There was this mythology that the financial sector and that the markets in
general were just so efficient that we didn't need to worry about them but
I think if we've learned anything in the last eight years it's that that's
not the case.
Welcome to the new co shift dialogues where we speak with leaders in business
government and media the people on the front lines of the greatest shift in
business since the Industrial Revolution. Rana Foroohar is here to talk about her
new book makers and takers
the rise of finance and the fall of American business
rana sent me an early draft to read and since then I've been referencing an
almost daily
it provides deep context on the massive shifts remaking our global economy
exactly the story we've been exploring in these dialogues welcome Rana
thanks so I read your book a few months ago I mean few months before it came out
your kind enough to send me a copy and I found myself thinking that it was really
framing the the narrative that new co is about arm but instead of trying to say
what it's about i'm going to ask you this question this
you're at a cocktail party and someone hasn't read your book but here you've
written one
yeah what's your you know central argument when someone asks you what's
your book about my book explores how the rise of our financial sector over the
last 40 years
the growth in size which has been tremendous and also the change in what
the capital markets actually do in their own business model is hurting companies
and it's hurting our economic growth and if there's a killer stat in the book
it's that only fifteen percent of all the capital flowing out of US financial
institutions right now and i'm including big banks insurance companies real
estate trust anybody that kind of you know moves money around all the cash
flowing out those institutions only fifteen percent of it is the is being
invested in businesses
so where's the rest of it going that's my question is eighty-five percent of
the money is being used to do what
well my argument is that it's in a sort of a closed financial loop
it's part of a process that I call financialization
we're by the markets have begun to exist
basically to serve themselves so you've got fifteen percent of investment going
into business which by the way just to step back for a minute
that's what the financial markets were set up to do right now if you think
about what Adam Smith envision banks doing they were supposed to take all of
our savings productive labor and put it into banks and then the banks were
supposed to lend it out to new businesses that grow jobs and grow the
economy so fifteen percent of it does that the rest is being used for trading
for the buying and selling of existing assets so bonds stocks real estate and
real estate is highly financialized one of the reasons that we have the housing
bubbles up and down housing bubbles him and we have won again in this country
not
not that the of the size we have in 2008 but one of the reasons that happens is
because those markets have become so financialized in banks and other
financial institutions now spend the majority of their time buying and
selling and slicing and dicing those assets rather than investing in the new
thing when I talk to people who are at financial institutions about this
question which is you know it doesn't seem like even though the . arm one of
the many points of the 2008 bailout was to encourage more lending but it doesn't
seem like that actually has happened to certainly to the extent that maybe the
economy needs as you would argue that they would respond to me and say well
lending to small business which is where most of the jobs and the growth comes
from is too risky
yeah well that's that's the most ironic answer because that's what you're
supposed to be doing yeah nobody said it was easy
you know you can ask any venture capitalists I'm sure here in California
it's not easy it is risky but that's what the capital markets were set up to
do
nobody ever thought that wall street was going to become an end in and of itself
whereby for trading buying and selling that has very little social value and
this is not just my opinion that the opinion of many serious economist some
Nobel Prize winners like Joe Stiglitz that has very little social and economic
make value instead the stuff that does have real social and economic value the
productive allocation of capital to new businesses
that's not happening and by the way this is barely being talked about in policy
circles and it's not even being modeled you know when the Fed comes up with it
sort of giant algorithms that crunches in the basement
you know in Washington to decide what the economy is going to look at the
financial sector itself doesn't need to get modeled
what's the impact of brexit are the sort of financialization story that you're so
your book is so focused on
it's it's a it's a big issue the big issue so just to take a step back
you know my take on the last eight years is that we haven't really had a real
recovery the markets are way up here you know they're still even after the market
to recover the markets are recovered yet even after the dip that we've seen
recently because it brings it and global volatility there's still you know of at
near-record highs but main street is still in the longest weakest recovery of
the post-war era you've still got stagnant wages you've got barely any
inflation and now you've got this headwind and turbulence from abroad in
the form of brexit but to go back to the immediate effects yeah Janet Yellen the
chair the Fed is very worried about not only risk in europe and china and other
overseas markets so she's keeping interest rates low
well low interest rates encourage debt it encourages the kind of corporate debt
bubble we've seen in the last few years corporate debt is at record levels which
also brings up another irony that I cover in my book even as there's a
bigger than ever corporate debt bubble corporations also have more cash on the
balance junk than ever before and we we talk about that I want to sidebar that
but but i wanna a
out when you say there's more corporate debt than ever
it makes one think oh well then there's a lot of lending going on but it's not
lending to the real economy know basically corporations are going to the
bond markets they're using this low interest rate environment and by the way
I'm not really blaming the Fed for this I think the Fed did what they have had
to do there was nobody in Washington that was able to push through real
fiscal policy of the kind that would have really stimulated a main street
recovery so the Fed just kind of came in and tried to put everything together
with duct tape and they dumped a lot of money into the economy and they kept
rates low but what that does is it creates an environment that makes it
really really easy for companies to issue a lot of down the public markets
and so that's why you see a record number of share buybacks
you know companies go out the issue of billions of dollars worth of debt they
use that money not to invest in new factories worker training higher wages
but to pay back shareholders that then increases this wall street Main Street
divided because eighty percent of the population
excuse me ten percent of population in this country owns eighty percent of the
assets
so when you're driving up asset prices you're really only enriching a tiny
sliver of the population right and that of course leads to political populism
that it's a terrible snowball sir really
let me try to bring this to an example that I think particularly people here in
the valley really understand which is Apple as an example of a company that is
sort of doing exactly what it's being in scented to do
yeah i did a big profile Carl Icahn a few years ago for time and at the time
he owned a large chunk of apple and about every couple days he was tweeting
you know maniacally for them to give more money back to shareholders do more
buybacks and Tim Cook was apparently listening to him because as you've seen
they've already done billions of dollars worth of debt issuances done share
buybacks and they now have commitments of the next few years to issue
almost as much debt and do as many but buybacks as they have money sitting in
overseas bank accounts now they don't want to bring the money back obviously
and pay the higher than average US corporate tax rate but it's this great
irony that a company like Apple which actually doesn't need any capital is
more involved than ever in
capital markets in a way that I think is not actually changing the underlying
business story
it's certainly not helping main street and it's also creating a really volatile
path for Apple itself because you see the minute that you most bullish is carl
icahn was for a number of years and then there's bad news for the company in
China boom he dumps the stock and it tanks which just shows you how
financialized that growth story is right
we're talking about hundreds of billions of dollars yeah right two hundred
billion dollars sitting overseas and bank accounts commitments to do almost
that much in terms of debt issuance and buy back here so they're they're
literally just be super clear they are issuing debt even though they have
plenty of cash to buy their own shares back and release dividends to
shareholders
that's right and you know i would not using that money yeah
just to be clear yeah to figure out what the next iphone is no no they're not as
a matter of fact RND as a percentage of revenue at Apple has been falling as
buybacks have been increasing and they're not alone thats that's by and
large true for foremost S&P 500 companies
you know it's kind of ironic because of course a lot of technologies that make
the iphone smart we're actually developed by the federal government so
one might say well it might be a good idea to bring back that money and Brenda
pay the US tax rate whatever it is but that's and that's another argument you
know the point is that this doesn't change the underlying growth story of
the company it's not real growth
it's sort of genetically modified growth for words
its stock price growth that saccharine its market highs and it can go away I
mean right now we're at a tipping point actually if you look at the record
number of share by buybacks that are being done
it has a less and less effect in terms of bolstering the stocks i'm curious
when your book came out or maybe if you circulated reading copies to some of
your sources in the financial industry
what was the response i mean if I'm making 10 11 million bucks a year
bonuses running this financialized engine and pump it through
probably not going to like this book I'm
yeah well it's funny I thought I was going to get a lot of pushback from Wall
Street but in fact I've got a lot of calls from from high-level finance years
from hedge funders and private equity guys who are actually really interested
in the book because they're interested in the underlying premise that when
finance gets too big growth starts to slow because they think about that is
something that's eventually going to hit their own portfolio as a percentage of
corporate profits you have a great metric I want you I want you I want to
tease that out yeah yeah this is the taker part wrong
so finance as an industry makes only four percent of jobs in this country but
it takes twenty-five percent of corporate profits
so all you have to do you know you can even just look at this as a classical
economist and say that's a lot of economic oxygen being taken out of the
room that's a monopoly power right there
the other thing that's really important i think will resonate with people in the
valley is as finance has gotten bigger it has not gotten more efficient so
financial fees have doubled as the industry has grown so that again shows
me that there's something funny going on here this is not an efficient productive
model right
so if the smart money so to speak is i would assume is calling you and saying
all right
may we taking this a bit too far are their ideas about what to do about it
yeah so the asset management industry which is the fastest growing part of
finances the part of finance the managers everybody's pension money for
one case they're very interested in this right because they see a looming crisis
coming
a lot of smart money believes that we are at the tipping point of financial
eyes growth we've had 40 years of this and that we're now because of that and
because of this lack of investment into the underlying economy we're entering a
period for the next 20 30 40 years where returns will be lower
like significantly lower maybe half what they have been in the past that creates
a pension crisis
it begs the question what role government because you know UD in your
book you trace a lot of the incentives that that have been
created over the past 40 years to a pretty significant deregulatory you know
philosophy in the eighties and nineties
yeah does this mean that we should be thinking about more regulation one
simple question that the financial industry should be asked and should come
up with a metric to answer is what is the productive useful economically and
socially useful thing that you are doing for Society for business for the economy
and that's a simple question if you don't if you don't know what to say that
then it's that's an important point yeah
do you feel that there may be a growing consensus about what the outcome is and
if so can you tell me what that outcome is
that's a really good point and it's a deep question because it requires an
existential kind of shift in mindset from a market knows best
finance knows best if we just do what Wall Street tells us to do as companies
as consumers that we will have good economic outcomes that has been a very
difficult orthodoxy to turn back and there's still powerful people in
Washington and on the street that that have that belief system but i think the
fact that we are eight years on still in the slowest tweakers to recover the
post-war era that we are basically relying on near-zero interest rates to
avoid falling back into another recession is kind of you know waking
people up and they're like we need a new model wall street and main store not the
same thing and eventually in an economy that is seventy percent consumer
spending
if people don't get a raise the math starts to not work
absolutely yeah the idea was you know and i think you put some figures in your
book
prior to the past 40 years we've adopted this orthodoxy your pension your
retirement was sort of part of your working life and you can you paid into a
regularly and it was it was sort of a highly regulated environment but it took
care of you
that's which completely and and and sort of in the eighties and nineties we said
well don't worry we'll just make our pension the market right and and and
then
so everybody including
my mother it checks their their their stock balances almost every day and
they're off a little concerned Yeah right right and it you as a society then
get into this sort of Faustian bargain where everybody is dependent on the
market is going up up up up for their wealth or their perceived well and so
you don't want to look too closely at how the sausage gets made
that's why you know when you start to be someone like me who raises these issues
people get a little concerned well what's that going to do for the markets
well we may have a correction at some point but ultimately will have stronger
more robot sustainable growth if we switch to a different model right
the previous conversation twenty mm company whoever
came up
now whoever i think is now a Rashomon here in the valley and it's sort of
place
it plays the role that the google played 10 12 years ago or that Facebook played
five years ago
it's our greatest success yeah it's also the thing that makes more people
uncomfortable
yeah than almost any other company in in recent history
what's your point of view about twenty as an
expression of our you know current Western capitalism is it a maker or a
taker
well you know I think to the extent that it's putting a lot of wealth in a very
small number of people's hands
it's taking you know twenty is an interesting company
because i think you're right it really touches on people's anxieties about what
the 21st century global economy is going to look like and I think all of us know
to some extent that we can be uber eyes do you know journalism has been uber
eyes many white color professions have been or will be uber eyes and so what is
that breakdown of the traditional social compact which over didn't start but it's
just a really public expression of what does that look like
who picks up the slack you know you have a system where you've got a company with
an incredibly high market value creating fewer and fewer full-time you know good
sustainable jobs and a lot of freelance piecemeal work
how do you make sure that the people that are doing that work are secure and
don't end up you know sort of getting the drugs of the economic
yup there are you going to have portable benefits is government going to step in
and do that you know what are the solutions that I think that it really
just touches a lot of anxiety
I'm curious what your sort of East Coast establishment point of view is about the
current west coast obsession with basic income
I'm more interested in how technology might actually help labor to harness a
greater share of the pie
I'm interested in some of the co-operative platform technologies that
are springing up you know there's some disgruntled uber drivers that have
started their own ubers online you know and and there could be more of that I
think that if we adopted some kind of model rather than just hang out a flat
rate everybody which I think could become politically very difficult i
think if we figured out ways to help technology help labor get a bigger share
of the capital pie to me that's the way to create a more shared recovery was
there is a significant lack of trust between sort of the the put the
population at large and that populations elite
yeah can you tell me a little bit about that
yeah I think you see it playing out you know not only the brexit vote in Britain
but here at home in the politics in our presidential cycle I've been so struck
not only by the success of Donald Trump and to a lesser extent Bernie Sanders
but the fact that Hillary Clinton even when she comes up with policies that are
smart and do address these underlying Main Street growth issues
she can't get traction now part of that may be down to her own sort of you know
political persona but i think it's about the fact that for 40 years
elites have been a bit smug about globalization and financialization and
you know I know just in these sort of East Coast establishment circles until
the last few years it was just totally forbidden to question any of this stuff
you would be laughed out of out of rooms you know for asking dumb questions
that's just arrogant and I think that we we need to look at how these trends
which increased prosperity at a global level impact citizens on the ground in
every country because they do create winners and losers and we have to make
sure that we're getting the rules right to compensate those who are losing
I think it's about the fact that many of us who are invested in asset markets who
own equity stakes and firms or at least own property and large stock portfolios
are doing better than ever before because the returns to assets have been
rising and rising and rising that's where capital flows it flows up
you know it's the opposite of trickle-down but if you get most of your
money from income
you're in trouble now most people haven't gotten a raise in real terms
since the early nineteen nineties Donald Trump's voters haven't gotten a raise in
real terms since the nineteen seventies
well there you have it in a nutshell I think fascinating Veronica thank you so
much for coming by today we're having it
the new code
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