Finance industry in the United States
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The finance industry in the United States has been investing roughly half a billion dollars each year in lobbying and political campaign contributions and have netted over $160 for each $1 so invested.
ROI: $160 per $1 in lobbying and campaign contributions
The lobbying and campaign contributions seem to have focused primarily on deregulating financial services. The dangers of such deregulation are evident in the accompanying plot of the number of nations in banking crisis for each year since 1800: There seems to have been an explosion of banking crises since the end of the regulation provided by the Bretton Woods agreement. The United States escaped most of these problems until the Financial crisis of 2007–2008.
The accompanying figure uses the definition of "finance industry" developed by the Bureau of Economic Analysis of the Federal government of the United States for Table 6.16 in the National Income and Product Accounts (NIPA): "Finance" includes finance, insurance, banks, and other holding companies.
The lobbying data mentioned below also includes real estate, not included in the estimates here of the return. If real estate were excluded from the lobbying data, the estimated ROI would be higher than given here.
The finance industry has received direct benefit as indicated by the rise in the percent of domestic corporate profits in the accompanying figure. They have also received indirect benefits in terms of immunity from prosecution for massive fraud.
From 1934 through 1985, the finance industry averaged 13.8% of US domestic corporate profit. Between 1986 and 1999, it averaged 23.7%. From 2000 through 2011, it averaged 31.7%. Some of the increase prior to 1999 was due to increased efficiency from banking consolidation and innovations in new financial products that benefit consumers. However, Stiglitz noted that the Late-2000s recession was created in part because, "Bankers acted greedily because they had incentives and opportunities to do so". They did this in part, Stiglitz said, by innovating to make consumer financial products like retail banking services and home mortgages as complicated as possible to make it easy for them to charge higher fees.
Consumers who shop carefully for financial services typically find better options than the primary offerings of the major banks. The Late-2000s recession might have been avoided or postponed if most consumers had refused to accept financial products they did not understand, e.g., negative amortization and other predatory loans. However, few consumers think to do that.
Beyond this, the destabilization of the international economy described above tends to hurt the poor much more than the rich: In a financial crisis, people with cash drive very hard bargains with individuals out of work and business without adequate cash reserves. One empirical study concluded that "on average, one year of recession had six times the (negative) impact on inequality that one year of growth was able to achieve."
These effects that benefit the rich relative to the poor have been largely enabled by changes in law flowing from the corrosive effect of money in politics. The need for large amounts of money to get elected give all politicians a conflict of interest: If they protect the public, they will offend the finance industry, which has made substantial contributions to political campaigns.
To be conservative, suppose we attribute only the increase from 23.7% to 32.7% to crony capitalism – the need to deliver a return for the investments of the wealthy in campaign contributions. That's 8% of US domestic corporate profits. The latter averaged roughly $1 trillion per year between 2000 and 2011, so 8% of that is $80 billion per year.
Return: $80 billion per year between 2000 and 2011.
That's a return of $160 for each $1 invested in lobbying and political campaigns over that period. That's roughly $270 per year for every man, woman and child in the US.
Obviously, there is substantial uncertainty in this number. Honest people can differ over how much of the 32.7% of US domestic corporate profits should be attributed to gains the finance industry receives as a result of governmental action that benefits this industry at the expense of the public at large. This history of the Glass–Steagall Act includes a series of governmental decisions beginning at least by the 1960s that produced the general upward trend visible in the accompanying figure. Thus, the real number could be substantially larger. On the other hand, if the industry spent substantially more to obtain these benefits than the amounts reported for lobbying and campaign contributions, then the number could be potentially lower.
However, whether you believe this overstates the benefits by a factor or 10 ($16 for each $1 invested in lobbying and campaign finance) or that the benefits are four times this number ($640 for each $1 so invested), there is hardly any place outside of politics with such a high return on investment in such a short time.
Immunity from prosecution
William K. Black, a lead litigator during the Savings and loan crisis of the 1980s and 1990s, decried the "de Facto Decriminalization of Elite Financial Fraud". "Federal Prosecution Of Financial Fraud Falls To 20-Year Low, New Report Shows". The top figures in the Financial crisis of 2007–2008 seem so far to have been immune from prosecution. This follows the pattern of the Savings and loan crisis, where politicians who owed their positions to contributions from Charles Keating and others involved in the scandal effectively blocked serious investigations until the scandal became to big to cover up. That point seems not yet to have been reached in the current crisis, even though the current crisis is 70 times as large. The campaign contributions from the finance industry are also substantially larger than in the 1980s.
On March 6, 2013, United States Attorney General Holder testified before the Senate Judiciary Committee that, "the size of some of these institutions becomes so large that it does become difficult for us to prosecute them [because] if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy. And I think that is a function of the fact that some of these institutions have become too large." There is a subtle distinction here between prosecuting a corporation and prosecuting individuals. "The 2002 criminal conviction of accounting giant Arthur Andersen for work related to Enron Corp. was a death sentence for the company. The Supreme Court later overturned the conviction in 2005, but by that time the firm was effectively defunct after losing its license to practice." The charges against Arthur Anderson put 28,000 employees out of work, most of whom had nothing to do with the Enron case. This example provides a strong argument against prosecuting corporations. However, "[i]f prosecutors had already claimed a prominent scalp from the financial crisis, there wouldn’t be such a loud conversation about too-big-to-jail."
William K. Black has countered that the collapse of Enron and other similar scandals in the early 2000s "significantly influenced millions of investors to withdraw from the stock market, [with a loss of] $9 trillion [in market capitalization]. ... Effective regulation is essential if modern markets are to remain honest and efficient."
The major banks all have substantial advertising budgets. This gives the major media conglomerates a conflict of interest in disseminating news that reflects ill on such major potential clients. In the United States, this is particularly true of commercial broadcasting, which gets 100% of its funding from advertising. Advertisers have been known to shift their advertising budgets away from media outlets they perceive to be unfavorable. In some cases, this has contributed to the demise of media organizations. On the other hand, advertising budgets are set by audience size and spending habits. Some consumers who perceived that a media organization is too biased in favor of major advertisers will go elsewhere for their news and entertainment.
Conflicts of interest among elected officials is part of the story behind the increase in the percent of US corporate domestic profits captured by the finance industry depicted in that accompanying figure.
- This analysis is similar to Figure 10.1 in Reinhart and Rogoff (2009). For more details see the help file for "bankingCrises" in the Ecdat package available from the Comprehensive R Archive Network (CRAN).
- Lessig 2011, p. 83
- Sachs, Jeffrey D. (2011). The Price of Civilization: Reawakening American Virtue and Prosperity. Random House. pp. 54, 126. ISBN 978-0-679-60502-7.
- Stiglitz, Joseph E. (2010). Freefall: America, Free Markets, and the Shrinking of the World Economy. Norton. pp. 5–6.
- Charlton, Andrew (2008), "5. Capital market liberalization and poverty", in Ocampo, José Antonio; Stiglitz, Joseph E. (eds.), Capital Market Liberalization and Development, Oxford, pp. 121–138, ISBN 9780199230587
- Black, William K. (December 28, 2010). "2011 Will Bring More de Facto Decriminalization of Elite Financial Fraud". Huffington Post. http://www.huffingtonpost.com/william-k-black/the-role-of-the-criminal_b_802115.html. Retrieved March 17, 2013.
- Eichler, Alexander (November 15, 2011). "Federal Prosecution Of Financial Fraud Falls To 20-Year Low, New Report Shows". Huffington Post. http://www.huffingtonpost.com/2011/11/15/financial-fraud-prosecution_n_1095933.html. Retrieved March 17, 2013.
- Morgenson, Gretchen; Story, Louise (April 14, 2011). "In Financial Crisis, No Prosecutions of Top Figures". New York Times. http://www.nytimes.com/2011/04/14/business/14prosecute.html?pagewanted=all. Retrieved March 17, 2013.
- Black, William K.; Jay, Paul (August 20, 2012). "Black Report: No Criminal Prosecution of Wall St. and Who is the European, Romney or Obama?". The Real News Network. http://therealnews.com/t2/index.php?option=com_content&task=view&id=767&Itemid=74&jumival=8713#.UUW3jhwccYQ. Retrieved March 17, 2013.
- Black (2005)
- Zibel, Alan; Kendall, Brent (March 6, 2013). "Holder: Banks May Be Too Large to Prosecute". Wall Street Journal. http://blogs.wsj.com/washwire/2013/03/06/holder-banks-may-be-too-large-to-prosecute/. Retrieved March 17, 2013.
- Sorkin, Andrew Ross (March 11, 2013). "Realities Behind Prosecuting Big Banks". Dealbook (New York Times). http://dealbook.nytimes.com/2013/03/11/big-banks-go-wrong-but-pay-a-little-price/. Retrieved March 17, 2013.
- Black (2005, pp. 248-249)