BIF drains, not lines, national coffers

The following are extracts from ‘Divested’ by Ken-Hou Lin and Megan Tobias Neely

They claim the BIF – Banking Insurance Finance – sector is draining, not lining, developed nations’ coffers

For proof, they look to the USA’s experience

Until the 1970s, the financial sector accounted for a mere 15% of all US corporate profits:

  • Banks took deposits from households and corporations and loaned those funds to homebuyers and businessmen – most of their revenue was generated by interest, by paying depositors lower interest rates than they charged borrowers – they made profits in the “spread” between the rates:
    • They also issued and collected cheques to facilitate payments
    • And they provided space in their vaults to safeguard valuable items
  • Insurance companies received premiums from their customers and paid out when costly incidents occurred

Since then, the financial sector has tripled, accounting for 45% of all US corporate profits – these profits arose from increasingly complex fee-based products such as securitisation, derivatives trading, fund and wealth management, card services, M&As – most of which take place between financial institutions, not individuals or companies – hence they remain opaque to the general public

At the same time, wealth inequality has soared – compensation for corporate executives and those working on Wall Street rose rapidly whilst mass layoffs became a common business practice instead of a last resort

The result is the top 0.1% of U.S. households now own more than 20% of the entire nation’s wealth

And non-interest revenue – from non-traditional banking activities – has risen from less than 10% of all revenue in the early 1980s to more than 35% in the early 2000s – for example, just before the 2008 financial crisis:

  • JPMorgan Chase earned $52 billion in interest income but almost $94 billion in non-interest income – half was generated from activities such as investment banking and venture capital, a quarter from trading
  • Bank of America earned about 47% of its total income from non-interest sources, including deposit fees and credit card services

This new banking model has led to a significant transfer of national resources into the financial sector, not only for corporate profits but also its elite employees’ compensation

Related industries, such as legal services and accounting, have also benefited from this boom

However, many now question whether these non-interest activities actually create value commensurate with their costs – excessive returns without corresponding benefits?

Consider the historical capital-labour relationship


For most of the 20th century, labour was considered a crucial driver of American prosperity – its role, however, has been marginalised as corporations increasingly attend to the demands of the stock market

To maximise returns to shareholders, American firms have adopted wide-ranging cost-cutting strategies, from automation to offshoring and outsourcing – downsizing and benefit reductions are common ways that companies trim the cost of their domestic workforce

Many of these strategies are advocated by financial institutions, which earn handsome fees from mergers and acquisitions, spin-offs and other corporate restructuring

As non-financial firms expanded their operations to become lenders and traders, they came to earn a growing share of their profits from interest and dividends – intensified foreign competition in the 1970s, combined with deregulated interest rates in the 1980s, drove this diversion, with large U.S. non-finance firms shifting investments from production to financial assets – instead of targeting the consumers of their manufacturing or retail products to raise profits and reward workers, these firms extended their financial arms into leasing, lending, and mortgage markets to raise profits and reward shareholders

As American corporations shifted their focus from productive to financial activities, purchasing financial instruments instead of stores, plants, and machinery, labour no longer represented a crucial component in the generation of profits, and the workers who performed productive tasks became devalued

In addition to marginalising labour, the rise of finance pushed economic uncertainties traditionally pooled at the firm level down to individuals:

  • Prior to the 1980s, large American corporations often operated in multiple product markets, hedging the risk of an unforeseen downturn in any particular market – lasting employment contracts afforded workers promotion opportunities, health, pension and other benefits, unaffected by the risks the company absorbed
  • Since the 1980s, fund managers have instead pressured conglomerates to specialise only in their most profitable activities, pooling risk at the fund level, not at the firm level

Consequently, American firms have become far more vulnerable to sudden economic downturns

To cope with this increased risk, financial professionals advised corporations to reconfigure their employment relationships from permanent arrangements to ones that emphasise flexibility — the firm’s flexibility, not the employees’:

  • Workers were seen as independent agents rather than members or stakeholders of the firm
  • As more and more firms adopted contingent employment arrangements, workers were promised low minimum hours but required to be available whenever summoned
  • Their compensation shifted, too, from a fair-wage model that sustains long-term employment to one that ties wages and employment to profits – should their portion of the company lag in profits, their job, not just their compensation, is on the line
  • Retirement benefits were also transformed from guarantees of financial security to ones dependent on the performance of financial markets


This model mostly benefits high-wage workers who can afford the fluctuations, but many low-wage workers, not knowing how many hours they will work and how much pay they will receive, are forced to borrow to meet their short-term needs

Retirement has also become risky for many – it no longer depends on age but financial status – many middle-class families have had to cash out their retirement accounts to cover emergency expenses – many others fear they cannot afford to exit the workforce when the time comes – and these are the lucky ones

  • The abundance of credit provides affluent families the opportunity to invest or meet short-term financial needs at low cost
  • At the same time, middle-income households carry increasingly heavy debt burdens, curtailing their ability to invest and save
  • And low-income households are either denied credit or face enormously high borrowing rates from pay-day loan companies that go beyond preventing savings to imprison the impoverished in a cycle of debt payments – unable to pay the bills on their debts, an increasing number of families have become insolvent, owning less than they owe


The credit market has thus emerged as a regressive system of redistribution benefiting the rich and devastating the poor

Taken together, the rising inequality in developed economies, not just the USA, is not a “natural” result of economic growth but reflects how developed economies currently are organised and resources distributed

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