What is Good for Banks is not Good for the Economy, Harvard Economics Review, October 2015.

Economists and analysts of the 2007-2009 financial meltdown usually take the domestic housing and securities markets as the point of departure in their prognoses of the crisis. While refusing to look beyond the apparent roots of the malaise, they continue to begrudge the decline in housing prices as the bedrock of the financial crunch. And, that, of course, makes perfect sense. With a housing bubble bursting by the end of 2006 that forced the prices of assets down, a deregulated credit market running on an unbridled debt explosion, and numerous banks plunging into failure and insolvency, the ground was rightly laid for the suspicion
that the roots of the plague ought to be investigated in the housing and securities markets. But to accurately diagnose the origins of today’s economic depression, one should look beyond the U.S. financial and housing markets. The fundamental source of the crisis today—both in fnance and beyond—is the declining economic vitality and dynamism of the advanced industrialized countries, especially the
United States. Contrary to the mainstream account, the crisis is deep-rooted in the zero-sum game that the rapid development of some newly emerging economies abroad has entailed for the U.S. economy as well as the advanced world in general. Stemming from intensifying international competition, U.S. manufacturing frms had to struggle ever more with lower rates of proft, which led to system-wide economic distress. In what follows, I explain how the origins of the crunch should be probed in the intensifying competition in
the global manufacturing market, which afected the fnancial sector at home.

It is no longer an esoteric reality that since the 1970s, the American economy has seen a reconstructing so fundamental that its magnitude is hard to overstate. We hear much about fnancialization of the economy, which has permitted the stratospheric ascent of fnance. Te “Old Economy” of complex machinery and laborious manufacturing has given its way to the “New Economy” of fnance, sofware engineering and information technology. Quibbles among economists notwithstanding, the unmistakable broad trend is that the largest share of the aggregate profts in the economy—estimated to be roughly 40 percent of total profts—is generated in the fnancial sector (see Figure 1). Tis datum is ofen taken as the strongest evidence of the salience of fnance in the U.S. economy.

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