Rana Foroohar on How Finance's Growth Is Bad for Business
Rana Foroohar speaks at the 2016 Concordia Summit - Day 1 at Grand Hyatt New York. (Riccardo Savi/Getty Images)
How did finance — once a sleepy profession concerned with allocating money to businesses — emerge as a major industry in itself? And what were the consequences for the American economy? These questions form the basis of Rana Foroohar's new book Makers and Takers, which argues that finance's rise has been bad for business — and the country as a whole.
Born in Indiana to a Turkish immigrant father and a Swedish/English mother, Foroohar has worked as a financial and business journalist since the 1990s, including stints at Forbes, Newsweek, and Time. In March, she begins a new post as global financial columnist at the Financial Times.
In this conversation with Asia Blog, Foroohar discussed how she fell into journalism, why she honed in on the finance industry, and what disturbs her about the Trump administration. The conversation has been lightly edited for length and clarity.
How did you become interested in journalism and covering the news?
I’m actually a failed pre-med student. (Laughs). I attended Barnard College and majored in English Lit and did the pre-med curriculum. But I decided it wasn’t for me, and fell into journalism accidentally as many people do.
I got a job at a magazine straight out of college and really fell in love with the people. Journalists are very curious and compelling people to be with on a day to day basis. Also, I have a short attention span and tend to metabolize experiences quickly, so the pace of journalism suited my mindset and metabolism. So things took off from there.
I got into covering business because one of my first jobs out of school was at Forbes. I really learned my business chops there — it was kind of like getting an MBA.
Then I moved to a couple of other places but ended up at Newsweek, when the Graham family, which used to own the Washington Post, still owned it. It was a big hub at the time for foreign correspondents — it was known as a foreign correspondent’s magazine. Maynard Parker, who was the editor at the time, was a longtime foreign correspondent himself, and it was just a great place to cover foreign affairs and international news.
I ended up working on the foreign desk for Michael Elliott, who passed away recently. He was a real mentor to many of us who worked in foreign affairs. I eventually went abroad, taking a brief sabbatical to work in London in the financial sector, and then I went back to work for Newsweek as a foreign correspondent in Europe and the Middle East.
Then I joined Time, also as a European economics correspondent, and returned to the United States in 2007, right before the financial crisis, and ran international economics first at Newsweek and later at Time.
What kind of insight did your sabbatical in the financial sector give you for your career as a journalist?
It gave me tons of insight. I left Newsweek briefly in ‘99, which was an interesting time, as there was a big tech boom going on in the States which we now know became a bubble. The same thing was happening in Europe, actually. I was thinking of going abroad anyway to take a reporting job in Frankfurt, Germany for Newsweek to cover the introduction of the euro.
Some folks who were setting up an incubator funded by Citigroup approached me to set up pan-Europe media deals for them. I frankly could see that it was a bubble economy, but I thought that the experience of working within the industry I was covering would be really invaluable — whether I decided to stay in finance or business or go back into journalism.
In terms of what it taught me, two things: It made me in some ways even more skeptical of anything I’m being told by a business person when I’m reporting, but it also made me much more appreciative of anything a business is trying to accomplish. I think journalists covering business have no idea how difficult it is to get anything done. There are so many moving pieces within the global business landscape, particularly with the pace of technological disruption these days. That anyone that can accomplish anything is a big deal, so I have a lot of respect for people in the industry.
Your book Makers and Takers describes how the financial industry evolved from being a tool primarily used for allocating capital to various businesses to being a major industry in itself. Why did this shift happen?
There have actually been many periods of “financialization” over the last several hundred years. But the most recent period dates from the late 1970s onwards. I start the narrative of my book from the deregulation of interest rates, which happened under the Carter administration. It’s interesting because a lot of people associate financialization with the Reagan administration — this 1980s, wheeling and dealing, “greed is good” culture, and you know the robber barons of that period have re-emerged as “activist investors.” There is a lot that happened under the Reagan administration, but the deregulation of interest rates actually happened under Carter. And even though it wasn’t a bad policy decision, it opened up the door to a number of shifts that made finance the tail that wags the dog.
Before, finance had basically served business, and later, as capital markets were deregulated and globalization allowed more and more capital to flow into the U.S., there was this glut of finance that started to grow. Financialization took off as finance became bigger, and many other metrics of business health began to deteriorate: The amount of R&D that companies were spending as a percentage of their revenue declined, the number of startups per capita declined, and finance, which had these really high profit margins, really became the name of the game.
A couple of statistics that I find really telling: The financial sector today is about 7 percent of the U.S. economy, creates only 4 percent of jobs, but takes a quarter of all corporate profits. So that gives you a sense of how incredible the industry is in terms of its power in the economy and its monopoly share within the corporate sector. The other statistic: Today, only 15 percent of the capital flowing out of big financial institutions actually ends up in business investment. That’s a real shift. In the ‘70s, most of the money coming out of U.S. financial institutions would have gone into business investment.
Did the financial crisis cause financial journalists to become more skeptical of the industry in the years since? How did it change the tenor of coverage?
On the surface, coverage has become more skeptical. But I gotta say: I don’t see a lot of business journalists who actually dig really deep in terms of what’s going on, and I think this is a real problem in the industry. In general, the hollowing out of media and the problems in the media business model have put a lot of pressure on journalism. And frankly, business journalism was never all that sophisticated.
There’s a handful of journalists, many of them ex-financial analysts, or people who really come up through the trenches. A few people I would point to are folks like Gretchen Morgenson of the New York Times or Gillian Tett of the Financial Times who really understand the industry, but a lot of people are just very skeptical at a certain level and I think that creates a blowback. Financial types can say, well, “look at this journalism there — it’s really shabby.”
One of the things I wanted to do in my book was dig really deep and say, “Look, we have a narrative of what happened in a crisis, and that narrative is wrong.” Many times we pointed blame at poor homeowners or credit agencies, and it’s very surface level things. What I think has happened is that we’ve had an entire 180-degree shift in our economy where the financial sector has not only captured business (it now controls what business does. There is now a lot of pressure from Wall Street on businesses to make short-term decisions that may not be in the company’s best interest). But the financial sector through the power of its lobbying and through the cognitive capture of folks from Goldman Sachs going in and out of Treasury, has created a narrative that what is good for Wall Street is good for the economy, and that’s not factually true, and that’s what I’m trying to get out of my book.
Do President Trump’s rhetoric and policies about Muslims and immigrants challenge the ability of journalists who come from those backgrounds to remain objective?
I think that any good journalist regardless of ethnicity should always feel a huge sense of responsibility for digging deep and covering any administration well, and I would have felt this way even if Hillary Clinton had been elected president — in fact, I’ve been quite critical of Clintonian policies in my book.
I think of my own personal coverage of the Trump administration in two ways — there are really two stories here. One is a social story and a story about civil liberties and policies around immigration. And the other is an economic story.
And there are points of intersection between the two and one of the points I’m interested in is immigration. It’s fascinating to me: The Trump policies around immigration, that we should close the door and become a more defensive nation, are so antithetical to his other stated objective, which is jumpstarting U.S. growth. Because if you think about it, immigration is the key difference in the fact that the U.S. has a higher projected growth rate than most other rich countries. Immigrants and children of immigrants, many of whom are Asian, by the way, have started two-thirds of Fortune 500 companies in this country. Small and mid-sized businesses started by immigrants have a higher growth rate than the national average. Immigration is the key difference why the U.S. has close to a 3 percent trend growth rate, compared to Europe which is closer to 2 percent. The idea of shutting down immigration at either the high level or the low level makes no economic sense. This is an issue I’m planning to cover very closely and am covering in my debut column at the FT.
Do you think the Trump presidency will see a realignment of conservative politics toward the Steve Bannon-inspired, anti-globalist ideology? Or will it be a traditional small-government Republican administration?
I think that there are two wings in the administration. One is a classically Republican, laissez-faire, “we need to roll back the regulations” — the Carl Icahn, Steve Mnuchin, Anthony Scaramucci, part of the party. And then there’s the Steve Bannon wing, which I think is the wing that has power right now. And that’s disturbing because that view is much more ideological; a view of a country that is a citadel, that is siloed, that is shut off from the rest of the world.
I have to say — I give Trump, just as I give [Bernie] Sanders, credit for starting the debate about fair trade and the status quo of globalization. There are people who feel that it hasn’t worked out for them. I don’t understand what Steve Bannon’s vision for America is, economically. But nobody has articulated what this more closed-off America is going to look like.
Socially, it looks very disturbing to me. I’m not a practicing Muslim but my father is a Muslim. I’ve been very heartened by the way that many communities in the U.S. have stood up and said, “This is not America, this is not what we do.”
Donald Trump should be thanking his lucky stars that highly educated immigrants like my father came to this country and started small businesses — my dad employed dozens of people over the course of his career. He worked as a plant manager and raised children that are now in high tax brackets, paying lots of money into the treasury of this country. We should be welcoming people like that. And it’s very disturbing that the anti-immigration narrative has suddenly become the proxy of a more legitimate conversation about how globalization works.