Dear Friends,
It seems to me, the economy has cancer, sectors that are supposed to facilitate business creation and operation are now the ones supported and the real economic actors, (firms that build things and provide services) are now facilitators. I am of course talking about the legal profession and the financial sector. Turning the economic incentives against the creation of businesses and capital expansion of their production. This has had the effect of decoupling wages from productivity, drying up capital available to expand production and start new firms, adding extraordinary costs to doing business and lowering profits for firms the create things. An economy reacts organically to inputs from the actions of it’s various sectors, as such, when incentives become perverted firms need to use more and more creative measures to stay competitive, and are forced to do creative accounting to appear more profitable than they really are. All these negative incentives in an economy result in lower economic outcomes for everyone… except those in the financial and legal services sectors.
The financial services sector of the economy is there to be a conduit from people’s savings to firms looking for capital to start or expand their businesses. The way economists traditionally see banks is that they take in the savings of individuals and firms, paying reasonable interest, amass that capital and make it available to businesses to start new ventures, or expand profitable ones. In this scenario both savers and firms win, a win win. However, today the financial services sector has become the be all end all of the elite. Politicians kowtow to the too big to fail banks, giving them special privileges denied to other sectors of the economy, they have out sized power over the policies of government, there is even a shadow pseudo government agency that explicitly protects them… the Federal Reserve. Instead of being a facilitator of business the financial services sector has become the focus of our economic policy. Wall street versus Main street if you will.
The legal services sector is there to allow self interested people to come to agreements that benefit both parties. It is imperative that when people do business they trust each other. That is impossible without verifiable contracts and standards holding all participants to their word. These important factors in facilitating business cannot be overstated. Sadly, the legal system has bent over backwards to undermine this very noble calling and pervert it to serving lawyers, at the expense of everyone else. Today, contracts are only as good as the lawyers who break them on some absurd technicality, the primary role of attorneys is to bankrupt businesses for huge profits, drive up the cost of doing business by a continual threat of frivolous lawsuits, and keep new possibly disruptive products from the marketplace to protect older less efficient ones who have political favor.
The liver is supposed to filter toxins from the blood. As long as it does it’s work the body is healthy, but when the liver becomes distended and cancerous, it ceases to filter toxins. Instead it adds to the toxin load in the body. In that case the liver has ceased being a facilitator of bodily health and instead has become a drag on the body’s ability to function. The financial services and legal service sectors have become like a cancerous liver and kidney. They don’t perform their function in our economy, like a cancerous liver and kidney cease to filter blood, they only serve themselves. In both cases, a cancerous liver/kidney and perverted financial/legal sector, the body eventually dies… and so does the economy. Until the cancer is removed, allowing them to return to their correct function, the body becomes more and more diseased, and the same is true with the economy.
The proof is in the out sized compensation of those in the legal and financial sectors. The wages of the lawyer far exceeds that of the entrepreneur. The bonuses of the “banksters” is exponentially more than the those who create wealth. From this small example we can see that the lion’s share of profits today, flows to those who are supposed to facilitate business, from those who actually do business. The huge percentage of the total economy of these two sectors, that are supposed to be facilitators, is proof they have outgrown their place and, like cancer, have become a threat to the very existence of our economy. Since everyone wants the most profit possible for their actions, it is clear that the extraordinary wages in the financial sector and legal profession, come at cost to the rest of the economy, imply that those sectors have more than their fair share of power, political and economic, because if they didn’t those profits would be instead kept by those who create things and provide other services.
The result is that our economy, the world over, has become dysfunctional. The financial services sector now only serves itself, at cost to the rest of the economy, it doesn’t fund small business start ups or CAPEX, because taking printed fiat money and investing that money in government bonds is more profitable, moreover, it earns the favor of the political elite. This drives up the cost, and pushes down the return, on those bonds. Lawyers get rich by finding ways to break contracts, drive up legal expenses, suing firms and individuals and otherwise undermining the economy. These two sectors have become cancer in the most alarming sense. Most people understand this, at least subconsciously, and hope it will solve itself, but cancer never spontaneously heals, it only grows. If we don’t cut the cancer out with legal and financial reforms, and prevent it’s recurrence… the cancer will eventually kill our economy.
Sincerely,
John Pepin
