How Wall Street Hijacked American Business: The Shocking Rise of Financialization

Imagine a world where banks were simple institutions, safeguarding deposits and lending prudently to fuel innovation and growth. For much of the 20th century, this was the case, thanks to regulatory frameworks like the Glass-Steagall Act, which maintained a firewall between commercial and investment banking. This separation created a stable financial environment that supported steady economic growth for decades.

But as the decades progressed, a seismic shift occurred. Financial institutions began to expand their reach, fueled by deregulation, technological advances, and a growing appetite for profit. The rise of complex financial products, such as derivatives, and the increasing dominance of debt markets transformed finance from a servant of the real economy into a powerful master. Today, finance accounts for nearly a quarter of corporate profits, despite employing only a small fraction of the workforce.

This transformation, known as financialization, fundamentally altered corporate behavior. Companies shifted focus from investing in innovation and employees to financial engineering—buybacks, dividends, and short-term stock price manipulation. The consequences are stark: declining research and development, fewer new companies going public, and tragic failures like the ignition switch crisis that claimed over a hundred lives due to cost-cutting and siloed management.

Business education played a pivotal role in this shift. MBA programs prioritized financial metrics and shareholder value, often at the expense of ethics, sustainability, and innovation. Top graduates gravitated toward finance, attracted by higher salaries, reinforcing the cycle of finance-first thinking that permeates corporate culture.

Activist investors further intensified pressure on companies to deliver immediate stock price gains, often demanding trillions in stock buybacks and dividend payouts. While these moves temporarily enrich shareholders, they starve companies of the resources needed for long-term growth and innovation. The rise of non-financial firms acting like banks—issuing bonds and engaging in financial trading—adds complexity and risk to the economy, blurring traditional boundaries and challenging regulators.

The modern financial system's complexity is staggering. The global derivatives market alone is estimated at over $400 trillion, dwarfing global GDP, while the shadow banking sector operates largely outside regulatory oversight. This opacity and risk multiplication create systemic fragility, making another financial crisis a persistent threat.

Yet, amid these challenges, there is hope. Proposals to reinstate regulations like Glass-Steagall, fully regulate derivatives, and broaden corporate governance to include workers and communities offer pathways to a fairer, more sustainable economy. Public support for such reforms is growing, reflecting a collective desire to restore balance and empower the makers who drive real economic progress.

Understanding this story is crucial for anyone seeking to grasp the forces shaping today's economy and the possibilities for change. By recognizing the roots and impacts of financialization, we can begin to advocate for reforms that prioritize innovation, equity, and long-term prosperity over short-term financial gains.