Makers and Takers | Rana Foroohar

Summary of: Makers and Takers: How Wall Street Destroyed Main Street
By: Rana Foroohar

Introduction

Dive into the world of high finance as Makers and Takers explores the dark side of America’s financial sector. From revisiting the Great Depression to analyzing the disastrous consequences of the 2008 financial crisis, this summary exposes how Wall Street manipulates and devastates Main Street. Learn about the complexities of debt, credit, economic bubbles, and the role of financial institutions in shaping lives and the economy. As you explore this compelling narrative, you’ll gain insights into the inner workings of the financial sector and how it has evolved over time, transforming regular businesses into financial players, and the consequences it brings along.

The Great Depression vs. The Crash of 2008

The economic disasters that struck the US in the 1930s and 2008 were characterized by mounting debt, escalating credit, and an economic bubble. Debt and credit both play a major role in the growth of the financial sector, and during both crises, the financial sector had grown to never-before-seen sizes. Credit was also used to covers up income inequality resulting from low wages and soaring investor profits. Additionally, the financial sector was not held responsible for the crises, as the leaders involved continued to work in the sector, unaffected by any legal consequences. The similarities suggest that little has been learned from history.

The Blurred Lines of Commercial and Investment Banking

The Glass-Steagall Act was introduced after the stock market crash of 1929 to separate commercial and investment banking activities. However, bankers found ways to work around these regulations. Walter Wriston introduced negotiable certificates of deposit (CDs) to further blur the lines between commercial and investment banking. CDs were savings accounts with higher interest rates that were used to keep rich people’s money out of personal bank accounts. Credit cards were another blow to the Glass-Steagall Act, invented to loosen credit regulation surrounding credit issuing and rates. Americans’ rising demand for wealth led to the deregulation of interest rates in 1980 by President Carter, allowing banks to offer any rates they wanted. This created complex financial products that were nearly impossible to regulate, from variable-rate mortgages to derivatives. The merger of commercial and investment banking was a result of not just the bankers’ but also the politicians’ roles.

Financial Models’ Effects

Financial models emphasizing shareholder value have brought short-term gains, endangered product quality, and dictated how manufacturers produce goods. Companies prioritize profit over long-term company value, harming the public and endangering lives. In 2010, a Morgan Stanley report requested the pharmaceutical industry to focus on buying out companies and rewarding shareholders instead of researching, which demonstrates Wall Street’s vast influence on decisions that affect people’s lives. The negative effects of financial models have made apparent the relationship between the economy and how finance works, as a flaw in the financial system will harm the entire economy just as pee in a pool will cause contamination.

The Unfair Game of Shareholder Activism

Profitable companies often prioritize paying their shareholders instead of investing in innovation. Shareholder activists make millions by influencing corporate policies to increase their returns. This leads to a system where the rich get richer, and only a small portion of payouts go to regular citizens holding stock. Additionally, most technology used by big companies was developed through government programs, not shareholder funding. The current relationship between shareholders and companies according to the author is a bad deal for the latter, especially when shareholders make money without contributing to the company’s growth.

Big Brands, Big Money

Big brands’ foray into lending and investing is blurring the lines between their primary business and that of banks and financial institutions, posing a threat to the latter. What started as a credit facility for customers has turned into a profitable business, attracting bigger risks and leading to catastrophic consequences like the 2008 crisis. Companies like General Electric (GE) found themselves in a tight spot when their high investment in mortgages backfired. But big brands are not the only ones leveraging financial markets to drive a profit. Banks are also facing stiff competition from companies, as revealed by Goldman Sachs’ smart play with aluminum storage to raise prices artificially. With increasing commonality in businesses across industries, it is getting increasingly challenging to distinguish between core and peripheral activities of companies.

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