Best columns: Business
Where finance went wrong
The New York Times
A decade on from the financial crisis, the banking industry “has lost its core purpose,” said Rana Foroohar. “It isn’t serving us, we’re serving it.” While the biggest banks can credibly claim to have improved their balance sheets and off-loaded the risky assets that helped fuel the crash, “their business model has become fundamentally disconnected from the very people and entities it was designed to serve.” Economist Adam Smith, the father of modern capitalism, simply wouldn’t recognize today’s big banks, which he envisioned as partners for industry, rather than an industry unto themselves. Forty years ago, most of the money flowing through the biggest banks was devoted to new business investment. Today, lending to Main Street commands just 15 percent of what financial firms do. The rest of the money “exists in a closed loop of trading” and corporate deal making that works solely to enrich the already rich. It has proved to be an incredibly profitable strategy—the financial industry provides just 4 percent of U.S. jobs, while taking a quarter of the corporate profit pie—but it doesn’t help consumers much. Until we talk about how to create a financial system “that really serves society,” the big banks will be our masters, rather than the other way around.
Why inflation may be long gone
“The economic truths of the past may not be so true anymore,” said Zachary Karabell. Since the economy began to recover from the 2008 crash, officials at the Federal Reserve have been puzzled about why inflation hasn’t risen as their models predicted. As the economy improves and companies start hiring, wages are supposed to go up, which pushes up prices, spurring inflation; that’s when the Fed steps in to slow things down by raising interest rates. This process has always been at the core of the central bank’s mission, and for the past several years, the Fed has assumed that some economic conditions were simply taking longer to “return to normal.” But what if the stubborn lack of inflation is “not just a short-term blip?” Thanks to technology, the cost of most of life’s necessities, “from food to clothing to shelter,” has stabilized or fallen over the past two decades. Cars are more fuel efficient, and smartphones put “incalculable reams of data” into our pockets at cheaper and cheaper prices. Tech-driven efficiencies are all around us, from the app economy to the electrical grid. That surely affects inflation, but in ways that are still little understood. The Fed needs to begin formulating models that consider how technology has restructured the economy. “Otherwise we risk making policy geared toward a world that no longer exists.”