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  • Writer's pictureJoe Carson

How Did Finance Become America's "Titan" Industry?

How did Finance become America's "titan" industry, gaining so much power and influence in the economy and politics? Finance controls more wealth than any industry in US history and uses that to influence politics and policy. In 2021, the market value of publicly traded companies equaled the nominal value of the nation's private sector capital stock, something unheard of in the nearly 250-year history of the US. Fifty years ago, it was one-fifth the size, illustrating the spectacular rise. The rise in Finance has been years in the making and influenced by many factors, but three events stand out, two of which are often overlooked by many.

First, in the early 1980s, government statisticians removed financing costs from the consumer price index, with academics' recommendations and Congress's approval. This change in price measurement doesn't seem like a big deal, but it is. For example, when buying a car, the cost includes the price of the vehicle and the financing costs since most vehicle transactions use credit. So if GM raises the prices of a new car, that goes into the CPI, but if JP Morgan raises vehicle financing rates, that is not. So, the finance sector received "special exempt status." The impact is significant since excluding financing costs lowers reported inflation from what would otherwise be the case, depresses the level of interest rates, and lifts asset values. (See article by former Treasury Secretary Larry Summers on how the exclusion of financing costs impacts the CPI).

Second, in 1993, Federal Reserve Chair Alan Greenspan told Congress that the Fed would no longer target money and credit aggregates. This action, overlooked and ignored by many, represented a fundamental change in the Fed's conduct and view of monetary policy and furthered Finance's " special exempted status." The Fed has always said, "inflation is a monetary phenomenon" (See Fed Chair Greenspan's speech in September 1997), but now the Fed no longer targets or follows money growth that fuels inflation. So Finance (banking), after having been statistically removed from price measurement more than a decade earlier, was now officially removed from a policy perspective as a cause of inflation.


Third, the Fed created a new tool, quantitative easing (QE), after the financial crisis. With QE, the Fed purchases highly liquid fixed-income securities, with the primary objective of keeping market rates lower than otherwise and, in the process, encouraging private investors to allocate funds to more risky assets, like equities. Before QE, the Fed's balance sheet was around $500 billion; nowadays, it stands at around $7 trillion, down from a record high of nearly $9 trillion. Boosting the market value of equities was never the primary objective of monetary policy, but it is hard to argue it is not nowadays.

None of this means that other factors have not contributed to the spectacular rise in Finance. But I would challenge anyone to offer another example of a sector or industry exempt from price measurement, given little oversight of their primary function (creating money) by a governmental regulatory body, and has received over $8 trillion in financial support from the federal government. At $62.5 trillion at the end of Q1 2024, the market value of corporate equities is roughly $45 trillion over the level before the financial crisis. The policy actions of the last fifteen years make it appear that boosting equity values is a primary objective of monetary policy.

In a democratic society, one would expect the general public to have a say or vote in these decisions, but it never did. Finance has the resources to impact those decisions and is spending millions, maybe billions, to influence politics and policymakers. How this ends and when it ends is hard to say. However, the unevenness and unequalness of Finance versus everything else are too big to continue.

The upcoming presidential elections may serve as a turning point. Whoever wins, it would be fiscal suicide to extend the 2017 tax cuts as it increases the scale of budget deficits, running close to $2 trillion annually, risking financial instability. One of the Fed's mandates is financial stability, but the Fed tends to downplay financial conditions until they become unstable. Stay tuned.

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