In a new report, “Cracks in the Pipeline: Restoring Efficiency to Wall Street and Value to Main Street,” documents the swollen growth of the financial economy at the expense of the real economy.
“Cracks in the Pipeline” reveals a surprising and important relationship between the rapid growth of the financial sector and the weak economy: Wall Street’s share of GDP has jumped dramatically since deregulation commenced in 1980; over that same span of time, the financial sector has become less and less efficient at its true utility – serving as a pipeline to deliver capital from investors to productive businesses.
According to the report, the financial industry currently extracts some $635 billion a year from the economy – in excess of historic capital intermediation costs. Advances in information technology and quantitative analysis have plainly made some parts of the intermediation process more efficient and less costly. But those advances have been deployed, the report shows, to divert more capital from the pipeline of intermediation in order to ensure unprecedented profits for the intermediators themselves.
Turbeville details how three additional factors have reversed Wall Street’s historically productive role: 1) the consolidation of market power, 2) the era of deregulation, and 3) shifts in industry compensation to short-term performance benchmarks. As a result, the higher cost of capital prevents producers from growing, and job growth and consumption is stunted, income inequality grows, and monetary policy is less effective.