High Finance Run Amok

WASHINGTON -- The lurid 2002 portrait of the U.S. economy as a bunch of Enrons and Tycos, overpaid CEOs running corporations like casinos, electronic speculators, predatory hedge funds, fraudulent stock values, deceptive investment firms and collusive accountants didn't develop overnight. Unfortunately, while some of the excesses may shrink, they are not likely to fade away.

That's because much of the "financialization" that occurred in the 1980s and 1990s has been built into the system, save for the possible purgative of a market crash. The most visible evidence of this--the mushrooming of CEO compensation and the private sector's "imperial corporate presidency"--ironically parallels the dangerous growth and hubris of the governmental "imperial presidency" in the 1960s and early 1970s. Unhappily, reform of business and finance may be harder to achieve this decade than were the public-sector reforms following Watergate. Washington's business and financial lobbies are mobilizing. Over the past 20 years, the U.S. economy has been reoriented from making, growing, building and transporting things to moving, massaging and manipulating money and securities. So great has this transformation been that by the mid-1990s, the finance, insurance and real estate (FIRE) sector had raced ahead of manufacturing in gross-domestic-product and national-income numbers. By 2001, the FIRE sector had pulled ahead of manufacturing in profits; in the 1960s, manufacturing led by 4 to 1.

This staggering displacement isn't a blip, even though some yardsticks, like CEO compensation and financial profits, may have peaked for now. Examples of previous world economic powers suggest that once a nation's financialization escalates to this extent, it becomes systemic and isn't easily reversed.