HOW FINANCE RUINED BUSINESS
Makers and Takers adds up the ill effects of Wall Street’s zero-sum game. By David Sax
Three years ago, your can of Coke suddenly cost a few pennies more. The culprits? The clever bankers at Goldman Sachs. According to a Senate panel, they gamed the global aluminum market, warehousing tens of thousands of tons of the metal in Detroit and delaying delivery to customers like Coca-Cola. The bank was able to ratchet up the price on its supply, netting several billion dollars in the process. The best part: Goldman didn’t do it as a hedge against other investments. The bank did it to make money for itself, at the expense of everyone else.
Maneuvers like this are legal, but they’ve become more distasteful in the wake of the 2008 collapse, giving birth to the coinage of a term. “Our economic illness has a name: financialization,” writes Time business and economics columnist Rana Foroohar in Makers and Takers: The Rise of Finance and the Fall of American Business. The book offers a blistering critique of how Wall Street’s zero-sum thinking came to dominate and then hobble the U.S. economy. She isn’t peddling a vision of neo-socialism, à la Thomas Piketty or Bernie Sanders. Her argument is that finance for the sake of finance is bad for business—and capitalism as a whole.
Traditionally, finance served the needs of business (Foroohar’s “makers”) by providing capital and investing in longterm growth. But starting in the postwar decades and ramping up from the Reagan era onward, finance ( the “takers”) began to take care of No. 1 first. Figures like former Defense Secretary Robert Mcnamara popularized management by statistics, while investors such as Carl Icahn made short-term profits the ultimate goal. Businesses slashed research and development budgets in favor of balance sheet tricks and tax dodges.
In Foroohar’s view, the banks’ primary activity is moving debt around, a risky strategy that hurts the ability of business to grow. As proof, she cites the fate of companies such as General Motors, General Electric, and Xerox, whose myopic thinking led to a decline in innovation and their place at the pinnacle of global business. Instead of serving business, financialization became an end in itself, a closed system unmoored from tangible economic activity.
The message of Makers and Takers isn’t radical or entirely new. (Still, Foroohar’s argument is timeless given the extent to which openended anger is fueling populist fervor on the Right and Left.) While she writes with passion, you don’t get a sense of how she intends to fix things beyond the case she makes for a sleepier, simpler capitalism rooted in bread-and-butter businesses such as manufacturing.
If that seems like a simplistic or naive hope, Foroohar notes that our current system wasn’t handed down to us in perfect form from the heavens. Modern capitalism is the product of a messy evolution, driven by natural greed and constrained by the laws we’ve enacted to protect ourselves from it. “We can remake them as we see fit,” she writes, “to better serve our shared prosperity and economic growth.” Those are sunny ideals, no doubt, but there might be enough light just now to prevent Wall Street from ever bilking us out of our Cokes again. <BW>
BALANCE SHEET TRICKS AND TAX DODGES REPLACED R&D