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

Before Glass-Steagall was abolished, financial institutions accounted for 20% of total corporate profits. Over the last 18 years, that amount has doubled to 40%. We remind you that banks do not innovate; their profits represent a missed opportunity for someone else to innovate.

Summary

When banks take a bigger share of the economic pie, labor, investment activity, corporations and shareholders suffer. The removal of Glass-Steagall has resulted in a large shift of capital from those that consume and innovate to the financial intermediaries or the economic bookies. You may think it a trivial matter that financial institutions are subsidized and profit at the expense of others. After all, those additional bank profits accrue to shareholders who in turn invest the capital back into the economy. While plausible, the fact of the matter is banking stocks have not reflected the higher profits. 

The KBW Bank Index has risen about 1% on an annualized basis since the Gramm-Leach-Bliley Act was passed. In other words, the shareholders have not been the beneficiaries of the enormous profit growth. Therefore, the riches graphed above have largely gone to those executives and other highly paid employees of these institutions. These circumstances have also widened the wealth imbalance that is so prevalent in the working population today.

If you happen to be one of the beneficiaries of the policies aimed at the financial industry, then you probably have done very well and had no complaints. For the other 99% of the working class, there may be some resentment to the fact that they were not only left behind but that they subsidized the policies fueling the wealth of the top 1%.

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