Rent-Seeking in American Financial Institutions - Research Paper Example

Rent Seeking in American Financial Instutions and its Impact on Economic Productivity Rent seeking is a behavior by firms to seek only to make maximum profit without benefiting any other stakeholder such as the customers, the employees or even the society in general. Banks in America have been seen to apply this in the past. The rent seeking behavior has been discussed in this paper with regard to the way it affects the economy. The 2008-2012 economic recession in USA that overflew to the rest of the world also discussed in the context of rent seeking by the American banks. It became clear that the rent seeking behavior has a very negative impact on the American economy. Research Proposal According to Klunover1, rent seeking is a practice in which a party seeks to gain economic gain from others without himself adding value to those from whom he has gained the economic gain. The party in this case can be an individual, or an organization. The organization can be a for-profit firm or a nonprofit firm such as Nongovernmental Organizations, lobbyist groups or even regulatory authorities. In America, financial institutions, and especially banks and mortgage providers have been in the frontline of rent seeking, which has left poor individuals at a marginalized situation. The American economy has for so many years enjoyed high productivity levels compared to other economies. It can be argued that this is what led to the success of the American economy in the past. However, this has not remained the same over the years. Rent seeking behavior has been seen by some of the biggest players in the economy, that is, the American financial institutions. This behavior has left the American public (over 99% of Americans) at an economic disadvantage. Rent seeking by American banks has a negative impact on the American economy and can be said to be the source of the economic inefficacies that have been witnessed in the past, especially the past economic recession in the USA. Methodology The methodology that will be used for this paper is literature review. Scholarly works from different backgrounds will be consulted through their past work to identify how the rent seeking behavior has affected the American economy. Research questions How has rent seeking by American banks affected the American economy? How have the actions or inactions of the government led to an environment where rent seeking by American Banks is possible and profitable to then? How do rent seeking activities especially by the American Banks affect the economy? Literature review Social inequality has been discussed in a number of scholarly studies. From past literature, it becomes clear that social inequality has always been there since the civilization of man. Social inequality manifests itself as a stratification of the society where various strata of the society have varying degree of access to resources. Those who are at the tip of the social strata are able to access the best and the highest number of resources, usually at the expense of those who are at the bottom of the social strata. The most basic evidence or result of stratification is the allocation of individuals to social categories and the socialization of the practices and actions as well as environment that allocate these scarce resources unequally across the social categories2. The rent seeking behavior of the American financial institutions To be able to understand the rent seeking behavior of the financial institutions, it is best to look at the economic recession of the year 20008 and which lasted up to about 2012. Some even say the recession had started even earlier than the official date of 20008 and that it is still there and may continue to be there. In this economic recession, two sorts of evidence with regard to rent seeking behavior of the American financial institution can be identified. The first one is the mortgage scandal which came to be called the mortgage bubble. Says, it became very evident that the practices of the bank were not only unethical in most cases but also illegal in some cases3. They lured a lot of people to take mortgages to own a home, taking advantage of the desire for most Americans to own a home. Specifically, this was with regard the subprime mortgages, which were highly unregulated. Many financial institutions took advantage of the highly unregulated mortgage and financial services sector to give mortgage financing to people, even when it was very clear that these people were not in a position to take repay the loan, the mortgage bubble was to come to a bubble bust and when this happened, it became difficult for these people t be able to repay their mortgages. The inevitable result was that most of them were ousted from their own homes and home foreclosures by the same banks who had tricked the people to take the subprime mortgages came up. This can be said to be rent seeking behavior because of a number of factors. Given that most of the managers who manage these businesses are people with economic acumen, it can be assumed that they knew the inevitable outcome of the subprime mortgage lending, which is that it would come to a crush sooner than later4. They did this not necessarily because they were interested in helping making as many American to become home owners, but because they wanted to have as much economic gain as possible. In this regard, considering that most of the people who had gained subprime mortgages from these banks ended up being in the streets and houseless, it can be argued that it was only in the interests of the banks whose only interest was rent seeking, that is benefiting themselves without benefiting their customers in any way5. This has an impact on the American economy and it is necessary for there to be a good way to manage this issue. As American banks are allowed to rent seek, the American middle class is becoming more and more shrunk and this will mean that the American economy will continue to suffer as many people do not have the access to means of production6. For instance the many people who lost their homes and their life savings are not able to be productive and this has a fundamental negative impact on the American economic productivity. It is not only the mortgage customers who were affected; the many people who lost their jobs are a good exemplar of how the rent seeking behavior of the American banks affects the productivity of the American economy in a negative way. This is especially a good example because these banks, while they were laying off so many employees in the name of economic recession, they were paying big sums of money to their CEOs and directors whose contribution to the economic productivity is minimal7. Yet, even as they did this, they refused to come up with a way to help the so many people who were negatively affected by their rent seeking activities. This is a great example of how the rent seeking activities of the American banks and financial institution not only affect the productivity of the economy but also negatively affect do many people. The second way in which the rent seeking behavior of the American banks can be seen is in their seeking for bailout from government without helping those who were affected. This was despite the fact that many were left homeless and their life savings squandered by banks and banking officials. After the mortgage bubble and after they had thrown out some many poor people out of their homes, they still went ahead to ask for bail out cash from the government despite the fact that these banks already make millions, or even billions of dollars as profit every year8. Due to their political influence, they were able to get the so called bailout money through a government program called “too big to fail”. The too big to fail program was a program by the government to help the big financial organizations by giving them billions of dollars to help them continue with operation. It was conceived in the argument that these firms were too important to the economy and that if they failed, the economy would fail. However, this was questionable in a number of ways. First, there was no evidence that these firms would fail, especially considering the fact that they had made billion of dollars from the subprime mortgage market. Secondly, the ways in which they used the tax payer money that was granted to them by the government. For instance, bank CEOs were given massive bonuses even as millions of Americans were suffering from the illegal actions of the bank CEOs9. As Stiglitz10 says, most of the inequalities issues that are there today in USA are a result of government policy, with regard to what the government does and what it does not do. The environment that has made it possible for the American banks and financial institutions to rent-seek can be traced to government policies. For instance, lack of regulation or in fact deregulation of the financial services industry can be attributed to the rent seeking activities of the American banks and financial institutions. For example, bail out money was offered with no accountability. This meant that money was moved from the taxpayers who are actually productive in the economy, to parties who are not productive in the economy. The effect of this to the economy is that there is less production because those who are productive in the economy are denied the resources to be productive while the same resources are given to those who are not productive to the economy. Discussion It is very clear that the rent seeking activities of the American banks is detrimental to the production in the American economy. Because of this, it is very evident that the ways in which the American banks have been conducting themselves not only declines productivity of the American economy but also affects millions of Americans who are in the lowest tier of the American economy. This creates social inequality and at the same time creates opportunities for future inequalities. For instance, the families that are there in the American society are likely to not be able to come up with the resources that can help their future generations to be in a better economic condition. As a result, it can be argued that the rest seeking behavior of the American banks today will lead not only to social inequality today, but also in tomorrow’s generation. It was also evident that the government is at the center of the ways in which these firms are able to come engage in their rent seeking activities. As a result, while it cannot be argued that the government has all the solutions, it is very clear that that the government has a very huge responsibility and the ability to make sure that the rent-seeking activities of such firms are thwarted. This is very important in order to have a society that seeks to protect everyone and to make sure that everyone, regardless of their social standings are made to pay for their illegal acts. Bibliography Douglas, Massey. 2007. Categorically Unequal The American Stratification System. New York, NY: Russell Sage Foundation. Jerry, Rosenberg. 2012. The Concise Encyclopedia of The Great Recession 2007-2012. New York, NY: Scarecrow Press. Joseph, Stiglitz. 2012. The price of inequality. New York, NY: Norton. Kent, Baker and John, Nofsinger. 2012. Socially Responsible Finance and Investing: Financial Institutions, Corporations, Investors, and Activists. Hoboken, NJ: John Wiley & Sons. Robert, Hetzel. 2012. The Great Recession: Market Failure Or Policy Failure? Cambridge, UK: Cambridge University Press. Wilfried, Eecke. 2013. Ethical Reflections on the Financial Crisis 2007/2008: Making Use of Smith, Musgrave and Rajan. New York, NY: Springer Science & Business Media. Klunover, Doron. 2011. Rent seeking and income taxation with leisure and a work ethic. Ramat Gan: s.n. Thompson, Michael. 2007. The politics of inequality: A political history of the idea of economic inequality in America. New York, NY: Columbia University Press. Western, Bruce. 2006. Punishment and inequality in America. New York, NY: Russell Sage. Read More