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Too-Big-To Fail, Inequality and Quarterly Capitalism—The Big FIX

Bernie Sanders rang in the New Year with a rally in downtown Manhattan renewing his call to break up the big banks and jail executives who break laws. He also distilled the damage done by a predatory unconstrained economy into a single theme: for a long time, the rich have been getting richer as everyone else is mired in wage and wealth stagnation or worse.

Hillary Clinton’s positions recognize these issues as well by calling out the concept of “quarterly capitalism.” This denotes investment in businesses and assets that turn a quick profit while leaving undertakings that pay off big for the broader society over the long haul starved for resources. One long term goal that goes begging is income and wealth equality, but others include basic infrastructure and a sustainable environment that avoids the worst effects of climate change. 

Demos has proposed a policy that combines the best of Sanders and Clinton's ideas while adding a few innovations to make it all work.

The excesses of the financial sector that led to the 2008 crash are byproducts of the intentional transformation of the system that allocates private investment capital. It was changed from a sector whose purpose was to facilitate the growth of the rest of the economy to an independent sector of the economy in which the boldest and smartest could become unimaginably wealthy with almost no risk. Reagan and his spawn figured out that if you shifted assets and undertakings to the private capital sector and simultaneously stripped away all of its duties to the public, the despised government (that is to say, the representatives of the people) could be diminished even further than was possible by squeezing government investment.

This strategy worked. But it also produced an incentive for all businesses to please the financial sector (which doled out more and more of the society’s capital investments} by pursuing quick profits that would show up in share prices immediately. Quick profits feed the voracious trading businesses that came to dominate finance. Quarterly capitalism (and the more general concept, “short-termism”) became the driving force in the economy. 

The wealthy, having the wherewithal to make financial investments, could get richer by compounding short term returns. Everyone else, whose savings (if any) largely consist of their homes and some meagre retirement savings, depended on salaries for their well-being. The incentives of businesses and their financial sector sponsors were to squeeze salaries to improve current profits. A well-paid work force would provide strong consumer base so that businesses and jobs might grow over time, but the quarterly capitalists had no time to wait for that. It is better to send the jobs off shore or use other means to squeeze the workers if your intent is to get rich quick and then get out.

Thus, Sanders’ animus toward the big banks and businesses, Clinton’s concerns over quarterly capitalism and everyone’s desire to reverse growing income and wealth inequality are related at their core.

This is the motivation behind the new Demos policy proposal for a Financial Infrastructure Exchange, or “FIX.” The idea is to shift resources in the economy away from the short-termism of the financial sector trading culture toward longer term investment and returns. It is a policy that directs a small portion of the financial sector’s transactional profits to actual investment in the longest term investments of all, infrastructure and sustainability, shifting capital allocation from short term to long term purposes.

The FIX uses a special type of financial transaction tax. Unlike other forms of the “FTT,” the tax proceeds never leave the investment sector. It cannot be said that savers and retirees will bear the cost of the tax since it will be directed into investments for the benefit of these very investors. The FIX proposal assumes that the revenue moved from short term to long term purposes will be as high as $50 billion per year, but this will ultimately be determined by the specifics of the tax rates and the particular transactions taxed.

The FIX proposal incorporates local and state participation in choosing specific undertakings that are funded. Investors in these undertakings will receive a set amount on top of the returns paid by the sponsors of the projects and enterprises. This will compensate the investors for foregoing the short term returns that quarterly capitalism provides. Importantly, the government will not pick the projects that are funded, nor will it be on the hook if a project or enterprise fails. That is left to investors and the sponsors of the project, not the government.

The entire economy will benefit directly from the improvements to the infrastructure and a secure and sustainable future. In addition, the FIX will generate hundreds of thousands of high-quality jobs over time that will plug a hole in our economy that still drags us down. Inequality will be redressed by enhanced growth and opportunity.

The FIX should attract the support of state and local governments, labor, construction, utilities, basic businesses, environmentalists and the investment community. It may never be supported by the big banks and other financial intermediaries, but then again it is the distortion in the economy that favors the intermediaries who profit from short-termism in investment that is to be remedied by the FIX.