candidate would be this:

3.5: The rules pertaining to the financial system have been modified over the past two decades in such a way that it has facilitated the concentration of wealth and power in the financial sector.

And now we have a complete and consistent logical story of a self-sustaining cycle in which greater concentration of wealth leads to more political influence by the super-wealthy, which leads to rule-changes to their benefit, which leads to greater concentration of wealth. And the financial sector is the arena in which this cycle has largely been played out.

Whether or not you believe this story, it is a plausible one, and it should not come as a surprise that many people believe it. And I think this is exactly what lies at the heart of the anger and frustration felt by so many toward the finance industry.


And now we get to the fuel that has been repeatedly added to this already hot fire in recent years: the repeated use of taxpayer money to rescue big banks, both in the US and Europe. The latest plan to end the eurozone debt crisis has, as one of its core elements, a commitment of additional taxpayer money to help keep Europe's banks afloat; the string of bank bailouts continues.

The whole idea of using taxpayer funds to support the financial system is justifiably difficult to digest. Weren't the world's biggest financial institutions exactly the cause of the financial meltdown in late 2008? Aren't they also substantially responsible for the eurozone debt crisis through their unwise lending? And in between these various crises, haven't they been earning obscene amounts of money while crying foul any time they are asked to share it through higher upper-income tax rates? So why should taxpayers lift a finger to help the world's bankers in those instances when they've bet the wrong way?

The problem is that banks are absolutely essential to our economic system. Like it or not, they are special. This is largely the result of their unique ability to make loans, create money, and direct capital toward sectors of the economy that need it. Without financial intermediation, today's economy would immediately grind to a halt. The health of the world's economy is, without exaggeration, completely at the mercy of the banking sector.

And that is the icing on the cake. It's awful to contemplate that our basic economic system, and the very livelihood of most of us who participate in world's modern market economy, are crucially dependent on institutions that are so hard to understand, have done so much to concentrate wealth and power among the privileged few, and are directly responsible for financial chaos and crisis. But it's doubly awful to be forced to repeatedly bail them out under threat of widespread economic catastrophe, which is exactly what would happen in the absence of those bailouts. It really violates every fundamental notion of fairness.

The remedies for this situation are precisely those policies that the financial industry hates the most: significantly more government oversight, and/or mechanisms through which taxpayers can share in the benefits the financial sector brings during the good times. In the absence of such measures to rectify the basic unfairness of the current system, antipathy toward the world's financial industry will only grow. And with good reason.


  1. Anonymous7:23 AM

    Why do you say "<span>Super-wealthy individuals in the US have grown even more super-wealthy over the past two decades," when even your evidence shows that it has been over the past "three" decades?</span>

  2. dilbert dogbert9:42 AM

    By extension of your arguments, the banks should become a public utility or like our Armed Forces publically owned.  WooHoo!  I predict another civil war over those ideas.

  3. Anonymous11:53 AM

    "The problem is that banks are absolutely essential to our economic system"

    Yes they are. But the incomes of the people working in the finance sector are not, not at all. So the solution is obvious.

  4. You are missing one element in the plausible story you are describing: the fundamental tenet of economic growth; for it is not only the corrupting effect of money on the democratic utopia that makes the story plausible. There must be an ideological component.

    It is this: given that a human population must create wealth at an increasing rate (i.e. GDP rate must be positive), the State should make every effort to engineer the transfer of wealth from society at large to those already rich, because those already rich have proved that they know how to create wealth out of wealth.

    Of course, observation of the current situation shows that the fundamental tenet is false. When those already rich (the 1%) increase their control of the economic dynamics with the help of the State they engage in personal gratification (witness the inflation in collectibles, luxury cars, yatches, art, etc) and unwise lending, increasing the chances of systemic failure.

  5. In Hell's Kitchen12:53 PM

    Here's another chart that goes some way of explaining the outrage:

  6. CaitlinO8:28 PM

    "The problem is that banks are absolutely essential to our economic system. Like it or not, they are special."

    If they are that damn critical on top of being as irresponsible as they have repeatedly acted throughout our history, then we need national and state banks run by government employees for the good of the people, not for the good of some anti-democracy brie-eating pond scum.

  7. John L8:45 AM

    What is your definition of "banks"?  When investment banking was forced to be separate from normal banking, these institutions were not so systemically dangerous.  Allowing banks to use depositor's funds for speculation and hedge fund activities was a serious breach of public trust.

  8. Lemiwinks5:06 PM

    That"s not correct argumentation. Any industry group could have been told the same.

    Bankers are getting richer because most of the GDP growth in the past 2 decades happened to come from lending fueled consumprion growth.

    If GDP growth had com from solar panels, now solar panel makers would be in the top 1% and they would pay for policy makers and bend the rules for their sake.

  9. William deB. Mills11:05 AM

    You are missing the point. The problem is not with banks but with criminals working at banks - robosigning, bribing politicians, withholding information from investors and betting that the setup you just sold will fail, etc. The other problem, as you well know, is Glass-Steagal - i.e., the removal by the banks and their political allies of the reform that compelled banks to be...banks, not brokerage firms or whatever else. Americans do not have a problem with banks; lucky small towns still have them. Americans have a problem with criminals being rewarded for crime.

    William deB. Mills