Makers and Takers summary

After the stock-market crash of Black Tuesday, 29 October 1929, the Glass–Steagall Act was enforced. The new legislation separated the commercial and investment activities of American banks to protect the public from their risky trading.

Despite these regulations, the lines between commercial and investment banking remained blurred. It wasn’t long before bankers began to use this to their advantage again.

If someone pees in a pool, all the water becomes contaminated. The same goes for the economic system – what goes down in finance affects the waters of the entire economy. This is what happened when financial models for maximizing profit were introduced.

In finance, the focus on increasing shareholder value has led businesses to prioritize short-term gains over long-term company value, cutting back costs and endangering the quality of their product in turn. General Motors, for instance, had to recall hundreds of thousands of vehicles in 2013 because of a switch failure.

Imagine asking a friend for a dollar. They agree, but only on the condition that you pay them back two dollars later. Bad deal, right? Well, this is essentially what the current relationship between shareholders and companies looks like.

The benefits of profitable large companies primarily go to their shareholders. Back in the 1980s, shareholders who actively tried to influence corporate policy to increase their returns were branded corporate raiders. Today, they’re simply called shareholder activists and make millions.

In recent decades, big brands have become increasingly involved in lending and investing – activities that were traditionally the work of banks and financial companies. It’s getting harder and harder to tell what a company’s core business really is.

Today, most large companies have a lending unit. Originally established to offer credit to customers who wanted to purchase one of their products, lending units became increasingly profitable over time. With each success, financial departments grew increasingly daring and began taking greater risks.

Imagine having your house taken from you by somebody who then demands you pay them outrageously high rent. This, in a nutshell, is what happened both before and after the 2008 financial crisis. As banks bought up houses and rented them out, the financial sector began to benefit from the housing crisis at the expense of the average citizen.

Following the 2008 crisis, both home sales and rent prices skyrocketed in the United States. You could read this trend as a sign that people are getting back on their feet and are buying properties again.

Just as we ask caretakers and educators to look after our kids while we’re at work, we also expect the government to watch over the financial system. After all, it’s their responsibility. So why is it so poorly controlled?

After Lehman Brothers fell in 2008, politicians seemed determined to reform the financial sector. Eight years on, only a handful of reforms have been ratified. In 2014, a few lines of legislation were added to the federal spending bill.

Before regulations in the financial sector were loosened, the sole purpose of finance was to support business and economic growth. In an age when companies have become banks and vice versa, how can we get finance to once again boost regular business?

The first step is reducing the complexity of banking and financial regulation, which will cut risk-taking. Every day, millions of financial transactions take place with a total worth of $81.7 trillion. The financial system has become so sprawling and convoluted that it’s impossible to oversee. Banks like Citigroup are themselves so complex that even their own boards struggle to supervise their activities.