Leaving a hearing before the subcommittee of the House Financial Services Committee a few weeks ago, a pleasant woman approached us and introduce herself, noting she and her companions worked for SIFMA—the Securities Industry and Financial Markets Association. These are the folks, who, with the other financial lobbyists, outnumber Public Citizen and other consumer lobbyists 150-1, and spend a collective $1.4 million a day, to oppose increased regulation of Wall Street. We noted that we were probably on opposite sides of most issues. “Don’t you care about the health of the financial sector and our role in the economy?” our new acquaintance asked.
The answer: Absolutely. We need a healthy, stable financial sector that serves the real economy – and ordinary Americans – rather than a boom-and-bust, speculation-crazy financial sector that dominates and stymies the real economy.
On June 28, Americans for Financial reform hosted a half-day seminar on the “financialization” of the American economy at Public Citizen. Panelists included Vanderbilt University Prof. Margaret Blair, Kansas City Federal Reserve Bank President Thomas Hoenig, and AFL-CIO Policy Director Damon Silvers, among other important figures.
Silvers defined “financialization” thus: “Financialization is the growth of the size and importance of financial markets and institutions compared to other economic activity and the increase in the power of financial interests over other interests within firms and within the larger economy and society.”
Another definition might be, with capitalization expressive: WALL STREET v main street; and the capitalization of Wall Street just keeps getting bigger.
Professor Blair put the numbers to the problem. The financial sector accounted for about 10 percent of the GDP just after World War II. By 2009, it had doubled to more than 20 percent.
Has this sector invented personal computers? Developed green energy sources? Constructed homes? Not at all. In fact, for all the fancy new derivatives, credit default swaps, collateralized debt obligations concocted by the Ivy League math majors, none of it would be foreign to a 16th century Venetian banker, Silvers wryly noted. Yet somehow, without significant changes to the industry of banking the influence and power of the sector continues to grow exponentially.
When speaking to the group, Hoenig, of the Federal Reserve Bank of Kansas City, urged regulators to follow through with a strong Volcker Rule ban on proprietary trading as means to reduce financialization. Proprietary trading involves banks trading for their own accounts, as opposed to servicing a custsomer. “Prop trading,” more colorfully described by author Michael Lewis in his book “The Big Short” as “ripping the face off a customer,” (which he did as a Solomon Brothers trader in his younger days), must be eliminated from regulated banks under the new Dodd-Frank Wall Street Reform Act.
Since the proprietary trading business has been so lucrative, Wall Street has dispatched a special swat team of lobbyists to preserve it and the power that comes with it.
So here’s our answer to the SIFMA lobbyist who asked us if we care about the health of the financial industry. We care very much about its health. Right now it’s a bit like the financial sector is the real economy’s cancer, metastasizing and disabling more of the real economy over time. We want to cure it.
Bartlett Naylor is Public Citizen’s financial reform analyst. Amit Narang is Public Citizen’s regulatory analyst.