Suppose that all of the money invested in S&P companies’ stock was in funds that charged a 1% management fee each year (this isn’t quite true but 1% is a pretty standard management fee). Now, suppose that the average price-to-earnings ratio at an S&P company was 20:1 (it’s usually slightly lower, but 20:1 is a pretty good approximation). Then for every dollar that an S&P company makes, some financial management fund gets 20 cents. That is, suppose that the total value of S&P companies was 10 trillion dollars. Then there would be about 500 billion in profit and 100 billion in management fees.
Under this model, which isn’t entirely inaccurate, financial services companies take a 20% cut of just about every dollar made in the United States. That can’t be true, can it?
The number that jumps out at me is that at that peak point upwards of half the profits in the entire US economy was in the financial sector. And it’s been near or above a third for most of the last decade. Quite apart from the public policy implications, but rather in the realm of political economy, these graphs provide a revealing look at what the 2005 push to privatize Social Security was all about and what the implications of its success could have been.
The distribution of capital obviously plays a critical role in our economic system. But how on earth can it be so critical that financial firms are making half the profits, given that their primary role is to facilitate profit-making and wealth-creation in other sectors of the economy?
I’m not a hang ’em high anti-bank type at all. But the extent to which the financial sector has quite literally stolen from the rest of the economy is hard to overstate. To hear them complain now about “moochers and looters” is rich indeed.