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We're currently hosting our discussions at Café Walnut, near the corner of 7th & Walnut in Olde City, just across the street from Washington Square Park. The cafe's entrance is below street level down some stairs, which can be confusing if it's your first time. Our group meets in the large room upstairs.

Since we're using the cafe's space, they ask that each person attending the meetup at least purchase a drink or snack. Please don't bring any food or drinks from outside. If you're hungry enough to eat a meal, they have more substantial fare such as salads, soups & sandwiches which are pretty good and their prices are reasonable.

The cafe is fairly easy to get to if you're using public transit. With SEPTA, take the Market-Frankford Line & get off at the 5th Street Station (corner of 5th & Market), and walk 2 blocks south on 5th and then turn right on Walnut Street and walk 2 blocks west. With PATCO, just get off at the 9th-10th & Locust stop and walk 3 blocks east & 1 block north. For those who are driving, parking in the neighborhood can be tough to find. If you can't find a spot on the street, I'd suggest parking in the Washington Square parking deck at 249 S 6th Street which is just a half block away.

DO BANKERS RULE THE WORLD?
ASSESSING CONSPIRACY THEORIES ABOUT BANKS & BANKING POLICY

INTRODUCTION:

This meetup will address arguments commonly found on both the political left & right about the dangers of U.S. banking policies, institutions like the Federal Reserve, and private commercial & investment banking firms. We'll try to sort out the rational critiques of things like irresponsible monetary policy and unethical or illegal banking practices from the irrational conspiracy theories about evil bankers colluding on a massive scale for centuries, controlling all of the world's leaders, and crushing anyone who gets in their way.

WHY DOES PSYCHOLOGY HELP US EXPLAIN FINANCIAL CONSPIRACY THEORIES?

Before we dive into the topics I've listed in the body of the discussion outline, I wanted to make 7 brief points. (I've provided links beneath several points, but you're under no obligation to read them unless you want to.)

  1. Originally, I planned to lead another discussion before this one from 1-3pm on banking policy, but I didn't have time to put together a discussion outline. That means that we're going into this discussion without providing even "Econ 101" type background information on what money & credit are, how interest on loans works, what commercial & investment banks do, etc. We also haven't discussed why most mainstream economists approve of the U.S. having a semi-autonomous central banking system (i.e. the Federal Reserve), issuing fiat currency, allowing fractional reserve banking, etc, or why some heterodox economists disagree with this. We also haven't delved into the details of banking regulations & the relevant laws. Unfortunately, this means that we're going into this discussion of banking conspiracies without a shared understanding of what beneficial & legal banking practices look like and how we can spot harmful & illegal banking practices. We'll just have to do the best we can, but this is something to be aware of.
  2. Studies indicate that the average American's financial literacy is quite low. As part of a longitudinal panel study that surveyed a representative sample of about 20,000 Americans, the economist Annamaria Lusardi asked participants 3 basic questions on interest, inflation, and risk diversification and found only 30% could answer all three correctly. This indicates that at least 70% of Americans probably don't have the ability to understand even the simplest issues in personal finance or economics. It's reasonable to assume the average American could be very vulnerable to conspiracy theories which don't require any math skills to comprehend, and yet provide simple black & white narratives that purport to explain everything wrong with our economy in terms of bankers behaving like the supervillains in comic books & James Bond films.
  1. Psychological studies have found that most people appear to have an instinctual aversion to the idea of businesses making a profit since there's an implicit assumption that we live in a zero-sum world where one person's gain must come at another person's loss. This aversion to profit appears to be especially strong for profit made from lending money at interest which appears to violate instinctual norms of "reciprocal altruism".
  1. Variations in 3 of the "Big Five" personality traits (i.e. Agreeableness, Neuroticism & Conscientiousness) are associated with variations in economic ideology. The more Agreeable & Neurotic you are, the more likely you are to favor altruistic economic policies & be anxious about economic risks, while the more Conscientious you are the more likely you are to oppose redistribution to people you view as "freeloaders".
  1. Differences in personality traits probably play a role in the different fears about the banking system people have depending on their economic ideology. At least anecdotally, it appears to me that fiscal conservatives tend to fear Big Government taxing away their hard-earned income & bailing out banks, and they often resent the Federal Reserve for the hidden tax of inflation. Conversely, fiscal liberals tend to fear a dog-eat-dog world where heartless capitalists & "banksters" exploit the less fortunate with impunity, and they favor government intervention to prevent this.

My educated guess about partisan differences in resentment of bankers is somewhat supported by a 2016 study that did find a partisan split among people who view the American economy as "rigged". Clinton supporters were slightly more likely to say the economy rigged in favor of the rich, banks & corporations, while Trump supporters were a bit more likely to say it's rigged in favor of politicians. (The big split is on economic racism: Clinton supporters were much more likely to say the economy is rigged in favor of white people, while Trump supporters were much more likely to say it's rigged in favor of minorities.)

  1. Conspiracy theories about banking can be understood as a subtype of "folk economics", i.e. the intuitive economic beliefs of people with no formal training. A recent study indicates that when laypeople reject the "neoliberal" (i.e. free market) economic view, it tends to be for one of 3 reasons: (1) fear of the "Bad Invisible Hand" (i.e. market failure), (2) fear of "Government malfunction" (i.e. bad policies), or (3) fear of conspiracies.
  1. These 3 fears about the free market are similar to the 3 ways of thinking about foreign policy disasters we discussed in our earlier meetup: (1) intelligence failures, (2) policy failures, (3) conspiracies. In that discussion, we discussed how conspiracy theories about foreign policy disasters can typically be sorted into 3 categories: (1) MIHOP - i.e. "made it happen on purpose", (2) LIHOP - "let it happen on purpose", (3) Hoax - it didn't really happen. As we'll see, these explanations of disasters transfer over to the banking & finance world as well.

LASTLY, BEFORE WE TACKLE BANKING CONSPIRACIES, WHAT ABOUT THE BROADER ISSUE OF "FINANCIALIZATION"? DO BIG INVESTMENT BANKS EXTRACT MORE PROFITS VIA RENT-SEEKING OR CAUSE MORE ECONOMIC HARM VIA MALINVESTMENT THAN THE BENEFITS WE GET FROM THEIR HELP WITH "CAPITAL ALLOCATION"?

In our last discussion on conspiracy theories about globalization, the first section looked at whether the evidence we have on life expectancy & measures of extreme poverty (less than $1.25/day) supports the assertion that globalization has made most people in the developing world better off. The evidence shows it has, even in spite of "debt trap diplomacy", poor conditions in sweatshops, pollution, and the social turmoil caused by urbanization. We could ask a similar question about the overall effect of banks; for example, by looking at the economic effects of the Federal Reserve or the growth of financial sector since the 1980s. Unfortunately, I couldn't find any good studies on this...

However, I found a blog post from the economist Arnold Kling noting that economists "have no idea how to measure the value created by the financial sector," and that economists’ analysis of the financial sector is "close to 100 percent mood affiliation" (i.e. partisan bias).
http://noahpinionblog.blogspot.com/2013/02/finance-has-always-been-more-profitable.html

I also found a NY Times article where one of America's top economists, Greg Mankiw, disputed the claim that the economy is rigged:

"To say that the economy is rigged... assumes that some small group of oligarchs planned this outcome. Clearly, the wealthy and powerful try to protect their interests, and they sometimes succeed. But the economy is a complex, decentralized system. Many outcomes are under no one’s control. Technological change, for instance, is an emergent process reflecting the decisions of thousands of engineers and entrepreneurs. Growth slows when the pace of innovation falls below historical norms. Inequality rises when the innovations that do occur are used by skilled workers and replace unskilled workers. Such skill-biased technological change, as economists call it, is widely considered a leading cause of the increasing inequality the United States has experienced in recent decades."
https://www.nytimes.com/2016/05/08/upshot/the-economy-is-rigged-and-other-presidential-campaign-myths.html

Over at the University of Chicago's IGM Experts Panel, there's a poll of some of America's top economists that disputed the claim that the rise in wealth inequality in the US since the 1970s is primarily due to the gap between the after-tax return on capital and the economic growth rate. When returns on capital investment (r) rise faster than economic growth (g), that's often an indication that capitalists are extracting wealth from the economy - i.e. taking a "bigger slice" of the economic "pie" as opposed to "baking a bigger pie". It appears most mainstream economists don't think that's happening, at least not on a big enough scale to explain the wealth inequality we see today.
http://www.igmchicago.org/surveys/piketty-on-inequality

The economist associated with the "r>g" explanation of wealth inequality - Thomas Piketty - countered that he doesn't hold this view either. He countered that he actually thinks the major drivers of wage inequality are unequal access to job skills & higher education and a huge rise in top managerial compensation. (These 2 explanations are supported by the majority of the IGM Experts Panel.)
http://economistsview.typepad.com/economistsview/2014/10/no-mainstream-economists-did-not-just-reject-thomas-pikettys-big-theory.html

To those who think that "financialization" is a relatively recent problem, I found a blog post where the economist Noah Smith points out that while finance basically doubled both its GDP share and its profit share since the big deregulation of the early 1980s, the financial sector hasn't just captured an outsized share of profits since 1980; it has done so all the way back to World War 2. He conjectures this is due to socialization of risk and economies of scale:
http://noahpinionblog.blogspot.com/2013/02/finance-has-always-been-more-profitable.html

I realize this material on financialization is pretty technical and doesn't yield any easy answers, but I just wanted you to be aware of how economists think about the "big picture" before we dive into the details of various conspiracy theories.

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