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Grand Rapids Community College |
How Wall Street is crushing Main Street
|
ECO 251 |
March 31, 2014Nancy Vrooman |

How Wall Street is crushing Main Street

The financial sector has grown faster than the rest of the economy, which cuts into long-term investment and overall growth, and the financial sector has grown is not necessarily a problem; what is a problem is that it has grown faster than the rest of the economy. The purpose of the financial sector is to facilitate investment in a wide array of activities.   If the rest of the economy does not grow along with the financial sector, it is not fulfilling that purpose
Today, we face the reverse condition: the casino market that dominates the finance sector is crowding out important public investments. The deregulation of the financial sector has changed America from an economy focused on sustainable growth toward a chaotic situation for the wealthy.   This change is called "financialization." The financial sector has grown to almost 8 percent of GDP, from about 4 percent in Reagan's time. Financialization causes many problems. First, the financial industry is a poor producer of middle-class jobs, disproportionately benefiting high-end earners (see chart).
Second, the financial industry is extremely myopic when it comes to economic trends. One study finds that the growth of the financial sector has decreased long-term investment in the real economy because financiers work in short-term gains and losses. Finally, financial "innovations" like securitization and derivatives have freed trading markets to grow unconstrained by the actual amount of stocks, bonds, and commodities in the real economy. One need only to recall the mortgage-backed market that crashed in 2008 to grasp the scope of this phenomenon. 

A consequence of the rise of the financialization machine is that there is less money available for government investment in the real economy. Direct federal investment is already constrained by fiscal...

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