3.3.4.2 Exploitation by the Financial Services Industry

(This is a current page, from the Patterns of Power Edition 3 book contents.  An archived copy of this page is held at https://www.patternsofpower.org/edition03/3342.htm)

Banks act as intermediaries between borrowers and lenders, who might be savers or investors; they charge both the lenders and the borrowers for providing this service, which is a basic and necessary component of an economy (3.2.7).  The financial services industry in both America and Britain was more than three times bigger in 2008 than it had been in the 1960s, as a proportion of the total economy – as reported in the Prospect article, A greedy giant out of control.  The size of the financial services industry would not be a problem were it not for two issues: it is unstable, as described in the next section (3.3.4.3), and it is exploitative.

The financial services industry was able to grow so quickly and so profitably because it had persuaded governments to loosen regulation.  As Russ Roberts commented in the interview with Cathy O’Neil referred to above (3.3.4.1):

“They help write the rules; they help make the rules; they influence the rule-makers as much as they can.” [after about 30 mins]

Its influence was made all the stronger by some of its key figures, like Hank Paulson for example, who had been the CEO of Goldman Sachs before moving into government – as described in the film Inside Job, which was reviewed by The Guardian among others.

The deregulated industry cynically exploited its customers and enriched itself.  Cathy O’Neil used to work for it before becoming disillusioned and joining the Occupy Wall Street movement (she now blogs at https://mathbabe.org/); she noted, near the start of the interview referenced above, that the traders despised their clients – as shown by this quote: “We’re smart money; they’re dumb money.  We are so smart that we deserve their money.”

Financial services organisations advise investors on which products to buy, but this can lead to conflicts of interest with their own pursuit of profit.  Goldman Sachs, for example, recommended a product even though one of its clients “had bet that the value of the securities would fall”; it was accused of fraud and, as reported by the BBC, Goldman Sachs agrees record $550m fine.  Greg Smith, a senior Goldman Sachs executive, drew attention to this conflict of interest in his resignation letter: Why I Am Leaving Goldman Sachs.

Governments have been reluctant to interfere with what they saw as an important source of employment and tax revenue, but the industry ought to be prevented from damaging its customers.  The topic of tightening regulation is discussed below (3.3.4.4).

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