It's not news that the size of the financial sector in the US has grown rapidly, and there is plenty of evidence that this has been a significant driver in the ruinous maldistribution of wealth that is occurring in our country.
This seems on the face of it to be an unstoppable force, especially considering the new makeup of Congress. Since it is sadly very unlikely that the actual regulatory climate will change in the next few years, that leaves only one remaining option to achieve change.
A 2009 Huffington post by Robert Creamer lays it out in stark terms (and things have not improved since):
Over the last several decades, the financial sector has grown relentlessly. It has doubled in size over the last 14 years. During the period 1973 to 1985 the financial sector never earned more than 16% of domestic profits. This decade, it has averaged 41% of all the profits earned by businesses in the U.S. In 1947 the financial sector represented only 2.5% of our gross domestic product. In 2006 it had risen to 8%. In other words, of every 12.5 dollars earned in the United States, one goes to the financial sector, much of which, let us recall, produces nothing.
There is a legitimate purpose to having a financial sector. Fundamentally, it intermediates between having and wanting money in various types of transactions such as loans, purchases, and capital investments. It is the accounting department of the economy.
The "accounting department" analogy illustrates the problem. As a corporation becomes more efficient, applying the latest in technology and work processes, the size of its accounting department, and other overhead functions, should decrease. But in the economy, that's not what is happening. Financial companies and markets are no longer just imtermediating between real needs, they are creating new types of transactions, inventing new ways to profit while generating nothing.
There is only one way that financial activity can consume a growing portion of the total economy, and that is by profiting from some combination of:
- Deceit
- Market-Distorting Muscle such as tilted regulations and monopoly power
This fat appears to be "profit" for the overall economy, but it actually detracts from the real productive activity of the country. I was going to go with a cancer analogy, but it's more like sugar and fat; sweet and appealing until you pay the piper at the scales later. On a family scale it harms people who pay too much for a loan or get too little for their investment; on a macro scale it harms America because it diverts capitalists from building real stuff (because, they will build and sell whatever you will buy).
What that means: It is our patriotic duty to do everything possible to reduce what we pay for financial "services". When we, all of us, pay only for real things of value, then not only are we stronger as families, but our country is stronger.
This is not left-wing stuff. This actually is core capitalist theory going all the way back to Adam Smith and probably before. When parties agree to an arm's length transaction for the benefit of both parties, then the right goods get made and are provided to the right place. It is our duty to demand the right goods.
Deceit is a charged word. It implies lying or factual mistatements. But that's not quite how deceit works in financial services, most of the time. Usually it takes the form of an agreement which contains clauses that they don't tell you about, or don't tell you the significance of. The predatory aspect is when people with good math skills, and lots of cunning, concoct deals that a reasonable person would think is fair unless they look really, really hard at it. When the bad aspect of the deal surfaces, the customer is stuck because they agreed, and in capitalism the contract is sacred, no matter how deceptive the clauses.
It is your patriotic duty to become more skilled at avoiding getting taken for a ride, and helping others in your community to do the same.
Here are some of my favorites:
- Actively managed mutual funds.
These funds take an average of 1.19% a year of your holdings, sometimes a lot more, to "manage" the fund by picking investments. These managed funds do no better than index funds having an expense ratio of about .19%, and the only difference is that you pay more, a lot more, for them. In the case of retirement funds, that extra 1% a year ends up being from 20% (22 years) to as much as 33% (40 years) of your money during the period of time you might hold the money. You earned it! Don't give it away! It is your duty as an American to not pay this money to some guy in a suit with shiny shoes; rather you need to spend it on good real things that help you, hopefully in a great and well-funded retirement.
- X days same as cash
The ultimate gotcha capitalism. It's true, if you comply exactly with the requirements, you might get some free money for a few months, but guess what - you are going to mess up, just once, maybe paying late by just one day, and they will hit you with retroactive 27% interest on the whole amount.
Sometimes it's even worse. Once I needed some dental work that would be a few thousand dollars after my paltry insurance. The dental office handed me a pamphlet from the third party loan company that would loan you the money at 0% interest, provided you made X payments and paid it all off within 2 years. Now, a reasonable person would suppose that if you made all payments on time, you would pay no interest. Zap!!! Making all the payments would result in a balance of $24 after the two years, allowing them to invoke retroactive interest at 20%+. I had to use a spreadsheet to figure out the deceit.
- We don't even need to talk about overdraft fees, late charges, all that stuff. The fact that it is mundane does not make it any less evil. Take late charges personally - anything you can do to keep your eye on this ball. Every late charge that you pay is directly funding the Darth Vaders of the funancial galaxy, allowing and encouraging them to build more financial Death Stars.
- Plastic instead of the cash discount
For years the credit card companies have worked the system hard to make it impossible for sellers to discount cash. The CC companies want their transaction fees. It seems lately that there are getting to be cracks in this headlock. I've been seeing to 5% off at gas stations.
Okay, let's consider that 5%. Chump change, a dollar a fill. But hold on - you are going to have to pay that money in about 30 days anyway, using real cash. So, you are paying 5% for a 30 day loan. That's an effective interest rate of 79% per year. Passing up a lowly 2% discount is a 27% annual interest rate.
This is not just about saving some money for you. I mean, it is, but just as importantly, we all need to STARVE THE BEAST!
The beast is not government, no matter what we keep seeing in mainstream media. We have found the beast that is truly feeding on our flesh - not so much corporations as such (although there is plenty to lament in corporations that make actual things), but especially corporations that somehow accrue money through a signature on a 79-page incomprehensible contract, a binding agreement entered when someone clicks on "I accept" on a web site, or captured from you by someone who is simply a whole lot better at math than most people and has no compunction about using that fact to harm you.
I am a pathalogical saver. We're blessed by having the ability to stash money every month, and we do. I approach this with a passion that somehow goes beyond the dry numbers. I finally figured out why: We are all programmed deeply inside to defend our families and our tribe against the worst threats. That's part of why it has been so easy to convince Americans to go along with so many misguided actions overseas and at home. We all think we are defending our families.
But I know that most serious threat to my family, measured in both likelihood and severity - it is the people who come for my house some future day because they found some way to foreclose even though I made all my payments; it is the insurance company who finds a way not to pay for life-saving surgery. It is the people who, through taking our money, take part of our lives.
Please take action:
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Find one bad transaction you are repeatedly doing today, whether it's paying too much in fees in your retirement accounts, overdrafting, or anything else,
and repair it.
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Teach your children about this and how much it matters
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Help your friends and extended family make well-informed decisions
Peace,