"Stop Blaming Wall Street"

This long and dense article by John Judis gives a history of how the United States' economic and monetary policy has increasingly marginalized the manufacturing industry.

The whole thing is worth reading, and the history is so complicated that I wouldn't even try to sum it up. But here's the bottom line (notice that Judis is criticizing liberals here even though he's pretty liberal himself):

Conservatives blame “big government” for throttling entrepreneurship; liberals tend to take aim at Wall Street. Rolling Stone writer Matt Taibbi memorably described Goldman Sachs as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” Among less inventive critics, the term in vogue is “financialization.” According to author Kevin Phillips, who popularized this notion, financialization is “a process whereby financial services, broadly construed, take over the dominant economic, cultural and political role in a national economy.” . . .

One thing is clear: Financialization, in some form, has taken place. In 1947, manufacturing accounted for 25.6 percent of GDP, while finance (including insurance and real estate) made up only 10.4 percent. By 2009, manufacturing accounted for 11.2 percent and finance had risen to 21.5 percent—an almost exact reversal, which was reflected in a rise in financial-sector employment and a drop in manufacturing jobs. It is also clear that high-risk speculation and fraud in the financial sector contributed to the depth of the Great Recession. But Phillips, Johnson, and the others go one step further: They claim that financialization is the overriding cause of the recent slump and a deeper economic decline. This notion is as oversimplified, and almost as misleading, as the conservative attack on the evils of big government. . . .

Some critics of financialization have insisted that breaking up the banks is the key to reviving the U.S. economy. Charles Munger, the vice chairman of Berkshire Hathaway, has said, “We would be better off if we downsized the whole financial sector by about eighty percent.” It’s certainly true that, if the derivatives market isn’t thoroughly regulated and if reserve requirements for banks aren’t raised, then a very similar crash could happen again. The Dodd-Frank bill goes part of the way toward accomplishing this, though it leaves too much to the discretion of the Treasury, the Federal Reserve, and regulatory agencies.

But, unless the United States takes the necessary measures to revive its industrial economy, radical downsizing of the financial sector could do more harm than good. It could even deprive the economy of an important source of jobs and income. Many mid- and large-sized cities—including New York, San Francisco, Jacksonville, Charlotte, Boston, Chicago, and Minneapolis—are now dependent on financial services for their tax bases. Instead of agitating for breaking up the banks, critics of financialization would do well to make sure that Republicans don’t gut Dodd-Frank.

Why, then, has financialization played such a starring role in explanations of America’s economic ills? One obvious reason is that the financial crash did turn what would have been an ugly recession into a “great” recession. This sequence of events is an almost exact replay of the Depression, which began with a short recession in 1926 . . . . In both cases, the financial crash played the most visible role.

Another reason is the centuries-old tendency in American politics to allow moral condemnation to outweigh sober economic analysis. Picturing bankers and Wall Street as a “parasite class” or as “vampires” is an old tradition in American politics. It goes back to Andrew Jackson’s war against the Second Bank of the United States and to Populist Party polemics against “a government of Wall Street, by Wall Street, and for Wall Street.” And currently it is one of the few ideological bonds between the Tea Party and left-wing Democratic activists. But, just as free silver wasn’t the answer to the depression of the 1890s, smashing the banks isn’t the answer to the Great Recession of the 2000s. The answer ultimately lies in the ability of U.S. businesses to produce goods and services that can compete effectively at home and on the world market.