This week, Chris interviews Time Magazine assistant managing editor and economic columnist Rana Foroohar about the findings within her new book Makers and Takers: The Rise of Finance and the Fall of American Business.
Eight years on from the biggest market meltdown since the Great Depression, the key lessons of the crisis of 2008 still remain unlearned — and our financial system is just as vulnerable as ever. Many of us know that our government failed to fix the banking system after the subprime mortgage crisis. But what few of us realize is how the misguided financial practices and philosophies that nearly toppled the global financial system have come to infiltrate all American businesses, putting us on a collision course for another cataclysmic meltdown.
Drawing on in-depth reporting and exclusive interviews at the highest rungs of Wall Street and Washington, Foroohar shows how the “financialization of America” — the trend by which finance and its way of thinking have come to reign supreme — is perpetuating Wall Street’s reign over Main Street, widening the gap between rich and poor, and threatening the future of the American Dream:
There is this fundamental dichotomy in the economy now where, if you are well off, you're doing better than you ever have before in history. But the majority of Americans, the majority of workers in this country, haven’t gotten a raise in real terms since the early 1990’s. Many people in the working class, the minorities haven’t gotten one since the late 1960’s. That's a real problem in an economy that is 70% consumer spending, because at some point the math starts to not work. If people don’t have more money they can’t spend. So we get these underlying growth problems.
My book is trying to look at one the reasons behind that. And I’m arguing that it is that the financial markets themselves are no longer supporting business growth.
The size of the financial sector –which includes not only banks, but hedge funds, private equity funds, real estate trusts, the mortgage market all the parts of the economy that basically move money around the economy — has more than doubled since the 1980s. So we've got a financial sector now that creates only 4% of the jobs in this country but takes 25% of all corporate profits. That's a lot of economic oxygen that's being taken out of the room. What are the consequences for this? Well, one of the consequences is slower growth. Why is growth slowing? Well, in part because the whole model of banking has changed. The killer stat in my book is that there's a lot of deep academic research to show that only 15% of all the money sloshing around in American financial institutions ends up invested in Main Street business. So where is the rest of it going? Well, it's being used to trade against existing assets, stocks, bonds, houses — it's doing something entirely different than what the banking system was set up to do, which is to take our savings and funnel them through financial institutions into business investments. Those businesses then grow and create jobs. When you only have 15% of the money in the markets doing that, you've got a problem.
The financial system, the whole point of it, is supposed to be that the banks will allocate capital to places where it is most productive. That's entirely broken now. If you look at the way money is being funneled around this closed loop of the financial system itself enriching more or less – and I’m being generous here – the top 10% of the country which owns 80% of the asset base stocks, bonds, houses, that's a bubble that is enriching just the wealthy while not actually creating real underlying growth. One of the things I must say that has been fascinating as I have put this book out there – I have gotten calls surprisingly from a lot of financiers who are very interested in the thesis because they recognize that at some point that starts to undermine their portfolios. Because sooner or later, everything that happens on Wall Street connects back to Main Street and I think we're at that tipping point now where you're going to start to see a market correction. We've had markets at record highs while Main Street has been stagnating and I think that we are at a turning point: these markets are going to eventually break.
Click the play button below to listen to Chris' interview with Rana Foroohar (37m:42s)
Chris Martenson: Welcome to this Peak Prosperity podcast, I am your host Chris Martenson and it is June 7th, 2016.
Enormous changes are afoot in virtually every dimension of life. On the plus side, technology continues to improve and amaze with its vast potential. And on the down side, a massive wealth inequality has been fueled by a transfer process from everyone it seems to an increasingly tiny and powerful elite. Forget the 1%, we are talking about the 0.01%. This did not happen overnight and many factors had to converge to make this happen. Some were structural—endemic to the system of money we have got—and some were intentional, driven by self-interested regulatory and legal changes.
But make no mistake – to paraphrase journalist and author Rana Foroohar, American Capitalism faces a great crisis. Her research leads to the conclusion, which will be familiar to my listeners, that Wall Street is choking the economy. In fact, the crisis is so profound that it can be described as a crisis of faith. Our very economic system that has lifted and supported so many people for so long is breaking down, and with it, our sense of social cohesion and perceptions of justice and fairness. So I am very pleased to introduce Rana Foroohar as our guest today.
Rana is the Assistant Managing Editor at Time and the magazine’s economics columnist. She also appears regularly on CNN as global economic analyst and is the author of the recently released book, Makers and Takers, released on May 17th, 2016. Rana, welcome to the program.
Rana Foroohar: Thank you so much for having me.
Chris Martenson: First, congratulations on your book and the fact that it is doing really very well.
Rana Foroohar: Thank you so much. I feel like the message is getting out there and I think it is good timing. The political cycle in many ways sort of confirms the underlying thesis of the book so I am pleased to have a platform.
Chris Martenson: Well let’s begin with that – the book’s title even - -Makers and Takers, I love it, but for my listeners, how did that title get selected?
Rana Foroohar: You might remember back in the last presidential election cycle in 2012 that Paul Ryan, who is now of course the Speaker of the House, used this term to talk about the amount of people in the country that were not paying income tax. These were apparently the "takers" and the "makers" were the capitalists that were creating jobs. Well as somebody that has been studying the economy and covering business in the economy for 23 years I sort of went "hm, actually that trickle down message hasn’t been working for some time." The financial system has actually changed in such a way that it is actually trickling up wealth and that is one of the reasons that we have the stagnant wages and the longest, weakest recovery of the post-war era, which we are in right now. I wanted to kind of rebrand those terms and say: Let’s really question who is making and who is taking here and what is really happening at a Main Street level in our economy.
Chris Martenson: It is very timely of course and I would only maybe suggest that from my perspective it is not trickling up, it is a torrent at this point.
Rana Foroohar: [Laughter] Well that is absolutely true. If you look at the last 40 years of the share of the economic pie that is being taken, certainly by the top 1%, and as you point out the top .01%, but also the labor share of the pie has gone to record low levels. There is this fundamental dichotomy in the economy now where if you are well off, you are doing better than you ever have before in history. But the majority of Americans—the majority of workers in this country haven’t gotten a raise in real terms since the early 1990s and many people in the working class and minorities haven’t gotten one since the late 1960s. That is a real problem in an economy that is 70% consumer spending because at some point the math starts to not work. If people don’t have more money, they can’t spend and we get these underlying growth problems.
My book is trying to look at one of the reasons behind that and I’m arguing that it is that the financial markets themselves are no longer supporting business growth.
Chris Martenson: Let’s talk about that. I’m guessing it was probably 2007 I went and I heard author Kevin Philips. He was very worried about the financialization of the US economy back then. I looked at my notes and he had a quote from back then: "Today’s financial services sector by contrast is a grasping, gargantuan combination of banks, stock brokers, insurance-men, loan sharks, credit card issuers, hedge fund speculators, securitization mavens and mortgage operators." I think he left a few people off that list. It seems to have only gotten—maybe gone further and faster since then. Would you agree?
Rana Foroohar: I would. I think what has happened is that our economy has become financialized. By that, what I am talking about is that the size of the financial sector—which includes not only banks, but hedge funds, private equity funds, real estate trusts, the mortgage market all the parts of the economy that basically move money around—that part of the economy has more than doubled since the 1980s. So you have got a financial sector now that creates only 4% of jobs in this country but takes 25% of all corporate profits. So that is a lot of economic oxygen that is being taken out of the room.
Now what are the consequences for this? Well one of the consequences is slower growth. Why is growth slowing? Well in part because the whole model of banking has changed. The killer stat in my book is that there is a lot of deep academic research to show that only 15%—15%—of all the money sloshing around in American financial institutions ends up invested in Main Street business. So where is the rest of it going? Well it is being used to trade against existing assets, stocks, bonds, houses. It is doing something entirely different than what the banking system was set up to do, which is take all of our savings, funnel it through financial institutions into business investments; those businesses then grow and create jobs. When you only have 15% of the money in the markets doing that, you have got a problem.
Chris Martenson: As Matt Taibbi put it there is a giant vampire squid –
Rana Foroohar: Yes. Sucking sound and the squid. The squid is such a great visual metaphor for this.
Chris Martenson: It is very important. We have a lot of people at my site and elsewhere, they talk about all the isms – capitalism versus free markets this and that. You hit on a very important point here which is that capitalism really should exist in support of the real economy. So what is the real economy? Well people create goods and perform services and then the money is just supposed to be a medium of exchange that facilitates that. What you are describing, just 15% of all the newly created money or money outstanding out there actually creating new goods and services—you are describing an enormous imbalance between the claims on the real economy and the real economy itself.
Rana Foroohar: That’s right. The financial system—the whole point of it is supposed to be that banks will allocate capital to places where it is most productive. That is entirely broken. If you look at the way money is being funneled around this closed loop of the financial system itself, enriching more or less – and I’m being generous here – the top 10% of the country which owns 80% of the asset base—stocks, bonds, houses—that is a bubble that is enriching just the wealthy while not actually creating real underlying growth.
One of the things I must say that has been fascinating as I have put this book out there – I have gotten calls surprisingly from a lot of financiers who are very interested in the thesis because they recognize that at some point, that starts to undermine their portfolios because sooner or later everything that happens on Wall Street connects back to Main Street. I think we are at that tipping point now where you are going to start to see market correction. We have had markets at record highs while Main Street has been stagnating and I think that we are at a turning point and these markets are going to eventually break.
Chris Martenson: I agree with that thesis because of course there has to be some relationship between the claims on the economy and the economy. Now, the Federal Reserve, starting under Greenspan, which—I have been tracking this a long time—decided that the business cycle could be defeated and it is never a good time to have a cleansing crisis. Where do you think all this started? Where would you begin to place this?
Rana Foroohar: This is one the most fascinating things I have found in my research. I went back and I actually looked at a 100 year period of the financial markets in the US because I wanted to see, in part, the similarities between the run up to the financial crash of 1929 and the Great Depression and the subprime crisis. And there are some interesting similarities. The difference is: After the Great Depression, we had some very sensible banking regulation that kept the system relatively in good shape working to support business until about the late 1960s, early '70s. What happened at that point was that the underlying GDP growth in America started to slow. Now, there were good reasons for this. In part, we had more international competition. Europe was starting to get back on its feet following World War II and the emerging markets were starting to emerge so some of that was just natural. The rise of the rest, the rise of foreign competition. But rather than then take real policy decisions that would actually change and enhance the growth picture in America, politicians in Washington decided well, you know, those are hard to do. It is kind of the guns and butter debate. When you are dividing up a shrinking pie you got to make choices between economic stakeholders and somebody ends up being a loser in that and then you lose votes. Politicians didn’t want to make those decisions so they decided to pass the ball to the markets and say "the markets should figure out how to create growth. Let’s deregulate interest rates, let’s let the Fed have more leeway to do easy monetary policy."
Basically, from the 1970s onward you start to see the growth of finance and that really speeds up in the 1980s. I want to be fair and say the decisions that were being taken—the policy decisions that allowed that growth of finance—they weren’t venal. I mean people weren’t trying to do bad things. In some cases there were some good arguments or reasons for various policy decisions, but they came with all these unintended consequences of funneling capital to less and less useful places—to high frequency trading, to complex securitization, to areas of the economy that just weren’t doing all that much for Main Street. We are now, 40 years on, living with the consequences of that.
You started by mentioning the Fed. The fact we have to have near-zero interest rates in this country—or zero in real terms—to create any growth at all is a mark of just how far we have come in thinking about what is good for Main Street.
Chris Martenson: Absolutely. I agree maybe it wasn’t venal, but I’m wondering if maybe disingenuous. Both Ben Bernanke and Janet Yellen have professed surprise at the wealth gap. Puzzling over it as if it were a new species of fungi that just sprouted from the grout in their kitchen tiles like, "what is this thing?" From my view, the relentless decline in interest rates you just mentioned plus the failure to allow or permit the proper cleansing of the system seems to be an all but certain guarantee for us to end up where we have. Would you agree with that?
Rana Foroohar: I would. I would. It is interesting – one of the fascinating things—and it is the most bizarre thing—is that most economic models, including the models used by the Federal Reserve for many decades, don’t actually include the financial system as a kind of data input. I mean if you can believe it, when we are modeling the economy we actually don’t think about how the financial system works. Now that is changing. There is a whole school of economics now post 2008 that is like "oh yea that fungi—not only did it sprout but it is taking over the entire bathroom. We better figure out where it came from and start modeling that." So the pendulum is starting to shift. In truth you have got a point. I mean people didn’t model this stuff. They just didn’t even think about the financial markets as being possibly an impactful point that they should be thinking about for how the economy works. It is incredible, given how financialized we have become.
Chris Martenson: It has been known for a very long time that those who are closest to the monetary spigot due best. There is a French term for it that comes from the 1700s. To me it was mysterious that the Fed had somehow lost its footing to the extent that they were unaware what kind of wealth gap they would be creating by printing literally trillions of new dollars into the system.
Rana Foroohar: I think that this is all part of a larger phenomenon. It is almost an existential shift – there is actually a wonderful academic, Jerry Davis, at the University of Michigan that studies financialization. He talks about the Copernican shift towards the markets in our society. I think what happened from the 1980s onwards, not only at policy levels, but at the personal level with the rise of the 401k, the privatization of retirement, the fact that we are all in the stock market, we are all looking at Money Magazine and wondering about our portfolios. We all started to think that the markets do know best and, more than that, that finance and the financial markets are sort of the tippy top of the economic period that we should all aspire to. You know, after we moved from being an agrarian society to a manufacturing powerhouse to a services economy that finance is the very top. And when you think about that model then you do what is best for finance. But I am arguing we need to have this other Copernican shift. We need to turn that triangle on its head and say financial services —and I stress the word "service"— should be in service to business rather than the other way around.
Chris Martenson: Well that is a fantastic idea and as well we have talked about some of the class warfare, if I can use that word, that seems to have arisen. I want to talk about the generational effects of this as well. I understand there was a subprime housing crisis, housing prices were falling for the first time since the Great Depression. It scared people and the Federal Reserve under Ben Bernanke at the time said "we need to rescue this so we are going to jam interest rates down; that will help support the real estate market." Fast forward and we find that young people can’t afford to get into this market anymore. Would it be inappropriate for young people to look at this and say "wow, the boomers have just saved themselves again at my expense."?
Rana Foroohar: Absolutely and you are pointing to what I think will be the biggest political tension point of the next 20, 30, 50 years, which is this square off between the boomers and the millennials for a shrinking economic pie. And the pie is shrinking because we have had a completely perverse system that has enriched the few, the financial markets, at the expense of the many.
It is interesting you mentioned housing because housing policy is a big part of this. In fact, often in this country when we talk about the dysfunctional nature of the financial markets, we often have a very siloed conversation about too-big-to-fail banks and "we need to break up the banks and that will fix everything." It may be a good idea to break up some of the biggest banks but that is not a silver bullet for fixing this problem that we are talking about because it is a much deeper and broader problem that intersects with the way housing policy is run, with the way tax policy supports debt, with the way our retirement systems works. There are all these kind of concentric circles moving outward and we actually have to step back and start looking at the entire ecosystem and how it incentivizes really bad behavior at every level.
Chris Martenson: This is fascinating, particularly—here we are recording this in the thick of the presidential primary cycle, soon to be a presidential election. From my view, many of the current US presidential candidates have a variety of prescriptions for how they might address the wealth gap or maybe the too-big-to-fail phenomenon, but to me they seem to be nibbling at the edges and you are describing something that sounds much more structural and fundamental.
Rana Foroohar: Yea absolutely. I agree with you. I think that each candidate is trying to tackle some element of this, at least rhetorically. You have got Bernie talking about breaking up the big banks, you’ve got Hillary talking about the shadow banking system and strengthening the existing Dodd Frank financial regulation. You’ve got Donald Trump... who knows what he thinks from day to day, but you have got him sometimes talking about taxing hedge funders more, talking about the people that make money from money, hedge funders, private equity. But each of those things is really just a tiny sliver of this larger problem whereby the financial markets no longer serve real business. The financial markets exist to essentially bid up the value of assets, creating asset bubbles, creating, for example, the sort of housing bubble you mentioned that prevents younger people from getting in on the housing market, and in order to fix the problem we are going to have to tackle the whole system.
This is not going to be a silver bullet fix. It has taken us 40 years to get here—40 years of small policy changes in many, many different areas of our society and economy, and it is going to take a while to work backward from there.
Chris Martenson: Let’s talk about how we might begin to address this. I am interested in what sorts of things we could and should ask for if we wanted to reverse this process—and by that, I mean short of waiting for the next gigantic financial accident.
Rana Foroohar: Which, by the way, are coming more and more frequently. That is part of financialization that as an economy has a larger financial system, it also has more frequent financial crises. Financial crises, with the exception of wars and natural disasters, are the biggest destroyers of wealth. You are absolutely right this is a pressing issue.
There is some low-hanging fruit. I have a chapter in my book about solutions, and some of them are small and some of them are big. One of the really bits of low hanging fruit I would say is our tax code. The US tax code really subsidizes debt and encourages people to take on debt and write that off of their taxes. That is both at the individual level and at the corporate level. Things like the mortgage interest tax deduction where I can come and buy more house, frankly, than I might need and then write it off my taxes—that is one example. The way in which corporations can issue more and more debt and write that off their taxes – that is another issue. We should be encouraging investment, we should be encouraging savings and just shifting that whole paradigm. That is one really easy solution.
There is also a lot that we can still do in terms of making the financial system as a whole more transparent. Post-2008, with the Dodd Frank regulation, there were efforts to bring a lot of things out into the light, to make all those complex securities—those CDOs and CDSs that Warren Buffet calls weapons of mass financial destruction—to make them easier to track so we would know who is holding risk and where it might explode. That was only half successful because the financial lobby really lobbied hard against a lot of this. They created loopholes. We need to close those loopholes. Whoever the next president is needs to really look very carefully at the existing holes in that regulation and plug them because otherwise risk is kind of like water; wherever it finds a crack it can travel and migrate.
Chris Martenson: This process though—I agree with the prescriptions you have got in there—it feels to me like we have to go... It is in our culture at this point. I go back 50 years and look at the popular cultural heroes—we had people back there, we had astronauts, scientists, explorers, artists. There were literally no financial icons to speak of at that time. But now some of the wealthiest, most influential people out there, the people who get invited to Davos to talk about things—they are quite often people who literally make nothing, but money, right? They are hedge fund operators, they are financial speculators. They are making trades for gains. It is brilliant, it is sophisticated, but it seems to me the financialization has included a cultural shift in attitudes.
Rana Foroohar: For sure. Absolutely. Just look at the sort of movies of our day. The HBO series Billions—or maybe it is a Showtime series. We definitely glorify the financier to the exclusion of others. That is a real problem. This goes deep because this gets into our educational system. I have a chapter on the problems with our MBA education, that it is so financially oriented and kids come out and finance is still the number one area they want to go into. They don’t want to go into industry. And increasingly you have got even the smartest scientific minds, the mathematicians—a quarter of the class of MIT graduates will end up on Wall Street figuring out sort of complex, 14 dimensional algorithmic models for trading instead of inventing the next green airplane engine over at Boeing. That is a real issue. So we have to look at education. We have to look at the way we even speak to each other. We use words from the financial lexicon. We talk about "human capital." We think of workers as being as expendable as assets themselves. This is all part of this problem. You are absolutely right.
Chris Martenson: It is so severe I was just reading the other day about—Senator Grassley even called a nonprofit hospital to the carpet because they were suing the people who came in and couldn’t pay. Here you have a nonprofit hospital, it is about health, and they are filing literally thousands of suits per year to pull what they can from people. I think that probably feels okay and the CEO of the hospital in question is earning $1.7 million for a reasonably small sized Midwestern hospital. So we do, we have a very large, increasing class of people who feel like they are worth it and whatever the ends justify the means and the ends are: We need to earn as much as we can.
Rana Foroohar: Right. And actually you are bringing up another point that I cover in the book. Business itself has begun to act like banking. There is some really wonderful academic work that has been done looking at the percentage of revenue across all industry that comes from financial services and from just moving money around—hedging, trading, tax optimization, all these different things. It is five times as much as it was in the 1980s. It is as if we are all bankers now.
Chris Martenson: Absolutely. I think it was about 10 years ago I realized that GM was a financial company with a car company bolted to the side.
Rana Foroohar: Absolutely. You are seeing subprime auto loans being a problem in the last few years. I have a whole chapter actually in the book on GE, which... Their evolution is really fascinating. GE is arguably kind of the original American corporate innovator. Founded by Thomas Alva Edison, created the light bulb, created any other number of fabulous inventions. But in the 1980s under Jack Welsh, and then continuing trough the 1990s, they became a too-big-to-fail financial institution. And actually Jeff Immel who is now the CEO after the financial crisis had to go hat in hand to Warren Buffet to ask for a loan to keep the company afloat. I think that was a real turning point for him. That was a real eye opener. I have done some interviews with he and other executives there and they’ve actually said "look, we came to a crisis point where we had to decide: Are we going to be a bank with a few products attached or do we want to really go back to our roots and be an innovator?" They decided to do the latter and they have moved away from finance. They have been selling off their financial assets and they are trying to now move into making things particularly geared for the emerging markets that are going through the kind of consumer boom, the development boom that the US went through in the 1950s. A lot of people are really watching that company to see, hey, can a big American company that went this far into the process of financialization pull back and really move to a different paradigm? I think it will be very illustrative to see what happens.
Chris Martenson: Well of course, to move from the "taker" back to the "maker" column. Let’s go back to those numbers. You said, if I heard you right, that the financial sector has roughly doubled since 1980 and it is 25% of all corporate profits and maybe 4% of all jobs... When I saw 2008 happen, and of course Hank Paulson was reading the Martial Law Act to people and there was a lot of panic in the air – that was really, I thought, that self introspection, look in the mirror, "what have we been doing?" Here is the number I want to tack to yours: Since 1980, the United States has been expanding its debt at twice the rate of its nominal GDP growth. So you as an individual, Rana, and I as an individual know that I can’t double my debt at twice the rate of my income growth. I have a math problem sooner or later. Shouldn’t that have been the moment we said "wow we have a math problem"?
Rana Foroohar: Absolutely. This is also fascinating thing: A lot of the research around how much debt leads to financial crisis has been done post 2008. People just weren’t thinking about this stuff. They thought: "Debt? Great!" We are even subsidizing it with the tax code.
But actually, yes, fast run ups in debt in particular. The speed of the run up in debt is almost more important than the sheer amount of debt. When you have got really, really fast run ups in debt you almost always get financial crises and economic downturns.
Debt has been, I think, used as a palliative in our society. We have had slowing growth, we haven’t taken the real hard decisions about "let’s come up with a national growth strategy. Let’s think about how to connect the dots between educators and job creators and fix infrastructure and do the really hard things you need to do to create really mainstream growth." Instead we have just piled on more debt. We have used low interest rates as a tool as part and parcel of that. Consumer debt also has expanded dramatically since the 1980s as a way of kind of distracting people from the fact they haven’t gotten a raise, and we have a huge debt bubble now. Globally there is now $57 trillion more debt out there in the world than there was before the financial crisis. It is not like the problem has gotten any better.
Chris Martenson: Certainly. Let’s broaden out a little bit. Let’s go global for just a second. You said the speed of the run up in debt. As impressed as I was with the United States – China. China absolutely takes my breath away. Talk to us about that speed of run up of debt in China.
Rana Foroohar: China is, I think, the next theater, if you will, for financialization. If you look at the amount of debt in China that is out there it is incredible. It is about 300% of GDP. That is over three times what it is in the US. And more importantly, the pace of that debt run up has been eye popping. If you go back to 2008 it took about a dollar of debt to create every dollar of growth in China. Today it takes $40 of debt to create a dollar of growth. So they have a major, major debt bubble. Interestingly, they are also—even though they have a totally different political system than we do, they are at a kind of similar pivot point, politically, that the US was in the 1970s when growth began to slow.
Growth has begun slowing in China, which, again, is natural. They have been growing at double digits for over a decade so that slowed to single digits and now low single digits. So they have to change their model and go to a different kind of growth. They have to move from being a poor country to a middle income country. Well, that requires hard political changes. It probably requires real political form and opening up the system. Those are hard things to do and they shake up vested interest. So there is a big question about whether the Chinese are going to try to do what the US did and just throw the ball to the markets.
In fact, one of the reasons you saw so much volatility last summer in the Chinese markets was for that very reason, because they were trying to liberalize markets and make people feel wealthier by growing asset bubbles, and then things collapsed and we had a lot of global stock market volatility last August and September.
Chris Martenson: I think the Chinese people’s bank could be forgiven for seeing that being a serial bubble blower is perhaps a workable strategy.
Rana Foroohar: [Laughter] That is true too. It is funny, my book is actually being published in China. I am very pleased about that. I think it is a topic that they are extremely interested in and they want to really understand "how can we do it differently? Can we do it differently?"
Chris Martenson: I have a number of connections with people from China and I am finding them to be thinking much more long-term, very broadly. I spend a lot of time in the energy space so let’s – I’m wondering in your research if you ran across this – so here is a central thesis of mine: It is that endless growth is not possible on a finite planet. Not an original idea, but it is lurking there as sort of an 800 pound gorilla that nobody talks about. We have a financial system that seems to exist in two states – growing or collapsing – so I’m wondering if you ran across anybody who was sort of looking at this 10, 20, 50 years out and saying "Houston, we have a problem"?
Rana Foroohar: That is the $64,000 question. It is funny because right after the financial crisis, one of my key sources was a guy named Steve Roach who happened to be the Chief Economist for Morgan Stanley bank and then he ran Morgan Stanley Asia, brilliant guy. I called him up and I said, "what just happened?" He said, “Well, the financial markets have become unmoored from the real economy.” And then we started talking about growth. I said, "well what is going to happen now? I mean you know, we have been used to huge trend growth; can this really continue?" He said, “Well that is the big question. How much growth is viable?” What is interesting is very few people, economists in particular, are brave enough to ask that question. And it is the obvious thing. It is the elephant lurking in the room.
I think that what we are starting to see is that we certainly need a different kind of growth. It is interesting, you are in the energy space so you probably know about—many economists, people like Joe Stieglitz, are big fans of green growth projects that would basically employ more people in the green energy space, really focus on innovation and job creation, but not on sort of the sheer growth rate itself. Let’s not think about "we need to hit 3%, 4%." Let’s think about: "Can we employ people productively? Can we use resources more sustainably," and let’s just change the whole way we think about growth.
Chris Martenson: Yes, this is a fascinating topic. We will be employing more people in the energy space, and for a really geeky, physical reason which is that the energy return on energy invested from alternative energies is not the same as we got from sticking straws under the sand and got this really tasty oil out of the ground. Think of it from financial terms: If the return on investment is lower, you have to perform more work to get the same return, which means we need more people employed there. That is perhaps the good news. But for an economy that is unwilling to share the pie and say "we now have to make hard tradeoffs. We are going to have less of this and more of that..." That is where I don’t see the conversation beginning yet and we have papered over that by pretending it doesn’t exist by printing lots and lots of money, which makes people feel good. As you said, it is a palliative.
I am growing increasingly concerned that we are adrift, ourselves, from a strategic standpoint. I did a lot of strategy work in big companies. There is a bunch of complex models out there but it boils down to: Where are we going? What are our resources? You know? That’s it.
Rana Foroohar: It’s totally true. You are pointing out that often the simplest questions are the best ones, you know? I mean economists by and large live in an ivory tower. They speak in a lot of jargon—and this is something I encountered in my book again and again where you would ask really simple questions like: "Is the financial institution actually providing clear, measurable benefit for the real economy?" "Oh gosh, we haven’t studied that. We studied everything else. We studied how much tier one capital the financial institutions should be holding, but we haven’t actually studied are they doing anything good and useful," you know? These are great questions to be asking.
Chris Martenson: I am intrigued because you did a lot of research on this. If I am reading this right, you spent three years digging in this and you have done a fabulous job from the sounds of it all. What surprised you most in here?
Rana Foroohar: That is a great question. I guess what was really fascinating to see is that things happen over time. Changes that have all of these perverse unintended consequences happen over time. There wasn’t one silver bullet shift. I mean there were some big shifts. I think the deregulation of the derivatives market was big. I think that the way in which monetary policy was unleashed and we started to rely on really low interest rates to create any growth at all was big. But it is this big process – this sort of slow process where as finance got bigger and bigger and everyone was pulled into its orbit, almost like planets orbiting the sun, we just began to think of the markets differently and we all are oriented towards the markets. The point of my book really is to start a conversation about how, guess what, this is totally the wrong way to look at things. The markets need to be oriented towards us. The markets need to be focused on helping Main Street. Actually, I’m becoming a little more hopeful because I think that the tech revolution, in terms of crowd platforms, crowd funding and the sharing economy – the kind of Uberization of everything—even though that comes with some issues about labor protections and things like that, it also comes with opportunities to start creating a more old fashioned market system where you are actually more tightly connecting people and capital at the ground level. I think that could maybe start us in the right direction back to a more functional system.
Chris Martenson: I totally agree with that analysis, and as well, they are a much more efficient use of capital and we are going to have to be more efficient as growth slows. That is just part of the game.
I guess as a last question/comment I note that—very important point you just made—it is time to begin shifting that pendulum swing back to having our money system work for us instead of the other way around. I’m wondering how to get past that. I look at Japan, the largest retirement colony on the planet so far. They are doing everything they can to stoke growth in an economy where they are actually losing people on a population basis and the demographic shift is towards more elderly people. I would say if the economy was in service to the people, it could shrink. That would not be a bad thing. But they are desperately afraid of letting anything shrink and I think that again points to an inversion of who is in service to whom in this story. Is there something more fundamental we need to look at here?
Rana Foroohar: It’s a great question. I think that the key thing is: shift the narrative. This is something I would like to see the next president do and I am a little worried because none of the candidates have fully articulated this idea that the markets are not a measure of our economic health. The markets need to be focused on Main Street health. I am encouraged that Janet Yellen, although she is in an incredibly tough position because we have come so far down the financialization road – I think she is a labor economist that is very concerned about Main Street job creation. I know that the Fed is starting to have conversations internally about this topic and to throw a lot of things at the wall in terms of what might help goose productivity and job growth at a real fundamental level, not just relying on low interest rates, not just relying on easy money but thinking at a deeper level about what could create growth. These are the conversations we need to be having and hopefully whoever the next president is will push this ball forward.
Chris Martenson: I certainly hope so. From your lips to their ears.
We have been talking with Rana Foroohar. She has got this new book out. It’s fantastic – Makers and Takers – you can find it on Amazon. You can also find it at RanaForoohar.com and we will have the link at the bottom of this podcast. Rana, thank you so much for your time today.
Rana Foroohar: Thank you for having me.