The Bankers Vig And The Price We Pay: The Economic Cost Of Repealing Glass-Steagall

The financial industry claims that the significant jump in profits, post-repeal, is not just good for them but indicative of the benefits they deliver to corporate America and the economy. Ignorantly, such arguments fail to consider the massive costs shouldered by the citizens of the United States as a result of bailouts and the massive monetary stimulus that continue in unprecedented fashion to this day.

Measuring the Vig

Excluding the 2008 bailouts, whose costs are measured in the trillions, we attempt to quantify how much the repeal of Glass-Steagall is costing or benefiting economic activity. Said differently, how has the Vig, or economic tax, changed since 1999.

If the bankers are correct that deregulating financial institutions increased economic growth, then we should see an uptick in economic growth commensurate with the increased banking profits as shown above. As highlighted in the graph of GDP below, economic growth did not benefit. In fact, over the last 16 years, the GDP growth rate has been about 2.50% less than the pre-Glass Stegall era. Further, there has not been a quarterly increase in GDP higher than the average growth rate of the prior 50 years.

Data Courtesy: St. Louis Federal Reserve (FRED)

To further highlight the discrepancy claimed in the chart above, the graph below plots financial institution profits as a percentage of GDP.

Data Courtesy: St. Louis Federal Reserve (FRED) (NIPA profits with IVA and CC adjustments, Domestic – BEA)

Since 1999, bank profits (green) as a percentage of GDP are running about 1% higher than the red trend line of the prior 50 years. Our blunt take based on the graph above is that the repeal of Glass-Steagall effectively increased the VIG on the economy by 1%.

Furthermore, the collapse in profits in 2008 and 2009 was more than restored to financial institutions through the bailouts and extraordinary monetary policies used in the post-financial crisis era. As discussed above, those policies amount to massive subsidies coming at the cost of taxpayers and savers. They are directed at the banks, allowing them to quickly recoup self-inflicted losses.

Corporations are the heart and soul of the economy. They produce our goods, offer our services, pay our wages, and invest in productivity-enhancing projects. Therefore the capital flows of these companies are an important factor in economic growth. The more efficiently they can borrow and invest, the more innovation they can generate.

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