Wall Street As More of the Economy: Unjust and Riskier?

The financial sector, which includes banks like JPMorgan and insurance companies like AIG, had the fastest earnings growth in the Standard& Poor’s 500 in 2012.[1] As of mid-2013, the sector comprised 16.8% of the S&P 500, almost double the percentage back in 2009. With the technology sector weighing in at 17.6 percent in 2013, the financial sector was poised to become the largest sector in the S&P 500. The traditional critique of the financial sector having a larger share of the economy is that the sector doesn’t “make” anything. As this argument is well-known, I want to point to two others.

 

 

First, the financial sector had been responsible for much of the rising economic inequality in the U.S. over decades. "Together, finance and executives accounted for 58 percent of the expansion of income for the top 1.0 percent of households and an even greater two-thirds share (67 percent) of the income growth of the top 0.1 percent of households," according to Josh Bivens and Lawrence Mishel of the Economic Policy Institute.[2] Increasing the financial sector’s portion of the U.S. economy translates into more income going to the top 1 percent. This trend in turn has rather negative implications for not only the poor, but also American democracy (as distinct from plutocracy, being ruled by the wealthy).

 

 

The increasing income inequality from banking harkens back to the medieval thought on usury (the charging of interest on lent funds). Under the just price theory, the respective values exchanged in a transaction should be equal or the transaction is not fair.[3] With the time value of money not yet recognized and most loans being for consumption needs rather than productive enterprise in the Middle Ages, the return of lent principal was taken to be of equal value to the money (or commodities) lent.[4] A lender demanding more (e.g., interest) was thus considered unjust according to Canon Law, unless the debtor was late in returning the funds, or the lender missed an opportunity for economic gain or incurred a loss due to the lent funds being unavailable during the period of the loan. These exceptions came into effect during the High Middle Age. In the modern context, if the interest being extracted exceeds the value of the time value of money, we could predict increasing inequality of wealth as a result. In other words, the contribution of the financial sector to increasing economic inequality may indicate that the just price theory is being violated by Wall Street charging clients too much. As that sector becomes more of the economy, the unfairness is expanded.

 

 

Second, to the extent that a larger financial sector means that the economy is more reliant on leverage, the systemic risk of banks being too big to fail increases as well. According to former U.S. Sen. Ted Kaufman, the Dodd-Frank Financial Reform law of 2010 had largely failed to diminish systemic risk in the financial sector in the law’s first three years. As that sector becomes a larger proportion of the economy, relying on Dodd-Frank regulations becomes increasingly risky for the economy as a whole. In other words, increasing the role of Wall Street in the economy means that unless government can safeguard the public interest against harm from the financial sector imploding, the American tax-payer is even more exposed than in September 2008.

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1. Alex Barinka and Whitney Kisling, “Banks Poised to Lead S&P 500 as JPMorgan Beats Microsoft,” Bloomberg, July 29, 2013.

2. Josh Bivens and Lawrence Mishel, “The Pay of Corporate Executives and Financial Professionals as Evidence of Rents in Top 1 Percent Incomes,” The Economic Policy Institute, June 20, 2013. (Accessed July 29, 2013).

3. Childress, James F. and John MacQuarrie, eds., The Westminster Dictionary of Christian Ethics (Philadelphia: The Westminster Press, 1986), p. 639.
4. The time value of money is based on the principle of instant gratification. Having money to spend today (i.e., immediate utility or pleasure) is worth more than only having money tomorrow (i.e., delayed gratification). Applied to lending, the time value of money means that the fact that a lender does not have use of his or her funds until the debtor repays the principal represents a loss in value for the lender in addition to the value of the principal. Just price, or equivalence of value exchanged, could thus justify interest of equal value to the time value of money.