Financial Crises
According to Simon Johnson, a former chief economist to the International Monetary Fund (IMF), Wall Street financiers and major US corporations played a central role in creating the 2008 financial meltdown. More alarming, they are now using their economic and political power to stop the financial regulatory reforms enacted by Congress to prevent another financial crisis. No bank executive or hedge fund manager went to jail because of the financial meltdown of 2008. The government seems helpless or unwilling to act against these financial power houses.
More Money, More Punishment
Furthermore, the Fed recent QE3 initiative added over $1 Trillion of new money to the economy and helped lift the stock market to uncharted territories, thereby strengthening the power of the same financial institutions responsible for the financial crisis of 2008.
Financial Services
The financial industry gained strength since the 1980’s by taking advantage of many deregulate policies initiated by the government. Wealthy individuals and employed Americans invested more and more money in securities, using instruments such as IRAs and 401(k) plans “invented” by the government. These developments vastly increased the profit opportunities in financial services.
Financial Sector’s Power
From 1973 to 1985, the financial sector earned around 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990’s, it oscillated between 21 percent and 30 percent, and by 2010 it reached 41 percent. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007. The financial sector today controls over 8% of the entire US GDP as compared with less than 2% in 1980’s.
The Next Financial Crisis
There is a strong linkage between the financial tigers of Wall Street, wealthy corporations and the US government. All these groups collude in pushing risky investments for higher payoffs in the name of economic growth, but none of them enforces the necessary regulations needed to prevent the next crisis from happening. The ever growing appetite for immediate high profits blocks the badly needed regulatory enforcement expected from the government. From that standpoint, the US is not very different than other African banana republics in which the interests of government officials, bankers and large corporate executives are intertwined. The next financial crisis will definitely happen. The only question is when.
Interesting post. I would add that the Citizens United decision further muddied the waters between the government (i.e politicians) and large corporations.
Good point! I might just consider adding this in the article. Anyways, the government and large corporations do not always get along.
Yikes. It’s a pretty risky situation.. historically there is some sort of meltdown, or at least a recession every 10-15 years. We’ll see what happens in the next decade.
It will be interesting.
Thanks
I tend to ignore most of the noise out there. I figure it’s not anything I can control, so I’ll just prepare myself financially to withstand as much as I can and then react if and when an asset class melts down temporarily. The good thing is that if you can withstand the initial hit it seems to historically provide great opportunities for wealth creation…
Yes it does. Anytime you prepare for a financial crisis, in the long run it is better and safer.
Thanks for dropping by!
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I think all major countries are in a race to debase their currency to increase inflation and GDP. If everyone prints more money at the same time and holds hands, then nothing will come apart. If someone takes their foot off the accelerator or slams on it, then we’ll have issues 🙂
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