It’s bonus season on Wall Street, and a record-setting 2025 is yielding bigger paychecks than ever for America’s investment bankers, thanks to their hard work doing, well, what exactly? Answering that question is surprisingly difficult and helps to explain many of the nation’s most serious economic and social problems. It all starts, like so many of life’s puzzles, with Mary Poppins.
If you’ve taken an economics course — or if you at least enjoy classic family movies — you probably remember the scene: Young Jane and Michael Banks have come to visit the bank where their father works. When the bank’s chairman, Mr. Dawes Sr., snatches Michael’s tuppence, the boy shouts: “Give it back! Gimme back my money!” Overhearing the kerfuffle, a customer assumes the institution is refusing to return a customer’s deposit. Next thing you know, the bank run is on.
The incident nicely eases economics students into both the complex plumbing of the financial system and the important and unpredictable role of human psychology in markets. But it’s the preceding scene we care about here. That’s the one where the old bankers sing to Michael that instead of spending his tuppence, he should give it to the bank to “invest as propriety demands” in “railways through Africa” and “dams across the Nile.”
“Tell them about the ships!” Dawes shouts to his fellow bankers. “Fleets of ocean greyhounds … majestic self-amortizing canals … plantations of ripening tea, all from tuppence, prudently, thriftily, frugally, invested in the, to be specific, in the Dawes Tomes Mousley Grubbs Fidelity Fiduciary Bank.”
Not the catchiest song, but a compelling account of the economic engine that powered the British Empire and financed modernity: real, honest-to-goodness banking. People gave their savings to bankers. The bankers invested the capital, creating actual productive assets in the real world. Those useful endeavors generated profits, a portion of which were returned to the bankers, who paid some as interest and kept some for themselves, well earned for their consolidation and productive allocation of resources.
Since Mary Poppins’s day, the financial sector as a whole — investment banks, hedge funds, private equity firms, cryptocurrency platforms and all the rest of it — has exploded as a share of the United States’ gross domestic product. It now claims the highest share of corporate profits and attracts the highest share of top talent from top schools, in part by offering the highest compensation. But actual business investment has declined, to an average of 2.9 percent of G.D.P. over the past decade from 5.2 percent in the 1960s, when the film was released.
Unlike Dawes’s Fidelity Fiduciary Bank, a modern investment bank mostly earns its money in a way that not even the bravest lyricist would set to music: providing advisory services, executing complex financial engineering schemes, trading stocks and bonds, managing other people’s money, issuing credit cards and so on. Assets get bought and sold, divided and packaged, and the bank collects fees at each step.
David Solomon, the chief executive of Goldman Sachs, could not sing to young Michael about the many productive uses to which he might put the tuppence because Goldman Sachs rarely invests in anything at all. Fostering economic progress appears to be beside the point.
Less than 10 percent of Goldman’s work in 2024, measured by revenue, was helping businesses raise capital. Loans of Goldman’s own funds to operating businesses accounted for less than 2 percent of its assets. At JPMorgan Chase the figures were 4 and 5 percent; at Morgan Stanley, 7 and 2 percent. Even the efforts at helping to raise capital are misleading, because less than a tenth of it goes toward building anything new. The rest funds debt refinancing, balance sheet restructuring and mergers and acquisitions.
These are symptoms of financialization. That’s the term for making financial markets and transactions ends unto themselves, disconnected from — and often at the expense of — the societal benefits that support human flourishing and are capitalism’s proper purpose. Chief among those benefits are good jobs that support families, and products and services that improve people’s lives.
In a financialized economy, businesses become mere sources of cash, assets to be manipulated and then operated for maximum investor returns. Workers become just another cost, like lumber. Customers are just revenue streams to be tapped.
Financialization has made American businesses less resilient, less innovative and less competitive. It has been a major cause of slow wage growth and rising inequality. It has fueled the loss of manufacturing jobs across the heartland. It has corrupted sectors in which the profit motive was never meant to reign supreme — veterinary practices, funeral parlors, campgrounds, residential treatment services, youth sports, hospitals and nursing homes, even suppliers for volunteer fire departments — consolidating and managing them with ruthless efficiency, squeezing their vulnerable customers and then pointing to the higher cash flow as “value creation.”
It contributes to the breakdown in solidarity among citizens, with disastrous ramifications in the political arena, and weakens national security, with serious consequences abroad. It promotes reckless practices within financial markets that even in recent memory plunged the economy into deep recession. The capitalists driving financialization and promoting its results have become capitalism’s worst enemy. Every consumer and every worker in the United States feels the effects.
When consumers are lured into debt with offers to buy that shirt in four easy payments, that’s financialization at work. When you can’t keep track of all the subscription services needed to follow your favorite N.B.A. team, that’s financialization, too. When you’re no longer allowed to record your own child’s hockey game because an investment group bought the rink, that’s financialization. So is the discovery that your fire department’s software system is being shut down, the replacement will cost several times more, and the wait time for a new truck is now years.
When your local hospital and nursing home get loaded with debt, cut back on staffing and start charging more for worse patient outcomes, that’s financialization as tragedy. When airlines earn more by selling miles to credit card companies than by flying passengers, with consumers footing the hidden bill every time they swipe at the register, financialization has become farce.
The latest wave of supposed innovation attempts to engage consumers in various schemes as financial actors themselves. Cryptocurrency is perhaps the most obvious example, highlighted by top athletes shilling for a soon-to-collapse criminal enterprise and the president of the United States and just-departed mayor of New York both selling “coins” conjured from thin air.
Now, prediction markets are breaking through, with Kalshi recently raising $1 billion at an 11-figure valuation. “The long-term vision is to financialize everything and create a tradable asset out of any difference in opinion,” says Kalshi’s chief executive, Tarek Mansour.
The consumer experience is only the tip of the iceberg. Beneath the surface, stock markets are dominated by hedge funds that let mathematical formulas dictate what they should buy and sell, often relying on higher-speed fiber-optic cables — or, even better, microwaves — and continual spamming of stock-exchange servers to get trades to the market floor first, to eke out minuscule gains on endless activity.
It’s the absurd endpoint of financial nihilism: an entire business model built on gaming the system without knowing or even caring what’s being traded. Along the way, it increases market volatility and risk without producing any larger benefit.
Private equity firms control trillions of dollars, very little of which is invested directly in companies that will use the funds to grow. (Venture capital is the exception to this general rule; that’s real investment in growing businesses, though concentrated in a few industries and places.)
Mostly, those trillions are used to conduct leveraged buyouts, pursuing debt-fueled acquisitions of businesses that can be plumbed for more cash and then unloaded at a profit. The sales are often to other private equity firms, generating fees each step of the way while making the real value of the portfolios ever harder to determine. When firms find no buyers at all, they are now creating new “continuation funds” to buy assets from their own older funds.
Meanwhile, in the exploding multitrillion-dollar market for what’s come to be known as private credit, many of these same firms lend one another the money to fund their transactions. Peek inside, and you find yet more gamesmanship and financial engineering, rather than the creation of value.
The claim is that these firms are better suited for lending to businesses than banks, whose depositors can withdraw their money at any time. But converting short-term deposits to long-term loans is precisely what banks were designed to do.
Indeed, banks are often the source of funding for the private credit firms, which then make loans that regulators have told banks are too risky. These largely unregulated lenders are allowing borrowers who cannot afford to make their interest payments to just add the unpaid amounts to the total debt still owed, avoiding any acknowledgment that the loan is in jeopardy. If the bubble pops, as it will if everyone discovers that the underlying businesses cannot possibly pay back their debts, get ready for the next market crash.
Increasingly, nonfinance businesses have gotten into the game, cannibalizing themselves by making shareholder payouts with the profits they once would have invested in maintaining and growing their operations. Crown jewels of American industry like Intel, Boeing and General Electric all spent big on their own stock to please shareholders while falling badly behind foreign competitors that were focused instead on long-term growth.
The financiers say this bloodletting performs an important function, efficiently transferring capital out of businesses that cannot use it productively, to shareholders who will redeploy it in companies that can. More likely, those shareholders will either spend it, or use it to buy other stocks. Perhaps those recipients of the cash will go and build something? Or perhaps they will buy Bitcoin.
The problem is that the “best use of capital” from the financial sector’s perspective means only the highest financial return. The value of growing vital industries and employing Americans plays no role in the calculation.
The Excel spreadsheets have always seemed to give the same answer: Do not invest in shipyards, or semiconductor fabs, or research and development for a new airplane. Do cut costs, offshore to Asia, increase the dividend or invest in the social media company that could be the unicorn worth billions in a matter of months.
So few resources have gone toward new equipment, toward developing better ways to do things and toward hiring and training that productivity in America’s manufacturing sector — the output generated per hour of labor — has been falling. More workers are now needed than in 2012 for the same result.
This should not be possible in a functional capitalist economy. In the past 20 years, the United States has gone from leading China in 60 of the 64 “frontier technologies” identified by the Australian Strategic Policy Institute to now trailing in all but seven.
American companies have developed cutting-edge artificial intelligence models, but most rely on advanced chips that only Taiwan Semiconductor Manufacturing Corporation can produce. Widespread deployment will require upgrading an electrical grid that’s struggling with shortages of key components and rebuilding the nuclear power capabilities that the nation has abandoned.
Perhaps the most remarkable fact about modern finance is that it fails on its own terms. Mergers and acquisitions tend to destroy value even as they sate the appetites of empire-building chief executives. In 2016, the Harvard Business Review highlighted “the rule confirmed by nearly all studies: M&A is a mug’s game, in which typically 70 percent to 90 percent of acquisitions are abysmal failures.”
Private equity is now underperforming an S&P 500 index fund over three-month, one-year, three-year, five-year, and 10-year periods. When a buyout firm does score big with one fund, there’s little to no correlation with the performance of its next fund.
Hedge funds have consistently underperformed a simple blend of stocks and bonds going all the way back to the 2008 financial crisis. The more that pension funds allocate to these sophisticated, high-fee, “alternative” investments, the lower their returns.
Businesses acquired by private equity firms are five to 10 times as likely to go bankrupt as those that aren’t. For the funds that buy and sell them, that’s merely the price of doing business. For workers and their communities, it’s a catastrophe.
Of course, financialization does create winners, in those places where finance predominates. Financiers themselves, the armies of consultants and lawyers who advise them, and the communities where they live have profited handsomely. You, dear reader, may be among them. Insofar as that profit did not come from producing anything of value, however, it must represent resources extracted from elsewhere.
The Economic Innovation Group conducts a state-by-state analysis of economic dynamism based on factors including the launch and growth of new businesses, the presence of inventors, and people moving in and working. Nationwide, that dynamism fell precipitously over the past 30 years. Making gains were the homes of the financial centers — California, Connecticut, Delaware, Massachusetts, New Jersey, New York, North Carolina, the District of Columbia — and no one else.
When did the financial sector stop fueling the real economy and start consuming it? When consuming it began offering the biggest pay packages. If the surest path to wealth is building useful, community-sustaining businesses in places all across the nation, then the most ambitious and talented among us will follow it, creating opportunities for many others in the process. Consumers benefit, too, as businesses compete to provide the highest quality at the lowest price.
That’s what Adam Smith meant when he wrote, all the way back in 1776: “By directing that industry in such a manner as its produce may be of the greatest value,” a capitalist “intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”
When finance played a supporting role, its success was shared success, dependent upon the rising productivity of workers and the growth and profit of their employers. Bankers and business leaders were more likely to live where businesses operated, giving them reason to care about and contribute to those communities.
Businesses that did succeed used their profits first and foremost to hire and grow. Engineers could expect to earn as much as financiers, which led top engineering talent to pursue industrial and electrical rather than financial engineering, and to live and work in the many places where things were still being invented, designed and built.
This isn’t just nostalgia; it’s fact: Under these conditions, in the second half of the 20th century, America produced broad-based prosperity, constant technological progress and well-functioning democracy.
Financialization, by contrast, has concentrated economic development in narrower geographic corridors for the benefit of a narrower set of people. It has shifted risk from people who have capital, and can easily diversify their portfolios, to workers, who have only one job to lose.
We unleashed these forces on the promise that markets of any and all kind would make the economy more resilient, boost investment and generate prosperity. Instead, we got the opposite. But if foolish policy choices enabled the worst impulses of the financial industry, better policy could set it on a better course — and rewarding actual investment is only the first step.
We should establish regulations to curtail the riskiest and most convoluted financial activities, just as we did with stocks and bonds back in the day. We should stop giving companies a tax advantage for carrying more debt and start imposing a transaction tax to make strategies like high-frequency trading unattractive.
We should reform our laws so that when companies go belly up, workers and their communities get to join the line for compensation ahead of the lenders who financed the mess. We should ban stock buybacks, which were illegal until the 1980s.
None of this would impede the basic functions of an effective financial sector, like helping savers put their money to work instead of stuffing it in a mattress, helping businesses that are building things to fund those projects and maintaining the economy’s plumbing to ensure that capital can flow smoothly through it. All that happened, with better results, when finance played a much smaller role.
High-frequency trading is not necessary to provide liquidity. Lenient bankruptcy laws can encourage productive risk-taking without letting reckless corporate raiders get away scot-free. The surge of real investment now occurring in semiconductor manufacturing and data centers has been funded primarily by corporate profits and old-fashioned bonds, while the emergence of more speculative and exotically engineered arrangements among A.I. companies are already giving rise to concerns of a bubble. The financialized features of the American system are not what make our robust capital markets the envy of the world.
But policy alone won’t save capitalism from the capitalists. That will require a deeper cultural reckoning.
In movies and television shows, financiers take daring risks, outsmart the competition and come out on top. In real life, they promote themselves by funding free-market think tanks, honoring themselves at award galas and endowing sinecures in “applied liberty” and the like, to advance the proposition that anything generating profit must by definition be valuable.
Even critics of the financial industry tend to focus on the worst outcomes — the “lootings” that lead to bankruptcy, the irresponsible gambles, the outright frauds. But the problem isn’t the edge case; it’s the very premise.
Financialization is a grift, a rarified form of bookmaking, of no net value to workers and consumers, the economy, or society as a whole. Let’s treat it accordingly. Economists and the news media can stop using the word “invest” in contexts where no investing occurs. “Speculate” or “bet” will do just fine.
We must be willing to say that the hedge fund managers have no clothes and their parading about is an unpleasant sight for us all. Your daughter has taken a job at Blackstone? My condolences. When the accidental nudists of Wall Street respond that their critics simply lack the sophistication to understand the latest economic fashion, we can all laugh together.
Politicians should condemn financialization as not only harmful but also absurd. That will lose them support from several very rich donors but gain them support from many more constituents. Same goes for university leaders. Who at Harvard, with its mission of guiding students toward “learning how they can best serve the world,” is proud to have renamed entire schools after the hedge-fund managers John Paulson and Kenneth Griffin? Was the university’s endowment not already large enough?
The next step is for universities, along with large nonprofit foundations and both union and public-sector pensions, to put their assets where their values are, redirecting their savings and endowments toward real investment consistent with their own professed priorities. Demand the financiers behave more like Mr. Dawes if they want access to capital, and even the most rapacious among them will vigorously comply — though hopefully without the singing.
While Adam Smith’s economic insights in “The Wealth of Nations” are vital to understanding capitalism’s current predicament, his insights on human nature, in his earlier “Theory of Moral Sentiments,” may be even more important. Man naturally “desires, not only praise, but praiseworthiness; or to be that thing which, though it should be praised by nobody, is, however, the natural and proper object of praise,” he wrote. “He dreads, not only blame, but blame-worthiness; or to be that thing which, though it should be blamed by nobody, is, however, the natural and proper object of blame.” Into which bucket financialization falls determines much about how our economy will perform.
Mr. Cass, a contributing Opinion writer, is the chief economist at American Compass, a conservative economic think tank, and writes the newsletter Understanding America.
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