Ken-Hou Lin - Divested: Inequality in the Age of Finance

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finance has become an essential fabric of contemporary American life. From how we afford our educations, buy homes, or run businesses, to how we plan for retirement and so much more, finance governs our everyday lives. How did this come to be, and what are the consequences for inequality in American society? This is the question at the heart of Divested. In the process of answering it we explore a range of related questions: How did finance become the most lucrative of all businesses? How has it transformed US corporations? When did every household decision become an investment decision? Most importantly, how has finance shaped the distribution of resources among Americans?

These days, finance is so fundamental to our everyday lives that it is difficult to imagine a world without it. But until the 1970s, the financial sector accounted for a mere 15 percent of all corporate profits in the US economy. Back then, most of what the financial sector did was simple credit intermediation and risk management: banks took deposits from households and corporations and loaned those funds to homebuyers and business. They issued and collected checks to facilitate payment. For important or paying customers, they provided space in their vaults to safeguard valuable items. Insurance companies received premiums from their customers and paid out when a costly incident occurred.

By 2002, the financial sector had tripled, coming to account for 43 percent of all the corporate profits generated in the US economy. These profits grew alongside increasingly complex intermediations such as securitization, derivatives trading, and fund management, most of which take place not between individuals or companies, but between financial institutions (as its functions have become crucial to every level of the economy. The decisions made by households, corporations, and states are all guided by financial markets whose workings are, to most, utterly inscrutable.

And as American finance expanded, inequality soared. Capitals share of national income rose alongside compensation for corporate executives and those working on Wall Street. Meanwhile, among full-time workers, the Gini index (a measure of earnings inequality) increased 26 percent, and mass layoffs became a common business practice instead of a last resort. All these developments amplified wealth inequality, with the top 0.1 percent of US households coming to own more than 20 percent of the entire nations wealtha distribution that rivals the dominance of the robber barons of the Gilded Age (). When the financial crisis of 2008 temporarily narrowed the wealth divide, monetary policies adopted to address it quickly resuscitated the banks and secured the affluents assets but left employment tenuous and wages stagnant.

The past four decades of American history have therefore been marked by two interconnected, transformative developments: the financialization of the US economy and the surge in inequality across US society. This book shows that one cannot be understood without the other. Indeed, the rise of finance is one fundamental cause of the heightened inequality in the contemporary United States. The most damaging consequence of the contemporary financial system is not simply recurrent financial crises, but a widening social divide between the haves and have-nots. To understand contemporary finance is to understand contemporary inequality.

We are not the first to claim that the rise of the US financial sector engendered inequality. In the fall of 2011, protesters occupied Zuccotti Park, only blocks from the New York Stock Exchange, calling attention to the stark disparity in wealth between Wall Street and Main Street. Occupy Wall Street protesters initially demanded the arrest of financiers responsible for the 2008 crisis, a tightening of Wall Street regulation, a ban on high-frequency trading, and an investigation into political corruption. As the movement grew, the protesters demands became more ambitious. The movements well-known sloganWe are the 99%called on the American public to reclaim power and resources from the 1%, that small group of financial and political elites who control the vast majority of American capital. Protesters attributed stark inequality to a revolving door between New York and Washington, or between finance and politics, tipping the balance of political power in the favor of organized corporate interests, allowing ruling elites to prosper while working- and middle-class Americans flounder.

Perhaps the most successful outcome of the Occupy movement is that it underlined Wall Streets role in widening economic inequality between the 99 percent and 1 percent. In his 2012 State of the Union address, President Barack Obama emphasized that a deficit of trust between Main Street and Wall Street warranted the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Pundits including economist Paul Krugman publicly shared the sentiments espoused by Occupy protesters, arguing that the industry responsible for the Great Recession must pay for the damages caused by its greed and excess. Democrats and Republicans alike came to recognize that economic inequality was a paramount concern, and populism arose as the winning ideology in the 2016 presidential election. Still, amid scathing critiques and powerful political movements, the money to be had in financial services swelled and inequality continued to expand.

Of course, the overall connection between finance and inequality feels intuitive. Exactly how finance drives inequality, however, remains obscure. This is in part because finance is an all-encompassing term used for a diverse, interconnected web of activitiesmany of which cannot be adequately explained by even its handsomely paid practitioners. Financial activity is not restricted to individuals participating in banking and investment to make purchases or manage their wealth; large organizations including firms, nonprofits, and governments fund their operations through finance. The providers and consumers of these services are just as diverse, including community banks and credit unions that serve local ventures, global conglomerates that simultaneously operate in retail and investment banking, boutique funds that specialize in niche markets, and nonbank financial institutions such as insurance firms, payday lending, and corporations financial arms. All these financial producers and consumers have different agendas, incentives, resources, and constraints. Furthermore, with money constantly changing hands, contemporary finance conceals how resources are transferred from the have-nots to the haves.