Transforming the U.S. Financial System: Equity and Efficiency for the 21st Century

Transforming the U.S. Financial System: Equity and Efficiency for the 21st Century

Transforming the U.S. Financial System: Equity and Efficiency for the 21st Century

Transforming the U.S. Financial System: Equity and Efficiency for the 21st Century

Excerpt

GARY A. DYMSKI, GERALD EPSTEIN, AND ROBERT POLLIN

The U.S. financial and monetary system is broken and needs to be fixed. The collapse and bailout of the savings and loan industry--which, as of the latest government estimate, will cost U.S. taxpayers $300 billion and has crippled what was once the most accessible source of housing credit for nonwealthy households--is the most visible sign of failure. But problems in our financial system are far more extensive than this. The banking industry, for example, has also experienced unprecedented instability. Over the 1980s, banks failed at an average annual rate of 78 per 10,000, whereas for the period 1947-1979, the annual failure rate averaged 4 per 10,000. These weaknesses in lending institutions have been matched by rising levels of defaults and bankruptcies by nonfinancial businesses and households. Real interest rates, meanwhile, were sustained at historically high levels throughout the 1980s and early 1990s. From 1980 through 1989, long-term rates averaged 7.2 parcent, whereas from 1947 through 1979, the average figure was 1.2 percent. Even between 1875 and 1941, an era prior to the development of extensive government stabilization policies, the average long-term rate of 4.4 percent was significantly lower than for the most recent period.

More important still, our poorly functioning financial system has had a major impact on the overall performance of the economy. It affects our job prospects and chances for starting businesses. It is a major determinant of our income level, our opportunities to obtain decent housing, and the security of our retirement. It affects the long-term growth and stability of the economy and, thereby, the prospects for our children and future generations. It also has a major influence on who gets what from the economy--whether economic well-being will be distributed widely and fairly or, as has been the recent trend, increasingly concentrated among the wealthy few.

For generations, prevailing economic theory claimed that the financial structure was irrelevant to the performance of the overall economy. We argue just the opposite. The financial structure is the economy's circulatory system: it transmits material sustenance through the economy just as our bloodstream distributes oxygen, hormones, and cell-building nutrients through our body.

This book seeks to accomplish two basic tasks: to explain the underlying . . .

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