Rana Foroohar: How Wall Street Is Strangling The Economy

This week, Chris interviews Time Magazine assistant managing editor and economic columnist Rana Foroohar about the findings within her new book Makers and Takers: The Rise of Finance and the Fall of American Business.

Eight years on from the biggest market meltdown since the Great Depression, the key lessons of the crisis of 2008 still remain unlearned — and our financial system is just as vulnerable as ever. Many of us know that our government failed to fix the banking system after the subprime mortgage crisis. But what few of us realize is how the misguided financial practices and philosophies that nearly toppled the global financial system have come to infiltrate all American businesses, putting us on a collision course for another cataclysmic meltdown.

Drawing on in-depth reporting and exclusive interviews at the highest rungs of Wall Street and Washington, Foroohar shows how the “financialization of America” — the trend by which finance and its way of thinking have come to reign supreme — is perpetuating Wall Street’s reign over Main Street, widening the gap between rich and poor, and threatening the future of the American Dream:

There is this fundamental dichotomy in the economy now where, if you are well off, you're doing better than you ever have before in history. But the majority of Americans, the majority of workers in this country, haven’t gotten a raise in real terms since the early 1990’s. Many people in the working class, the minorities haven’t gotten one since the late 1960’s. That's a real problem in an economy that is 70% consumer spending, because at some point the math starts to not work. If people don’t have more money they can’t spend. So we get these underlying growth problems.

My book is trying to look at one the reasons behind that. And I’m arguing that it is that the financial markets themselves are no longer supporting business growth.

The size of the financial sector --which includes not only banks, but hedge funds, private equity funds, real estate trusts, the mortgage market all the parts of the economy that basically move money around the economy -- has more than doubled since the 1980s. So we've got a financial sector now that creates only 4% of the jobs in this country but takes 25% of all corporate profits. That's a lot of economic oxygen that's being taken out of the room. What are the consequences for this? Well, one of the consequences is slower growth. Why is growth slowing? Well, in part because the whole model of banking has changed. The killer stat in my book is that there's a lot of deep academic research to show that only 15% of all the money sloshing around in American financial institutions ends up invested in Main Street business. So where is the rest of it going? Well, it's being used to trade against existing assets, stocks, bonds, houses -- it's doing something entirely different than what the banking system was set up to do, which is to take our savings and funnel them through financial institutions into business investments. Those businesses then grow and create jobs. When you only have 15% of the money in the markets doing that, you've got a problem.

The financial system, the whole point of it, is supposed to be that the banks will allocate capital to places where it is most productive. That's entirely broken now. If you look at the way money is being funneled around this closed loop of the financial system itself enriching more or less – and I’m being generous here – the top 10% of the country which owns 80% of the asset base stocks, bonds, houses, that's a bubble that is enriching just the wealthy while not actually creating real underlying growth. One of the things I must say that has been fascinating as I have put this book out there – I have gotten calls surprisingly from a lot of financiers who are very interested in the thesis because they recognize that at some point that starts to undermine their portfolios. Because sooner or later, everything that happens on Wall Street connects back to Main Street and I think we're at that tipping point now where you're going to start to see a market correction. We've had markets at record highs while Main Street has been stagnating and I think that we are at a turning point: these markets are going to eventually break.


Click the play button below to listen to Chris' interview with Rana Foroohar (37m:42s)

This is a companion discussion topic for the original entry at https://peakprosperity.com/rana-foroohar-how-wall-street-is-strangling-the-economy/

I can't wait to get the book. These days it certainly feels like we are persona non grata for employing people in good, solid middle class jobs.  The costs have become astronomical and as a result we have to charge more than I would want to for our services and the threat to the sustainability of the enterprise is obvious where incomes of the 99% can't keep pace.
More and more US law firms are outsourcing work to India where people who speak good English and are steeped in the common law tradition we share will research and write legal memoranda for $10/hr.  Thus far we refuse to do that, but I wonder how long we can hold out.

Nice presentation! Rana Foroohar is very sharp and refreshingly strait forward. She definitely gets it and isn't  shy about telling it like it is.

I was thinking an updated interview with Lacy Hunt on debt and the market distorting / wealth transfer effects of QE would dovetail nicely with this interview.

Maybe we need a few more millers, tanners, and harness makers rather than a hoard of financial takers, eh, R.R.

I kept hoping the discussion would identify the role of the fed and central banks in getting us to where we are today.
How do we establish an equitable banking system without eliminating the fed and central banks, or at least remove their power to create money out of nothing?

I ask that knowing why governments are in bed with the central banks.



Chris Martenson: I have a number of connections with people from China and I am finding them to be thinking much more long-term, very broadly. I spend a lot of time in the energy space so let’s – I’m wondering in your research if you ran across this – so here is a central thesis of mine: It is that endless growth is not possible on a finite planet. Not an original idea, but it is lurking there as sort of an 800 pound gorilla that nobody talks about. We have a financial system that seems to exist in two states – growing or collapsing – so I’m wondering if you ran across anybody who was sort of looking at this 10, 20, 50 years out and saying "Houston, we have a problem"?
Until the price of energy (and our wasteful use of said commodity) get back to a price that is reflective of the real amount of work that it provides, we will continue to see financial gurus play these commodities to their maximum benefit. Whether it be energy slaves or human slaves, as long as they are classed as expendable, they will be undervalued for the benefit of the very few. We have a good 5000 years of history as an example. Consider living off your 3 acres with a shovel and a hoe and hauling your water from a spring or well. Your guest confirmed PP's observation from a while back; "the narrative has got to change".

I wish I could be optimistic, but I'm afraid the next 10,20, or 50 years will be bleak unless that new narrative is implemented with some haste. Don't look to the Fed or Draghi or whoever to provide the answer. Good subject selection and great interview.

The way to establish an equitable banking system IS to eliminate the Fed. No nation, determined to live within its means has any need for a central bank, only for a normally functioning Treasury Department. Central banks came into existence to enable deficit spending without resorting to taxation, to fund European wars. The very term was anethma during the most prosperous era in American history, from 1800 until the viper got its fangs into the economy in 1913 (just in time for WWI). What is most disgusting is the way the Fed is always depicted as the Good Fairy in the MSM (good, if at worst sometimes a bit misguided), when in fact it is every bit as vicious as depicted by Andrew Jackson (whose views are easily found on line.) The trillions, virtually interest free, in the name of TARP and QE, went to the very banks that own the Fed, not to everyone else, and this is true of foreign CB's as well, and they and their subsidiary hedge funds have already been dining on the bones of fallen industries for pennies on the dollar. But the American people must take responsibility for holding their legislators feet to the fire, and balance the budget for a start.



A few years back my family and I went to visit Abe Lincoln's birthplace.  A simple cabin in a tranquil setting is maintained there for all to enter into the beginnings of the Lincoln mystique.  The comment I remember most from the guide was "The Lincoln family's neighbors were ostracized because they had to borrow money!."  If we could recapture that disdain for debt it would be a good starting place for downsizing the rest of our narrative.

Can't compete with Wholesale Wall Street money.   My high school friend's father was a hired gun to operate the company day to day in the mid 80's (sadly he died of brain cancer too young).   It was a very nicely run company and ranch.   The family was big in the America's Cup where it was kept right next to their family table at the San Diego yacht club when Dennis Conner dominated.   Hollow it out!

I would like to see Free Banking where banks compete for business but have to use precious metals per constitution.   Blockchain banking with gold!

Is rationality really here?  No they weren't venal!!!  I have to disagree.  Per Merriam-Webster:

willing to do dishonest things in return for money
By definition the financial system is venal and in spades.  Did it really take three years of research to figure this out.  There are going to be a lot of very angry people out there when all this comes apart and they will need to have better apologists for the system out there than Ms. Foroohar.  I know there is some satisfaction in finally getting confirmation form the main stream press.  But........

When I see Jamie Dimon on bended knee, maybe…

We have a long ways to go before we finally get the money for nothing attitude out of our culture as a whole. We are all guilty of this, it has become our cultural norm.  The necessary correction of all this is about to begin as we all know and is about to get very ugly.