Wall Street is supposed to serve the economy – not harm it

Bethany McLean

THE WASHINGTON POST – In his new book, The Finance Curse: How Global Finance Is Making Us All Poorer, veteran journalist Nicholas Shaxson recounts his early years reporting in Angola, when he learnt what the “resource curse” was by observing the horrible poverty of that oil-rich nation. “All this money flowing from natural resources such as oil can make their populations even worse off than if those riches had never been discovered,” he wrote. Now, he argued, that same phenomenon afflicts modern economies like the United States (US) and Britain, because we have encouraged our financial sectors to flourish at the expense of the broader population. Hence, the finance curse.

Shaxson isn’t the first one to make this argument. In 2016, the Financial Times’ Rana Faroohar published Makers and Takers: The Rise of Finance and the Fall of American Business. In it, she argued that what she called “financialisation” – in essence, the increased share of the economy that is caught up in finance – is devastating the bigger economy it is meant to serve. But especially in this uncertain, insecure climate, the thesis is important and worth repeating.

As even a big bank chief executive like JPMorgan Chase’s Jamie Dimon has noted, the economy certainly is not working for everyone. That’s at least correlated with the rise of finance. Back in the 1970s, financial corporations earned little more than a 10th of all corporate profits; today, around a third of all corporate profits flow to finance, said Shaxson. For sure, a functioning economy needs the services of a healthy financial sector – but have we become the servants to our Lord Finance?

Correlation is one thing, and causation another. Shaxson doesn’t prove the latter. But he makes some provocative arguments. Among them: That “London and its offshore satellites (have) played a central role in turning global markets into a hothouse for organised crime, corruption, tax evasion and the cross border stashing of looted wealth”; that the decline of farming and the concurrent destruction of rural America are a result of a deliberately engineered strategy of mechanisation, consolidation and increased debt, siphoning off profits to lenders in big cities; that Ireland’s stunning economic success before the financial crisis was not actually a result of corporation-friendly tax cuts, as the conventional wisdom has it, but rather other policy choices compounded by some good luck.

Shaxson also makes one of those wonderful points that is so insightful, it seems obvious in retrospect: The idea of “competition” has come to stand for everything, yet nothing. We’re often told that our big banks and big technology companies have to be big because they have to be able to compete. Shaxson highlights a little-noticed excerpt from Facebook chief Mark Zuckerberg’s congressional testimony, in which Zuckerberg argued that breaking up Facebook would – you guessed it – strengthen China. So, Shaxson points out, we are supposed to “improve American competitiveness by restricting competition in America.” Which raises the larger question: When politicians and CEOs talk about competitiveness, what do they mean? Does competition mean a better life for a country’s citizens, or does it just mean more profits for big corporations? As Shaxson writes, “Improving the fortunes of Goldman Sachs won’t necessarily improve the fortunes of America.”

ABOVE & BELOW: The Finance Curse: How Global Finance is Making Us All Poorer; and the trading floor at the New York Stock Exchange. PHOTO: AP

How this relates to financialisation, rather than the broad category of obsequiousness to big business, is somewhat fuzzy. But it’s certainly true that one of the more pernicious forms of competition is how entities from municipalities to countries are made to compete for the privilege of having businesses choose to locate there. That often results in a race to the bottom, where “secretive consultants,” who Shaxson said can get paid up to 30 per cent (!) of the subsidy package the business is offered, operate by “playing local areas off against one another” and “jimmying more corporate subsidies from the public purse.” He quoted one city official saying, “We are now at a point where there is an expectation pretty much from every company that comes along that there is going to be some financing.” All men may be created equal, but between big business and your average taxpayer, there is no equality.

The most direct evidence of the damage done by financialisation is the way the modern private-equity business operates. Shaxson explores this via Alden Global Capital, the financial firm that has bought up local newspapers and stripped them bare. It’s clear how financialisation has transferred wealth: A private-equity firm like Alden can load a company up with debt, pay the proceeds to itself, crush the company – and walk away rich. Or as Shaxson wrote, “The main event in this game is borrowing.”

Ironically, a business whose existence was enabled by Milton Friedman, the economist who famously argued that a corporation’s sole duty is to increase its profits for shareholders, has been subverted into one in which the main purpose seems to be extracting payments for the private-equity overlords and leaving the rest of the shareholders, not to mention employees and other stakeholders, with a broken, bankrupt mess. (Yes, investors in the private-equity fund share in some of the spoils, but the real rewards go to the fund’s executives.)

Shaxson, who works with an entity called the Tax Justice Network, which focusses on the damaging effects of tax avoidance, also is obsessed with offshore tax havens like the Cayman Islands. His obsession might be to the detriment of this particular book. He asks: Is Alden Global “being funded by criminals” in offshore locales? As he writes, there’s no way to tell because of all the laws enabling secrecy.

About Cook Islands, one of the places that exists as a result of its tax status, he wrote that users include “a monkey house of fraudsters, billionaire Ponzi schemers, hedge fund swindlers, spiteful patriarchs in vicious divorce battles, snake oil salesmen peddling weight loss nirvanas and many others.” He identifies one of these nefarious characters as a man named Dr Dread, who apparently made a fortune doing botched plastic surgeries, but who are the rest of these people? Are they real, or are they rhetorical flourishes?