This week there was an announcement that GE was going to go back to being an industrial company. I always knew that the company was an industrial conglomerate with sophisticated engine products, lightings and lightbulbs, medical equipments and other industrial products – too many to name. I also knew that GE had a financial component: GE Capital. What I didn’t know was how outsized the financial component was: by 2007, it contributed to 60% of the profits. No wonder GE had to go to the government with its hand out because it was in danger of failing. GE was massively participating in the shadow banking world.
Paul Krugman had a great post concerning the nature of this shadow banking: it was essentially a regulations arbitrage. The value of the shadow banking was that it was a way to make money, and lots of it, in an unregulated state. There was no other value. Think about that. The only value in the shadow banking was its ability to operate outside of regulations and nothing else. It contributed nothing to society. The link to the article is here: “Victory Against the Shadows”.
But GE was just mimicking (or was it leading?) what the vast American business landscape was doing: moving toward all things financial. According to a Huffington article, “in 2001 the financial industry captured slightly over 45% of the profits yet contributed no more than 10% of the value added (WSJ)”. And somewhere I read that the finance sector employed only 5% of the working population. So the American business industry’s definition of value was out of whack. (And this was Jack Welch’s world that he made.)
Is GE’s latest actions a sign of an American movement away from all things financial? I don’t know but I do think it is a good sign that GE decided that true value added was in making products that would make life better for people, or to put it another way, “bringing good things to life.” Hopefully, this is a start of a long road away from financial engineering. Unfortunately, it is going to be a long road because I read elsewhere of a Harvard professor’s lament about the best and brightest still going into the financial industry. Sigh. I had hoped the youngsters would be wiser than we elders were.