Wall Street Versus the Rest of Us

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This article describes one of the many battles underway in Washington in which banks are attempting to limits aspects of the financial reform bill that will cut into their profits. The focus of this article is on the fees that the duopoly of Master Card and Visa charge merchants for every debit card transaction. These fees add up to $16 billion, and merchants pass much of this cost back to consumers via higher prices. Since there is no competition in this market the fees are higher than they would otherwise be. This is just another form of rent extraction that is quite common on Wall Street, where there is little price competition for many of the fees that the banks receive for services provided. The proposed reform would set the fees to the level that has been set in Europe so the banks can't argue that it would not be profitable, it would just reduce their rent extraction. The argument made by the banks is that it is not a battle between consumers and the banks but between merchants and banks. This argument presumes that merchants do not pass much of the cost to the consumer.

The other point made in this article is more bothersome. Just prior to the last recession, 40% of all corporate profits in the US went to financial service providers. Profits fell, of course in the recession, but they are now approaching their prior peak. We have an economy in which a major share of corporate profits go to financial service providers. It is also an industry that is not subject to price competition for many of the services provided. That is one of the reasons why wages are much higher on Wall Street than elsewhere in the economy. It is also one of the reasons why middle class wages have not grown much over the last 30 years. Historically, is has not been good for an economy to have the financial sector represent such a high percentage of the economy.