Overcharged: The High Cost of High Finance

By Gerald Epstein, Juan Antonio Montecino |

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A healthy financial system is one that channels finance to productive investment, helps families save for and finance big expenses such as higher education and retirement, provides products such as insurance to help reduce risk, creates sufficient amounts of useful liquidity, runs an efficient payments mechanism, and generates financial innovations to do all these useful things more cheaply and effectively. All of these functions are crucial to a stable and productive market economy. But after decades of deregulation, the current U.S. financial system has evolved into a highly speculative system that has failed rather spectacularly at performing these critical tasks.

What has this flawed financial system cost the U.S. economy? How much have American families, taxpayers, and businesses been “overcharged” as a result of these questionable financial activities? In this report, we estimate these costs by analyzing three components: (1) rents, or excess profits; (2) misallocation costs, or the price of diverting resources away from non-financial activities; and (3) crisis costs, meaning the cost of the 2008 financial crisis. Adding these together, we estimate that the financial system will impose an excess cost of as much as $22.7 trillion between 1990 and 2023, making finance in its current form a net drag on the American economy.

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Also published on Medium.

Dr. Gerald Epstein is Professor of Economics and founding Co-Director of the Political Economy Research Institute (PERI) at the University of Massachusetts Amherst. Among his recent works is Handbook of the Political Economy of Financial Crises, published by Oxford University Press in 2013 and co-edited with Martin Wolfson.

Juan Antonio Montecino is a PhD student in economics at the University of Massachusetts Amherst. He is a specialist in the areas of economic development, macroeconomics, and finance.