Oct 12, 2009
The financial industry is mainly designed to supply capital into the real economy. They should provide aid wherever it is needed most in the market. It is not supposed to be an end in itself. However, certain flaws in the sector’s structure enabled it to become a powerful entity that is capable of sucking the real economy into oblivious. And because it is prone to fraud, it threatens the nation’s economic stability, even democracy itself. Among the flaws that can be seen includes the following:
It Has Become Too Big
Financial institutions should mainly act as a “middlemen” that enables capital to flow through the markets. Similar to all middlemen, it should be kept as small as possible while accomplishing its goals. If that is not the case, its structure makes it become parasitical. This is exactly what happened. Since the financial sector became larger than what was necessary, it dwarfed the same economy that it is supposed to serve.
It should also be noted that it uses the capital for its own benefit. Whatever amount remains afterwards is misallocated. Financial sector rewards the already-rich while depriving individuals who need credit and additional capital most.
Causes Crisis around the World
Although the current economic crisis generates the most attention to the faults of the financial sector, it is not the first in their list of misdemeanors. As if that’s not enough, big banks are capable of causing devastating failure to the world economy. It has become very unstable while retaining its power. The industry has enough influence to convince Congress that their accounting rules work, though it is merely an attempt to hide their losses.
Contributes to Inequality
The predation of the financial industry has become so bad that it now controls the upper one percent of the country’s income distribution. As a result, income inequality has widened. This can cause massive problems not only to the economy, but to the social welfare of the citizenry as well.
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