Overcharged: The High Cost of High Finance

by: Gerald Epstein, Juan Antonio Montecino

July 20, 2016 |
Published Study

Big Finance’s destructive practices and the overcharging of customers will have cost the U.S. economy between $12.9 and $22.7 trillion by 2023. A new report by the Roosevelt Institute co-authored by PERI’s Gerald Epstein and Juan Antonio Montecino estimates these costs by analyzing three components: 1) rents, or excess profits; 2) mis-allocation costs and 3) the costs of the 2008 financial crisis. The authors describe mechanisms finance uses to pocket these rents and suggest policies to reduce these high costs and to reform the financial sector to play a more productive role in society.

After decades of deregulation, the current U.S. financial system has evolved into a highly speculative system that has failed rather spectacularly. To better understand the mechanisms and financial practices that have led to these excess costs, authors Epstein and Montecino show how the asset management industry charges excessive fees and delivers mediocre returns for households trying to save for retirement; how private equity firms grab excessive levels of payments from pension funds and other investors while often worsening wages and employment opportunities for workers in the companies they buy; how hedge funds underperform; and how predatory lenders exploit some of the most vulnerable people in our society. From this bottom-up perspective, we can see more clearly how the levels of overcharging we identified at the macro level actually come about in practice. These excess costs of finance can be reduced and the financial sector can once again play a more productive role in society. To accomplish this, we need three complementary approaches: improved financial regulation, building on what Dodd-Frank has already accomplished; a restructuring of the financial system to better serve the needs of our communities, small businesses, households, and public entities; and public financial alternatives, such as cooperative banks and specialized banks, to level the playing field.

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