Fed Chair Janet Yellen didn’t seem too put off by the idea that Wall Street dominance is weighing down the country.
The central banker was pressed about the theory positing that the growth of the financial sector, over the past few decades, has choked off commercial activity in other industries.
Yellen noted that American corporations have, in recent years, been hoarding money and failing to inject capital into the tangible economy, much to the dismay of policymakers.
“For many years, many American companies have been sitting on a lot of cash, and have been unwilling to undertake investment in plant and equipment of the scale that we would ideally like to see,” she said.
Yellen was asked about the theory, on the so-called financialization of the economy, by Rep. Keith Ellison (D-Minn.) at a House Financial Services Committee hearing on Wednesday.
Initially reluctant to concede any points, Yellen pointed out that improved technology and “globalization” have depressed the wages of the middle class families.
Ellison replied, noting that technological improvements have always been a feature of American life.
“When we went from horse-drawn carriages to cars, people who made horse shoes had to find something new to do,” he said.
“Is it possible that the financial services sector is sort of channeling investment into financial activity and not into agriculture [and] manufacturing services that actually employ people?” Ellison then asked.
The lawmaker also noted that financiers have demanded “outsized returns” when investing in companies that produce tangible goods.
Yellen said that she didn’t have “anything specific” in response to the question and would be “happy to take a look” at the issue, before offering her commentary on firms “sitting on a lot of cash.”
Rep. Ellison brought up the subject matter by pointing to a Rana Foroohar book published last year–Makers and Takers: The Rise of Finance and the Fall of American Business.
Ellison cited a stat from the book, noting that the financial sector comprises a little less than seven percent of the economy and creates four percent of overall jobs in the US, while earning a whopping quarter of all corporate profits.
In 1980, the financial services sector constituted about 4.9 percent of the economy. In 1950, the industry comprised only about 2.8 percent of total US output.
Since the 2008 financial crisis, the sector has only become increasingly dominated by a handful of players. In 2006, the four biggest banks controlled about 28.9 percent of industry assets. By the end of 2015, they held more than 40 percent of industry assets, which themselves had substantially increased in size.
Whether Yellen would actually be amenable to investigate the issue of financialization could be moot. She refused to discuss her future at Wednesday’s hearing when many lawmakers pointed out that her term as Fed Chair is up in 2018. She did note, however, that she would discuss the matter, if President Trump called her and asked her to stay on.
Yellen also didn’t seem generally keen on tacking any further from the laissez-faire approach to financial regulation. She was pressed by Rep. Al Green (D-Texas) about a recent Fed decision to allow the biggest banks in the country to reduce reserves to finance stock buy-backs and dividend increases. Yellen said that she was happy with existing reserve requirements.
“Once those capital buffers are in place, the Federal Reserve has no objection to firms distributing profits as dividends to shareholders or in the form of share repurchases,” she said.
