Makers and Takers

“Why do financial crises keep happening? Is it a cycle we’re doomed to repeat, or is there a way to fix it once and for all?”

1. Debt: The Root and Repeat Feature of Financial Crises

Debt has played a major role in triggering both the Great Depression and the 2008 crisis. In the 1920s, Americans depended on credit to access most consumer goods, masking large income inequalities. Similarly, prior to 2008, excessive borrowing hid stagnant wages and declining purchasing power.

After the 1929 crash, banks had encouraged investments in risky areas like copper stocks, inflating a bubble that led to collapse. Fast forward to 2008, institutions like Lehman Brothers promoted questionable subprime mortgages, leading to a housing bubble and financial implosion.

In both cases, those responsible evaded significant punishment. Charles Mitchell, chair of National City Bank during the first crisis, resumed banking after brief public shame. Likewise, Richard Fuld of Lehman Brothers continued his career post-crisis. It raises questions: Are the architects of financial disasters ever truly held accountable?

Examples

• In the 1920s, 75% of household goods were purchased on credit.
• Subprime mortgage lending ballooned in the 2000s, contributing to the housing crisis.
• Richard Fuld remains active in finance despite leading Lehman Brothers to its collapse.

2. Regulatory Loopholes Enable Cycles of Risk

Although the Glass–Steagall Act of 1933 sought to differentiate commercial from investment banking, over time, these lines blurred. Both industries sought ways around these rules to maintain profits.

The negotiable certificates of deposit introduced by Walter Wriston in the 1940s exemplify this. They allowed the wealthy to keep funds out of sight, destabilizing the financial system in the long run. Similarly, the invention of credit cards in the 1960s changed borrowing culture significantly but also sidestepped certain regulations.

Deregulation on a larger scale came under President Carter, who let banks set interest rates as they pleased in 1980. This created an environment ripe for risky products like derivatives and variable mortgages, laying the groundwork for future crises.

Examples

• The Glass–Steagall Act was established in 1933 but gradually undermined.
• Walter Wriston blurred commercial and investment banking lines with CDs in the 1940s.
• Credit card proliferation and deregulated rates during Carter’s presidency fueled financial risks.

3. Short-Term Profits Ruin Long-Term Stability

An obsession with shareholder value has distorted corporate priorities. Companies now focus on immediate profits rather than long-term stability and product quality.

This approach led to disasters like General Motors’ faulty switches, resulting in 124 deaths. Engineers feared reporting the defect due to the company’s tight cost-cutting culture. Profit-focused management often sidelines operational safety or customer interests.

Additionally, pharmaceutical companies now prioritize share pay-outs over innovation. A Morgan Stanley report in 2010 blatantly encouraged such behavior, suggesting that mergers and buy-outs hold greater value than new products or patient needs.

Examples

• General Motors’ switch design flaw caused widespread tragedies.
• A 2010 Morgan Stanley report encouraged pharma companies to prioritize shareholder pay-outs.
• Companies’ focus on short-term wins often eclipses quality assurance efforts.

4. Shareholders Benefit Unfairly While Contributing Little

Shareholders, especially activists, reap vast rewards without contributing much to innovation or growth. These individuals buy influence to manipulate company policy for bigger returns.

For instance, Apple returned $112 billion to shareholders between 2012 and 2015, at the expense of research and development. This money could have supported the creation of groundbreaking technologies, but instead boosted stock prices.

It’s worth noting that much of the tech Apple relies on was funded by public programs, not private investors. The government funded innovations such as touchscreens and GPS, yet private shareholders now reap the financial rewards of these advancements.

Examples

• Apple’s $112 billion shareholder returns overshadowed reinvestment in innovation.
• The top 10% wealthiest Americans own 91% of US stock.
• Technologies like GPS and the internet owe their existence to public funding programs.

5. Corporations Now Act More Like Banks

In recent decades, many corporations have entered the finance sector, diminishing the distinctions between businesses and banks. Lending activities, once a side hustle for companies, have become significant revenue sources.

One example is General Electric’s real estate investments before 2008. After the housing bubble burst, their risky ventures necessitated a government bailout. Similarly, banks exploit loopholes in other industries: Goldman Sachs manipulated aluminum storage rules to inflate prices, profiting at consumers’ expense.

This crossover is creating a tangled web, where businesses take on banking risks and vice versa, amplifying vulnerabilities in the system.

Examples

• General Electric’s mortgage gambles led to a massive government bailout.
• Goldman Sachs manipulated aluminum prices by exploiting legal loopholes.
• Increasing financialization of corporations adds systemic risks.

6. Housing and Retirement Markets Exploit Regular Citizens

The housing market saga post-2008 epitomizes how financial players profit while families struggle. Investment firms capitalized on foreclosures, purchasing homes en masse to turn them into rentals. This practice pushed homeownership out of reach for many.

Consider the Blackstone Group, which earns $1.9 billion annually by renting out 46,000 homes it acquired. Similarly, financial mismanagement has left retirees vulnerable. High-risk investment strategies have undermined long-term wealth, depriving retirees of security.

This exploitative dynamic further entrenches economic inequalities, creating a dangerous cycle of dependency on institutions for basic needs.

Examples

• The Blackstone Group rents out 46,000 homes for nearly $2 billion in annual income.
• Home ownership rates in the US have dropped steadily since 2004.
• Retirement households now average only $104,000 in savings.

7. Weak Political Will Favors Financial Titans

Attempts to regulate finance after 2008 fizzled due to political entanglements with the banking sector. Legislation like Dodd–Frank was lengthy and riddled with loopholes, rendering reforms ineffective.

For instance, swaps and derivatives – identified as high-risk factors – remain because banks lobbied to weaken reforms. PACs representing major banks spent heavily to influence votes, aligning political outcomes with their interests, not public welfare.

Career paths between politics and banking further complicate reform efforts. Many Treasury secretaries have roots in finance or transition there post-tenure, diluting their motivation to enforce tighter controls.

Examples

• Banks fund politicians to pass favorable policies, such as weakening the swaps reform.
• Dodd–Frank spans over 2,300 pages, opening space for manipulation.
• Thirteen of 35 Treasury secretaries since 1900 have connections to banking.

8. A Convoluted Financial System Invites Risks

The sprawling complexity of modern finance makes it almost impossible to regulate effectively. With $81.7 trillion in daily transactions, oversight is limited, and banks like Citigroup are riddled with internal management struggles.

Even attempts to rein in risk-taking fail. The Dodd–Frank Act, despite good intentions, became hard to enforce due to its sheer size and complexity. Important protections vanish into ambiguous language and unregulated areas.

To fix this issue, simpler and more transparent rules must replace today’s dense and unwieldy regulations. Only then can financial integrity be restored.

Examples

• Daily global financial transactions total $81.7 trillion.
• Banks’ internal boards, like Citigroup’s, often struggle to oversee operations.
• Loopholes in Dodd–Frank illustrate the futility of overly complicated reforms.

9. Limiting Debt Could Prevent Future Crises

Debt fuels unsustainable economies and financial crashes. To mitigate risks, banks should cover 20–30% of their investments with their own capital, reducing reliance on borrowed funds.

Encouraging citizens to save rather than borrow can also stabilize the economy. While tempting, excessive credit glosses over systemic stagnation, leaving underlying problems unsolved.

A balanced mix of stricter banking practices and individual financial education could reduce future vulnerabilities. Crises like 2008 show the dangers of ignoring these safeguards.

Examples

• Banks rely heavily on borrowed funds, amplifying risk.
• Consumer debt often disguises stagnant wages and weak economic foundations.
• Encouraging personal savings strengthens households during economic downturns.

Takeaways

1. Push for clearer, shorter financial regulations to close loopholes and limit risk-taking opportunities.
2. Educate yourself on the downsides of debt and prioritize personal savings over credit dependency.
3. Advocate for policies that reinstate boundaries between commercial and investment banking for a healthier financial system.