Makers and Takers

Makers and Takers

Rana Foroohar, without a doubt has written an impressive book on the American economy. Unlike in the 1970s, where every USD 1 spent on investment will generate USD 3 worth of GDP (Gross Domestic Products) related activities; the table has been turned. These days, especially after the Great Recession in 2008, the American economy has to spend USD 3 to produce USD 1 worth of Gross Domestic Products (GDP). Obviously something is not working accordingly. The industrialization that has been part and parcel of the US economy has been upended.  Chief among all the reasons out there is, financialization. The US economy, if not the rest of Europe, has sought to grow itself out of every problem by financialization. This involves the use and transformation of cheap financing currently available in the international market, where the interest rate is either nominal or zero.

To be sure, there have been legion of scholars have spoken of the secter of financialization, but no one has written it as clearly Rana Faroohar. Andrew Sheng, for example, has warned of the problem of shadow banking in China and the tendency to want to use money to make money, all without producing any tangible goods and services. Shadow banking involves a variety of financial houses and agencies able to lend to the local entities, and even borrow, from the international markets, all without much supervision.

Within the context of the US economy, Rana Faroohar is the first to explain the inter connectivity between Wall Street and the publicly listed companies. First of all, instead of companies specializing in industry and production, top CEOs are relying on easy credit from the banks to embark on their merges and acquisition; even shares buy backs; all with the aim to improve their quarter to quarter balance-sheet. When the latter looks good, the shareholders and the board members become delirious, that the company is doing well. They reward the CEOs handsomely, and the shell game continues all over again before the music stops. The music did stop in 2008, but due to the financial rescue initiated by the government of President Barack Obama, the bitter lessons have been lost. Indeed, President elect Trupmp looks set to raise the ceiling of the banks to USD 150 billion; not USD 50.

Therefore, banks that have assets and equities worth more than USD 150 billion will be rescued if they are ever in financial difficulties. This enlarges the problem of moral hazard, but also potentially the size of the next financial balloon. In the next ten to twenty years, the global economy can grow solidly, but the sector to benefit would be the banking and insurance sector only, not the real economy per se.

Secondly, due to the belief that the trickle down economy will enhance the livelihood and welfare of all, financialization will be allowed to continue unabated. With this comes the need for ever greater government supervision, all of which the government may not be ready to do, yet somehow, has to do them, especially when crisis erupts. This creates a self-fulfilling prophecy; akin to kicking the proverbial can down the road too.

In conclusion, this book highlights the path that the major corporations, indeed, countries are all heading. Instead of producing jobs, industrial products and standards, these companies have resorted to using easy credit to tide themselves over each quarter, therefore, polishing their own balance sheets and credentials; at the expense of other economic indicators.