TIME stock market

4 New Truths from the Stock Market Crisis of 2015

This is the world we live in post-2008 financial crisis

Smartphones, light fixtures and cheap shoes aren’t the only thing made in China. The next global recession might be, too.

This week’s international market rout, triggered by the biggest fall in Shanghai markets since 2007, has brought nearly every asset class down with it—European markets, U.S. stocks, global commodities, emerging market bonds, and so on. The U.S. has clawed back some early losses on August 24 already, but investors are jittery that the plunge in the Chinese market portends some larger sea change in global markets. Many are wondering if the world is entering a period like the Asian financial crisis of 1997 or even, God forbid, the worldwide slowdown of 2008.

I don’t think either are likely, but here’s what the global market crash is telling us:

1. The global debt crisis of 2008 hasn’t gone away—it’s just moved to China. Lots of analysts like to talk about how much “deleveraging” has been done by Western consumers and companies since the financial crisis. That’s true, but debt, like energy, doesn’t disappear—it just takes on new forms. When American consumers stopped buying stuff after the subprime crisis, China tried to take up the slack in the form of a massive government stimulus program. This meant a major run up in debt: A few years back, it took a dollar of debt to create every dollar of growth in China. Now it takes four times that. The debt-to-GDP ratio in China is a nauseating 300%. (American debt hawks worry about our rate, which is less than a third of that.)

A couple of years ago, that bubble started to burst. The Chinese government tried to stop it, by propping up one market after another, from housing to stocks. But now, having spent $400 billion to buoy overpriced stock markets in the last few weeks, they’ve realized they have to give in to gravity and let the markets fall. That fall is an acknowledgement that the government can’t micro-manage the Chinese economy forever. But investors don’t trust that China is going to be able to move smoothly from a state-run economy to a consumption led one (whatever Tim Cook might say about Apple phone sales in the Middle Kingdom). It’s a shift that only three countries in Asia have ever made—Japan, South Korea, and Singapore.

2. A slowdown in China is now a much bigger deal than it used to be. During the Asian financial crisis of the late 1990s, U.S. growth powered ahead. But the size of the Chinese economy has grown wildly since then. China made up about a third of all global growth over the last decade, even more than the US (which made up 17%). “This represents a major break from the past,” as Morgan Stanley’s chief macroeconomist Ruchir Sharma has pointed out. “Historically, the U.S. has been the single largest contributor to global growth, and a contraction in the American economy has been the catalyst that tipped the world into recession.” Now, it may be China that has that dubious role. While government statistics still say China is growing at 7%, Sharma puts that figure closer to 5%—which may not be enough to stave off a global recession.

3. This isn’t a disaster for the US, but it’s not good. U.S. companies aren’t as exposed to China as many emerging market countries. But U.S. companies do get a third of their earnings internationally now, about twice the rate in the 1990s. A fall in Shanghai isn’t going to tank our markets a la 2008 or push the U.S. itself back into recession, assuming that our own recovery continues at the current pace. But it will mean that we stay basically where we are, hovering somewhere between 2% and 3% growth, with stagnant wages, and not enough steam to turn the current recovery into something more robust. The downturn in China will add to the deflationary effects already at play in the economy, which will make it harder for employers to give raises, and tough to imagine much stronger growth in a U.S. economy made up 70% of consumer spending. That could make it hard for the Fed to hike interest rates in September (which would, in turn, draw out the already large and worrisome corporate debt bubble that has grown to record highs fueled by low-interest rates).

4. The world is still awaiting a true fix to the financial crisis of 2008. China isn’t the only place debt flowed after companies and consumers offloaded it following the subprime crisis. Governments around the world are holding more debt than ever before thanks to their efforts to buoy things post 2008. That means they are out of ammo to bolster the global economy with more fiscal stimulus, or, in the case of the U.S., with more central bank money dumps. Meanwhile, as interest rates rise, the corporate margin debt and share buybacks that have been fueling the market buzz will end, too. “The market hasn’t experienced even a 10% correction since late 2011,” says Sharma. “So, it was vulnerable to some bad news.” The solution now isn’t more easy money, but to create real growth, the old-fashioned way—with big infrastructure projects, more support for the innovative new businesses that create most of the jobs in the country, and so on. Tough stuff, and not something that will happen quickly.

The takeaway: the debt and central bank fueled market boom of the last few years is officially coming to an end. Keep your money in U.S. blue chips and T-bills (they are still the safest thing going). But be prepared for much more volatility, which is already much higher this year than last. And don’t expect anywhere near the kinds of portfolio gains you saw over the last couple of years.

TIME Economics

Trading Halt? Here’s What to Really Worry About in the Markets Now

A lot of unhappy accidents are occurring simultaneously

In markets, as in journalism, three’s a trend. So it’s no wonder that everyone is in a panic about the halt of today’s trading on the NYSE, coupled with the free fall in Chinese markets that has come on the heels of the Greek debt crisis. While the first is apparently a technical glitch, and the latter two are big, long-awaited macro events, the fact that they are all coming together isn’t great timing. Global markets were already on a hair-trigger.

Technical “glitches” are never welcome, but this one is coming at a particularly bad time. Markets have been waiting for a major correction for months now. Why? Because we’re now entering the second major global economic shift since the 2008 financial crisis–the end of the era of easy money. Central bankers have pumped trillions into the economic apparatus and kept interest rates low for an unprecedented period. The expectation until quite recently was that the Fed would slowly begin to raise rates in September, with the hopes of very gently deflating a market bubble that might otherwise pop (valuations of stocks are historically high).

MORE: Here’s What It Looks Like When the New York Stock Exchange Goes Down

But that was before the Greek crisis blew up, and threatened the future of the Eurozone and the political integrity of America’s biggest ally. And then there’s the market meltdown in China, which if it continues will make Greece look like a sideshow. China creates a new Greece every six weeks, and represents the biggest chunk of global growth in the last decade. TIME called the China bubble early on, but the fact that the markets have gone into a panicked slide now, as Europe is struggling and the US is about to change the economic paradigm by raising interest rates, isn’t a stellar combination.

(BTW, China’s crash is due to both market speculation—there are 90 million retail investors in China, two-thirds of which don’t have a high school diploma—and the real economy—debt is a whopping 300% of GDP. For all you need to know on that, check out Ruchir Sharma’s oped in today’s Wall Street Journal.)

What’s the upshot? Whatever correction is coming, US stocks are still a decent place to put our money relative to other regions at the moment. But investors have to take the long view and be prepared for a rough ride. Volatility in the first half of this year has already been greater than all of last year. I predict that when trading resumes on the NYSE, there will be jitters. And then people will go back to worrying about all the really important things in the global economy that they were worried about before the exchange halt.

TIME Economy

Why Greece Matters for Everyone

Like it or not, Greece is a domino that will have ripple effects throughout the rest of the world

Greece is a tiny country. It’s 0.3 % of the GDP of the world. Most private creditors took their money out of the debt-ridden nation years ago. So why is the possible exit of Greece from the Eurozone rocking markets? Because it represents what could be the end of the biggest, most benevolent experiment in globalization, ever.

On Sunday, Greek voters said “no” to Europe’s latest bailout offer. That means that a Greek exit from the Eurozone is now very likely–most analysts are putting the odds at somewhere around 60%-70% at this point. For Greeks, the next few weeks will be chaotic. Banks are closed; last week, people could take only 60 euros at a time out of ATM machines, this week it may go to as little as 20 euros. Merchants have begun eschewing credit cards in favor of hard currency as a cash hoarding mindset kicks in.

Global markets are not surprisingly down on the news and will likely be quite jittery for the next few weeks. It’s not that the economy of Greece itself matters so much–China creates a new Greece every six weeks–it’s that a Greek exit from the Eurozone calls into question the entire European experiment. Europe was always an exercise in faith: 19 countries coming together to form a made-up currency without any common fiscal policy or true political integration seemed like a great idea in good times, but was destined to be fragile in bad times.

MORE: Here’s What Greek Austerity Would Look Like in America

The risk now is that a chaotic Greek exit from the Eurozone starts to undermine faith in other peripheral countries, like Italy or Spain. Watch what their bond spreads do over the next few days. If they rise a lot, it means investors are worried. While ECB head Mario Draghi has promised money dumps to help stabilize these nations and any other Eurozone countries that need help (perhaps we should start calling him “Helicoper” Mario), he can’t stop the euro from falling against the dollar, or keep investors from fleeing to “safe havens” like US T-bills. That might be good for US bond markets, but Europe’s crisis could also impact the Fed’s ability to raise interest rates in September, which until quite recently seemed like a sure thing.

No wonder President Obama and Jack Lew are getting vocal about it all–while this isn’t going to be a Lehman Brother’s style domino collapse of financial institutions (private creditors represent only about 12 % of Greek debt; most got their money out back in 2011 or 2012), there’s little question that Europe’s growth will slow, which will affect US companies and workers. The stronger dollar will also hurt US exporters.

But even more important than the short-term jitters are the longer-term economic and geopolitical impacts of the Eurozone crisis. One of the reasons that Russia has been so aggressive in places like the Ukraine is that Europe is perceived as being weak, unable to make the political integrations that would actually solve this debt crisis permanently. (That would require creating a real United States of Europe–something that requires German buy in.)

MORE: Greece Says ‘No’ to Austerity

The Greeks may think that a “no” vote to Europe has increased their power to bargain for a third bailout, but I think it will be very hard to convince German voters of that (and any deal will have to pass through the Bundestag). Germans simply don’t understand why the rest of Europe can’t be more like them, despite the fact that the math doesn’t really work.

If Greece is left on its own, where will it turn for support? To Russia, China, and any number of countries in the Middle East. Suddenly, you’ve got the stability of the Balkans in play. And as it becomes clear that the future of the world’s second largest reserve currency isn’t necessary a given, that could weaken investment in Europe as a whole, throw the Eurozone back into recession, and undermine the EU on the world stage. A political bloc that can’t guarantee its own currency will also have reduced clout in any kind of political negotiation. Europe’s weakness could be very destabilizing at a time when America’s own geopolitical power has ebbed.

That’s bad news for everyone. Europe is one of the three legs of the global economic stool, along with the U.S. and China, which is in the middle of its own debt crisis. America’s recovery isn’t strong enough to pull the world along. Europe’s debt crisis is not only an economic crisis but also a political crisis–one that poses challenges not just the EU itself, but liberal democracy as the model of the future.

MORE: Greek Finance Minister Resigns

TIME Economy

Here’s the Secret Truth About Economic Inequality in America

Mmmmmoney: Get a grip; it's just paper
KAREN BLEIER; AFP/Getty Images

Once you look at the issue this way, it's hard to think of it any other way

We all know that inequality has grown in America over the last several years. But the conventional wisdom among conservatives and even many liberals has always been that inequality was the price of growth–in order to get more of it, we needed to tolerate a bigger wealth gap. Today, Nobel laureate Joseph Stiglitz, the Columbia professor and former economic advisor to Bill Clinton, blew a hole in that truism with a new report for the Roosevelt Institute entitled “Rewriting the Rules,” which is basically a roadmap for what many progressives would like to see happen policy wise over the next four years.

There are a number of provocative insights but the key takeaway–inequality isn’t inevitable, and it’s not just a social issue, but also an economic one, because it’s largely responsible for the fact that every economic “recovery” since the 1990s has been slower and longer than the one before. Inequality isn’t the trade-off for economic growth; rather, it’s both the cause and the symptom of slower growth. It’s a fascinating document, particularly when compared to the less radical Center for American Progress policy report on how to strengthen the middle class, authored by another former Clinton advisor, Larry Summers, which was widely considered to set out what may be Hillary Clinton’s economic policy agenda.

While the two have some overlap, the Stiglitz report is bolder and more in-depth. It’s also a much more damning assessment of some of the policy changes made not only during the Bush years, but also during Bill Clinton’s tenure, in particular the continued deregulation of financial markets, changes in corporate pay structures, and tax shifts of the early 1990s. During a presentation and panel discussion on the topic of inequality and how it relates to growth (I moderated the panel, which included other experts like Nobel laureate Bob Solow, labor economist Heather Bouchley, MIT professor Simon Johnson and Cornell’s Lynn Stout, as well as pollster Stan Greenberg), Stiglitz made the point that both Republican and Democratic administrations have been at fault in crafting not only policies that forward inequality, but also a narrative that tells us that we can’t do anything about it. “Inequality isn’t inevitable,” said Stiglitz. “It’s about the choices we make with the rules we create to structure our economy.”

One of the big economic questions in the 2016 presidential campaign will be, “why does inequality matter?” The answer–because it slows growth and thus affects everyone’s livelihood–is simple. But the reasons behind it are complex and systemic. Senator Elizabeth Warren and New York Mayor Bill de Blasio were on hand to help connect the dots on that front, with de Blasio calling for more social action in order to “move to a society that rewards work over wealth,” and Warren re-iterating a hot button point that she made last week about inequality and the trade agenda; she believes that Fast Track trade authority for President Obama would allow big bank lobbyists on both sides of the Atlantic to further water down financial reform that could combat inequality, which led the President to call her ill-informed (he didn’t elaborate much on why). Warren noted that the trade deal was being crafted in conjunction with 500 non-governmental actors, 85 % of whom are either industry lobbyists or from the big business sector.

Warren’s mantra about how America’s economic game “is rigged,” ties directly into two of the key takeaways from the Stiglitz report; first, that inequality is all about the political economy and Washington policy decisions that favor the rich, and secondly, that it’s not one single decision–Dodd Frank, capital gains tax, healthcare, or labor standards–but all of them taken together that are at the root of the problem. “Our economy is a system,” says Stiglitz, and combatting inequality is going to require a systemic approach across multiple areas–financial reform, corporate governance, CEO pay, tax policy, anti-trust law, monetary policy, education, healthcare, and labor law. It might also involve revamping institutions like the Fed; Stiglitz and Solow both agreed that the Fed needs to start tabulating unemployment in a new way, perhaps focusing not on a particular number target, but on when wages actually start to go up, which Stiglitz said is the best sign of when the country’s employment picture is actually improving.

Thinking in these more holistic terms would be a big shift for lawmakers used to tackling each of these issues alone in their respective silos. But as Stiglitz and the other economists on the panel pointed out, they are often interrelated–consider the way in which pension funds work with shareholder “activists” to goad corporations into over-borrowing to make large payouts to investors even as lowered wages and profits kept in offshore tax havens mean that long-term investments aren’t made into the real economy, slowing growth. Or how continuing to tie worker’s healthcare benefits to companies makes them virtual slaves, decreasing their ability to negotiate higher wages, not to mention start their own businesses.

It’s a huge topic, and the Roosevelt discussion was part of the continuing campaign on the far left to try to make sure that presumptive nominee Hilary Clinton doesn’t continue business as usual if and when she’s in the White House. Progressives are looking for her to do more than talk about minimum wage and redistribution; they want her to make fairly radical shifts in the money culture and political economy of our country. That would mean a decided split from the policies of the past, including many concocted by her husband’s own advisors, ghosts that Hilary Clinton has yet to publically reckon with.

TIME Economy

The Real Way to Fix Finance Once and for All

Bull statue on Wall Street
Murat Taner—Getty Images

Changing the way financial institutions operate will require more than calculations and complex regulation

We live in an age of big data and hot and cold running metrics. Everywhere, at all times, we are counting things—our productivity, our friends and followers on social media, how many steps we take per day. But is it all getting us closer to truth and real understanding? I have been thinking about this a lot in the wake of a terrific conference I attended this week on “finance and society” co-sponsored by the Institute for New Economic Thinking.

There was plenty of new and creative thinking. On a panel I moderated in which Margaret Heffernan, a business consultant and author of the book Willful Blindness, made some really important points about why culture is just as important as numbers, particularly when it comes to issues like financial reform and corporate governance. As Heffernan sums it up quite aptly in her new book on the topic of corporate culture, Beyond Measure, “numbers are comforting…but when we’re confronted by spectacular success or failure, everyone from the CEO to the janitor points in the same direction: the culture.”

That’s at the core of a big debate in Washington and on Wall Street right now about how to change the financial system and ensure that it’s a help, rather than a hindrance, to the real economy. Everyone from Fed chair Janet Yellen to IMF head Christine Lagarde to Senator Elizabeth Warren—all of whom spoke at the INET conference; other big wigs like Fed vice chair Stanley Fischer and FDIC vice-chair Tom Hoenig were in the audience—agree more needs to be done to put banking back in service to society.

MORE: What Apple’s Gargantuan Cash Giveaway Really Means

But a lot of the discussion about how to do that hinges on complex and technocratic debates about incomprehensible (to most people anyway) things like “tier-1 capital” and “risk-weighted asset calculations.” Not only does that quickly narrow the discussion to one in which only “insiders,” many of whom are beholden to finance or political interests, can participate, but it also leaves regulators and policy makers trying to fight the last war. No matter how clever the metrics are that we apply to regulation, the only thing we know for sure is that the next financial crisis won’t look at all like the last one. And, it will probably come from some unexpected area of the industry, an increasing part of which falls into the unregulated “shadow banking” area.

That’s why changing the culture of finance and of business is general is so important. There’s a long way to go there: In one telling survey by the whistle blower’s law firm Labaton Sucharow, which interviewed 500 senior financial executives in the United States and the UK, 26% of respondents said they had observed or had firsthand knowledge of wrongdoing in the workplace, while 24% said they believed they might need to engage in unethical or illegal conduct to be successful. Sixteen percent of respondents said they would commit insider trading if they could get away with it, and 30% said their compensation plans created pressure to compromise ethical standards or violate the law.

How to change this? For starters, more collaboration–as Heffernan points out, economic research shows that successful organizations are almost always those that empower teams, rather than individuals. Yet in finance, as in much of corporate America, the mythology of the heroic individual lingers. Star traders or CEOs get huge salaries (and often take huge risks), while their success is inevitably a team effort. Indeed, the argument that individuals, rather than teams, should get all the glory or blame is often used perversely by the financial industry itself to get around rules and regulations. SEC Commissioner Kara Stein has been waging a one-woman war to try to prevent big banks that have already been found guilty of various kinds of malfeasance to get “waiver” exceptions from various filing rules by claiming that only a few individuals in the organization were responsible for bad behavior. Check out some of her very smart comments on that in our panel entitled “Other People’s Money.”

MORE: The Real (and Troubling) Reason Behind Lower Oil Prices

Getting more “outsiders” involved in the conversation will help change culture too. In fact, that’s one reason INET president Rob Johnson wanted to invite all women to the Finance and Society panel. “When society is set up around men’s power and control, women are cast as outsiders whether you like it or not,” he says. Research shows, of course, that outsiders are much more likely to call attention to problems within organizations, since not being invited to the power party means they aren’t as vulnerable to cognitive capture by powerful interests. (On that note, see a very powerful 3 minute video by Elizabeth Warren, who has always supported average consumers and not been cowed by the banking lobby, here.)

For more on the conference and the debate over how to reform banking, check out the latest episode of WNYC’s Money Talking, where I debated the issue on the fifth anniversary of the “Flash Crash,” with Charlie Herman and Mashable business editor, Heidi Moore.

TIME

America’s Broken Ladder

Why racial and economic fairness can no longer be treated as separate issues

One thing is clear after the tragic death of Freddie Gray, the young African-American man who was fatally injured while in police custody in Baltimore last month: we cannot fix the problems of economic justice in this country without addressing racial justice. The deck is stacked against low-income Americans–African Americans and Latinos in particular. As a newly released report from a pair of Harvard academics has found, just being born in a poor part of Baltimore–or Atlanta, Chicago, L.A., New York City or any number of other urban areas–virtually ensures that you’ll never make it up the socioeconomic ladder. Boys from low-income households who grow up in the kind of beleaguered, mostly minority neighborhoods like the one Gray was from will earn roughly 25% less than peers who moved to better neighborhoods as children. So much for the American Dream.

This has big implications. Income inequality is shaping up to be the key economic issue of the 2016 campaign. If you have any doubt, consider that both Hillary Clinton and Marco Rubio, who declared their candidacies in the past few weeks, are already staking out positions. Clinton billed herself as the candidate for the “everyday American,” calling for higher wages and criticizing bloated CEO salaries. Meanwhile, Rubio said he wants the Republican Party–which, he said, is portrayed unfairly as “a party that doesn’t care about people who are trying to make it”–to remake itself into “the champion of the working class.”

What neither candidate has done yet is directly connect the recent spate of violence to the fact that the economic ladder no longer works for a growing number of Americans. Raising the federal minimum wage is just a first step. As Thomas Piketty showed in his best-selling book on inequality, Capital in the Twenty-First Century, creating a system of capitalism that more equitably distributes wealth is our biggest challenge now. A few extra dollars an hour will help minimum-wage workers (a group in which minorities are overrepresented), but it won’t address deeper economic inequality. And as a growing body of research from outfits like the Brookings Institution has shown, more inequality means less opportunity. As Brookings senior fellow Isabel Sawhill puts it, “When the rungs on the ladder are farther apart, it’s harder to climb up them.”

The dirty secret of America in 2015 is that the wealth gap between whites and everyone else is far worse than most people would guess. A 2014 study by Duke University and the Center for Global Policy Solutions, a Washington-based consultancy, found that the median amount of liquid wealth (assets that can easily be turned into cash) held by African-American households was $200. For Latino households it was $340. The median for white households: $23,000. One reason for the difference is that a disproportionate number of nonwhites, along with women and younger workers of all races, have little or no access to formal retirement-savings plans. Another is that they were hit harder in the mortgage crisis, in part because housing is where the majority of Americans, especially nonwhites, keep most of their wealth. In this sense, the government’s policy decision to favor lenders over homeowners in the 2008 bailouts favored whites over people of color.

That’s bad news for a country that will be “majority minority” by 2043, according to Maya Rockeymoore, president of the Center for Global Policy Solutions. The U.S. economy continues to be stuck in a slow, volatile recovery. Lack of consumer demand driven by stagnant or falling wages, and decreased opportunity for many Americans, is what many economists believe is behind the paltry growth. Given that 70% of the U.S. economy is driven by consumer demand, it’s a problem that will eventually affect everyone’s bottom line, rich and poor.

How to fix it? We need to think harder about narrowing the gap between those at the bottom and the top. If most people, especially lower-income individuals and minorities, keep the bulk of their wealth in housing, we should rethink lending practices and allow for a broader range of credit metrics (which tend to be biased toward whites) and lower down payments for good borrowers. Rethinking our retirement policies is crucial too. Retirement incentives work mainly for whites and the rich. Minority and poor households are less likely to have access to workplace retirement plans, in part because many work in less formal sectors like restaurants and child care. Another overdue fix: we should expand Social Security by lifting the cap on payroll taxes so the rich can contribute the same share of their income as everyone else.

Doing both would be a good first step. But going forward, economic and racial fairness can no longer be thought of as separate issues.


This appears in the May 18, 2015 issue of TIME.
TIME

How Women Will Fix the Economy

Janet Yellen and Christine Lagarde talk about what's next for the world economy

It’s not often that you get a chance to hear Federal Reserve chair Janet Yellen and IMF head Christine Lagarde interview each other. But I did Tuesday at the “Finance and Society” conference held at the International Monetary Fund in Washington, D.C. The event was unique in many ways; not only did it feature only women speakers, a rarity at financial events (I was a moderator), but it also went head on at one of the most contentious and important topics in economics right now: Why doesn’t the financial system do more to serve the real economy and society at large?

The event was the brainchild of Anat Admati, a Stanford professor and TIME 100 honoree whose book The Banker’s New Clothes is one of the sharpest takes on what’s still wrong with our banking system six years after the financial crisis. About a year ago, Admati told me that she wanted to get a bunch of smart women together to discuss why the global economy and financial system were still so screwed up, not so much because they were women, but because they happened to be the individuals who were actually questioning the conventional wisdom that finance was now in much better shape than before 2008, that the “too big to fail” problem had been solved, and that everyone could just go home and relax (see “The Myth of Financial Reform”). Women have frequently been whistle-blowers in finance; only now are they also among the most powerful people in the industry (aside from Yellen and Lagarde, the conference included many other top policymakers and thinkers), so it was a good idea to get everyone together to discuss the topic.

What the discussion made quite clear is that there’s a lot more that needs to be done to make the system safe. While Yellen said that banks have increased capital and decreased leverage, she also made it clear that “too big to fail” hasn’t been solved and that the Fed is worried about the risks that have been built up into the system because of the “unthinkable” period of low interest rates over the past six plus years, which was itself a response to the 2008 crisis. While she said the Fed believes low rates are still necessary right now to maintain employment and price stability, she also noted that Fed leaders were monitoring the deterioration in lending standards in various areas, like the market for leverage loans, and high-yield debt. As she put it, “equity market valuations are quite high,” and the divergence in monetary policy around the world (the Fed is pulling back from easy money while others, like the European Central Bank, are pouring more into markets) could lead to unexpected distortions and corrections. Yellen called out the “taper tantrum” of 2013 in particular, and noted that not just banks, but also insurance and pension funds might be caught out when rates eventually do rise (her opening speech can be read here).

For her part, Lagarde noted that there are still plenty of risks in the system — they have just migrated to different areas. Nonbanking entities that do finance (known as shadow banks) now hold more risks than major banks, which makes it harder for regulators to see where problems are. Liquidity is a bigger problem than bank solvency, and emerging markets are more likely to blow up than developed ones. Changing financial culture will be just as important to solving these problems as regulation, according to Lagarde, who advocates putting more women in positions of power within the industry, since they tend to be less oriented toward risk taking than men. Lagarde made a point she’s made before, which is that perhaps the financial crisis wouldn’t have happened if “Lehman Brothers had been Lehman Sisters.”

I don’t know about that, but I do think that Lagarde was spot on to disagree with the notion that “banking should be boring.” This CW is often thrown around to indicate the idea that banks should do “plain vanilla” lending rather than complex deals with sliced and diced securities. Fair enough. But as the IMF chief pointed out, “Why should lending to the real economy be boring?” The shifts that need to happen to bring finance back in service to the real economy are myriad and complex. They include changing tax policy that rewards short-term gains over longer-term ones, reforming corporate governance, increasing personal liability, changing the structure of banks themselves and making our system of shareholder capitalism more inclusive. But the original mission of banking — finding new innovations and funding them to create growth in society at large — is anything but boring. The regulatory and cultural journey back to that, which will no doubt take several more years, should be interesting too.

TIME Apple

What Apple’s Gargantuan Cash Giveaway Really Means

Mmmmmoney: Get a grip; it's just paper
KAREN BLEIER; AFP/Getty Images

$200 billion dollars—and it only means 1 thing

Apple’s announcement today that it would increase its dividend 10.6% and give out the biggest chunk of cash to shareholders in history—$200 billion of capital will be returned to investors through March 2017—means one thing and one thing only. The market has topped.

As I’ve written numerous times in recent months, share buybacks and dividend payments of this type don’t signal underlying economic health so much as they indicate a market riding on a financialized sugar high, one built on easy money, cash hording and tax dodging, which will eventually crash. Carl Icahn himself admitted as much to me when I interviewed him back in 2013, for a TIME cover story that looked at his quest to get Apple to give back $150 billion worth of cash to investors. “This market will break,” he said back then, even as he and many others were pushing for America’s richest firms to give investors more of the $4 trillion on their balance sheets (about half of which is held offshore). The only question now is when.

Indeed, one of the reasons that Icahn and others have been able to demand such huge payouts, and that companies like Apple have been able to deliver them, is that the Fed has poured $4 trillion into the market over the last few years, and kept interest rates at historic lows. That’s a crucial part of understanding this massive Apple payout. Despite having nearly 10% of corporate America’s liquid assets on hand, Apple has borrowed much of the money needed to do its capital return program over the last few years, at the lowest rates in corporate history, in order to avoid taking money out of offshore tax havens and paying the U.S. corporate tax rate on it. (CEO Tim Cook has said he would support repatriating some of the money at a lower rate as part of a wider deal on offshore holdings.)

Not only does issuing debt in order to hand over cash to investors save Apple billions, it almost always boosts its share price–buybacks necessarily do that, since they artificially decrease the amount of shares on the market, without actually changing the real value of the company via true strategic investments, like research and development, worker training, or anything else that might bolster the underlying prospects of the firm. More broadly, buyback wizardry underscores one of the great ironies of American business today–the country’s biggest, richest companies have more contact with investors and capital markets than ever before, yet they don’t actually need any capital.

Apple, one of the most admired firms in the world, now spends a large chunk of time thinking about how to create value via financial engineering. This is by no means just about Apple, which is pouring a lot of its wealth into noble pursuits such as green energy even in places like China and some limited factories in America.

But there is a larger uncomfortable truth here that many economists have begun to suspect, on a wide scale, has a lot to do with our permanently slow growth economy. One key part of the theory of “secular stagnation,” which is being bandied about by experts such Larry Summers, is that financial markets are no longer serving the real economy because they funnel so much money away from it. Others go further, believing that financialization itself is a core reason for slow growth and the decreasing competitiveness of U.S. economy in a global landscape.

The biggest economic conundrum of our age–why many companies aren’t investing the cash they have sitting on their balance into our economy in things like factories, workers and wages—turns out to have an easy answer. It’s because they are using it to bolster markets and enrich the 1% via capital return programs instead. A recent paper from the Roosevelt Institute shows that as borrowing to fund paybacks to investors has increased over the last few years has increased, investment into the real economy has decreased.

It’s a trend that has reached a fever pitch in the last decade or so, and particularly the last few years. From 2003 to 2013, the 454 firms in the S&P 500 index did $3.2 trillion worth of buybacks, representing 51% of their income, and another $2.3 trillion on dividend payments, which represented an additional 35% of income. By 2014, buybacks and dividends represented 95% of corporate income, and if the trend continues, they’ll reach over 100% in 2015. The bulk of these buybacks, which sped up following the low interest rate, easy money environment following the 2008 financial crisis, were done during market peaks, belying the notion that such purchases represent firms’ own belief in a rising share price. Many of them were done with borrowed funds (corporate margin debt is at record highs). The buybacks didn’t help make companies more competitive, but they did enrich executives, who took between 66% and 82% of their compensation in stock over the last seven years.

What this means on a practical level is that the claim from corporate leaders about how tight credit conditions, a lack of consumer demand and an uncertain regulatory environment has kept them from investing their cash horde back into the real economy is not the case. William Lazonick, a University of Massachusetts professor who has done extensive research on the topic of buybacks, says that the move from a “retain and reinvest” corporate model to a “downsize and distribute” one is in large part responsible for a “national economy characterized by income inequity, employment instability, and diminished innovative capability.” I couldn’t agree more.

TIME Economy

Hillary Clinton, Marco Rubio and Looking for Answers on Income Inequality

Will the rhetoric turn into real policy?

Income inequality is clearly going to be the key economic rallying issue of the 2016 presidential campaign. If you have any doubt, consider that both Hillary Clinton and Marco Rubio, who declared their candidacies over the last week, are already speaking out about their positions on the issue. Clinton billed herself as the candidate for the “everyday Americans,” criticizing CEOs’ swollen salaries. She also tweeted: “Every American deserves a fair shot at success. Fast food & child care workers shouldn’t have to march in the streets for living wages.” Meanwhile, Rubio told NPR he wants the Republican Party—which, he said, is portrayed unfairly as “a party that doesn’t care about people who are trying to make it”—to transform into “the champion of the working class.”

So will the rhetoric turn into real policy? Certainly, the pressure will be on Clinton to declare her position on minimum wage—she’s said she wants to have “a conversation” about the topic, but when so many states have already passed hikes, it will be hard for her to argue that there shouldn’t be a higher federal minimum wage. But as I’ve written before, that doesn’t solve the inequality problem. Clinton has said it’s unfair when “CEO are making 300 times the salary of their average workers,” but there’s an uncomfortable truth there, which is that many of the compensation and tax policies that allow those types of salaries were structured by economic advisers from her husband Bill Clinton’s administration—people like Robert Rubin and Larry Summers. Is she taking her own economic marching directions from that camp? Or will she go more toward the left-leaning economic ideas that people like Massachusetts Senator Elizabeth Warren have been pushing for.

Hiring former CFTC chair Gary Gensler as financial head of her campaign is a smart move: He’s the only regulator who’s ever been seriously tough on Wall Street. But I’m betting Clinton will remain a centrist Democrat on the economy, and as Politico reported, her Wall Street backers aren’t too worried.

As for Rubio, whatever he might say about helping the working class, when it comes to real policy, he appears to be mouthing the same old Republican “tax cut, balanced budget” line. I really think the Right is going to have to come up with something beyond trickle-down economic logic, which most of the population now realizes is broken, in order to justify the fact that American wages have been stagnant since 2000, no matter which party was in charge, in the face of many a tax cut. How about some trickle-up ideas, guys?

For more on the economic positions of both candidates and how they might play out in 2016, listen to me discuss the topic with the FT’s Cardiff Garcia, and Bloomberg’s Joe Weisenthal on this week’s WNYC Money Talking.

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