How Focusing On Finance Sets Up Companies For Crisis

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The modern American economy is dominated by finance. By size, for example, the finance and insurance industries accounted for 7.4% of US GDP in 2018, up from 2.8% in 1950. Does that not sound like much? In 2013, finance and insurance accounted for 37% of corporate profits. Power comes from profits, and finance is now so powerful that companies routinely hurt themselves to satisfy Wall Street’s demands. A Duke survey of Chief Financial Officers found that78% of them were willing to “give up economic value” and 55% of them would cancel a project with a positive net present value in order to fulfill Wall Street’s desire for “smooth” earnings.

It’s worth pausing for a moment to think about that statistic. More than three-fourths of CFOs were willing to hurt their company to give Wall Street what it wants. That weakens companies and leaves them vulnerable – and heavily financialized economies grow more slowly and are more likely to suffer from financial crises. In Part 1 of this series I wrote about how the most dangerous crises derive from unfounded assumptions. In Part 2 I described how specialization across global supply chains is a hidden driver of crisis. Here I’ll describe how financial thinking leads companies to disaster.




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