Above Photo: From rooseveltinstitute.org
A healthy financial system is one that channels finance to productive investment, helps families save for and finance big expenses such as higher education and retirement, provides products such as insurance to help reduce risk, creates sufficient amounts of useful liquidity, runs an efficient payments mechanism, and generates financial innovations to do all these useful things more cheaply and effectively. All of these functions are crucial to a stable and productive market economy. But after decades of deregulation, the current U.S. financial system has evolved into a highly speculative system that has failed rather spectacularly at performing these critical tasks.
What has this flawed financial system cost the U.S. economy? How much have American families, taxpayers, and businesses been “overcharged” as a result of these questionable financial activities? In this report, we estimate these costs by analyzing three components: (1) rents, or excess profits; (2) misallocation costs, or the price of diverting resources away from non-financial activities; and (3) crisis costs, meaning the cost of the 2008 financial crisis. Adding these together, we estimate that the financial system will impose an excess cost of as much as $22.7 trillion between 1990 and 2023, making finance in its current form a net drag on the American economy.
We put a price tag on just how much money the finance sector has siphoned from our economy—and it’s astronomical. Finance in its current form is actually a net drag on the American economy.
What has the flawed financial system cost the U.S. economy? How much have American families, taxpayers, and businesses been “overcharged” as a result of these questionable financial activities? The following findings —with all figures in inflation adjusted dollars—are from “Overcharged: The High Cost of High Finance,” by Gerald A. Epstein and Juan Antonio Montecino, a Roosevelt Institute report (bit.ly/RIOvercharged). This is the first study to generate an overall estimate of costs to the economy over and above the benefits that the finance sector provides.
After decades of deregulation, the current U.S. financial system has evolved into a highly speculative system that has failed rather spectacularly.
To better understand the mechanisms and financial practices that have led to these excess costs, in this paper the authors describe in detail some of the ways in which banks and other financial institutions have overcharged for their services. Epstein and Montecino show how the asset management industry charges excessive fees and delivers mediocre returns for households trying to save for retirement; how private equity firms grab excessive levels of payments from pension funds and other investors while often worsening wages and employment opportunities for workers in the companies they buy; how hedge funds underperform; and how predatory lenders exploit some of the most vulnerable people in our society. From this bottom-up perspective, we can see more clearly how the levels of overcharging we identified at the macro level actually come about in practice.
These excess costs of finance can be reduced and the financial sector can once again play a more productive role in society. To accomplish this, we need three complementary approaches: improved financial regulation, building on what Dodd-Frank has already accomplished; a restructuring of the financial system to better serve the needs of our communities, small businesses, households, and public entities; and public financial alternatives, such as cooperative banks and specialized banks, to level the playing field.
(And it wouldn’t hurt to lessen the undue influence of money in politics. The finance sector has spent billions of dollars on lobbying and other political contributions. It seems to have paid off…for financiers.)
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