It’s an amazing fact that a decade on from the financial crisis, Americans are still arguing about how to reform our financial system. Even as the Trump administration argues for a roll-back of the hard-won Dodd-Frank banking regulation, it’s worth noting that disenchantment with Wall Street is, paradoxically, one of the things that brought the president to office.



Since 2008, the markets have soared, but Main Street has suffered. That disconnect was expertly exploited by the president, who, despite his many lies, had the advantage of being a political “outsider” who told some important truths about the economy that resonated with voters.



Months before the election, he proclaimed that there was a “big bubble” in the market, fueled by “cheap money” that could cause a “massive recession” when it bursts. Stripped of their Trumpian embellishments, these statements are fact.



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Corporate debt and leverage are at record levels. Wall Street stock prices are at record highs, and yet wages have only just begun to tick slowly upward. Technically, America has been in a recovery since 2009. But it’s a recovery that Main Street hasn’t felt.

This divide between Wall Street and Main Street, which I explore in my book Makers and Takers: How Wall Street Destroyed Main Street, has been building for 40 years now, a product of myriad changes to our economic and political system that has left us with a kind of capitalism in which the tail – the banking system – is wagging the dog, meaning the real economy.



Our economic illness has a name: financialization. It’s a term for the trend by which Wall Street and its way of thinking have come to reign supreme in America, permeating not just the financial industry but all American business.



It includes everything from the growth in size and scope of the financial sector itself, which creates only 4% of US jobs but takes about a quarter of corporate profits, to the rise in risky, debt-fueled trading, to the way in which businesses in all industries have come to emulate finance, pouring more money into the buying and selling of existing assets, and less into productive investment in things such as research and development or worker training.

Even our culture and language has shifted – we speak about human or social “capital” and securitize everything from education to infrastructure to prison terms.

Has this system of financialization really shifted at all in the last 10 years? In a word, no. While the Dodd-Frank financial reform requirements mean that the largest banks can correctly claim that they have offloaded risky assets and bolstered the amount of cash on their balance sheets, lending to real businesses is still a small fraction of what they do.



Meanwhile, the shadow banking sector (which is not subject to similar regulation) has grown dramatically, with private equity and hedge funds snapping up assets on the cheap in the wake of the financial crisis, when few others had the cash on hand to buy (Blackstone, whose CEO Steve Schwarzman is close to the president, has become the largest owner of single family homes in America).

Debt, and in particular the growth of debt, which is the single biggest predictor of market trouble, is blinking red. The Institute of International Finance in Washington recently released figures showing that global debt has reached a whopping $217tn.

Follow where it has flowed from (the banking sector and individual consumers) and where it has gone to (China and corporations) and you’ll see a trail that may well lead to the next financial crisis.



Rich American corporations are flush with cash, but, paradoxically, they also have more debt than ever on their balance sheets. They are able to borrow money at record-low interest rates at home, while keeping the bulk of their cash sheltered in overseas tax havens, many of them in Europe.

Indeed, one of the only things keeping the markets – which have diverged wildly from Main Street fundamentals – up these days is the prospect of Trump tax “reform” (aka corporate tax cuts) that would allow companies to repatriate some of that cash, and use it to do even more “share buybacks” of their own stock, which has the effect of artificially inflating share prices. This enriches the C-suite, which receives the bulk of its compensation in stock, at the expense of taxpayers and workers.

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Perhaps that’s why CEOs don’t complain about a system that incentivizes them to keep share prices up rather than invest in what’s actually good for their business over the long haul – it ensures their own payday. Still, the pendulum may be swinging. There’s a growing realization on the part of some corporate leaders that financialization is undermining US competitiveness on the global stage. At the same time, there’s a debate in Democratic policy circles about how to compete with Republicans in the 2018 midterms and how to regain the White House in 2020.

Crafting a more sustainable and inclusive economic policy will be key to those goals. Aside from pushing back on the Trump administration’s Dodd-Frank rollback, Democrats should think about one key bit of math. In an economy that’s 70% consumer spending, you can’t have growth unless average people get raises.



That will require rethinking not just the financial system itself, but how Wall Street incentivizes business itself to take the wrong decisions. Adam Smith, the father of modern capitalism, believed that the financial system existed to serve the real economy. We’ve create a system that works just the opposite way. Fixing it will be the key not only to stable growth, but also to stable politics.