From Higher Education to Water Treatment, Financialization is Harming Our Economy

By Carrie Sloan |

One of the standout features of our increasingly financialized economy is a systemic disinvestment in public goods such as infrastructure and education. As the finance sector hoards the wealth our economy produces, wages stagnate, corporations and the wealthy avoid contributing their rightful share in taxes, and money and power coalesces at the top, revenues at all levels of government have declined.

Correspondingly, we have witnessed a turn to austerity measures including big cuts to the budgets of the entities that provide vital public goods, from water to public education. This is no accident- it’s a feature of a rigged economic system in which austerity is the price most of us pay for the wealthiest to get even wealthier.

Austerity creates vulnerability. As the stewards of public goods strive to meet the needs of the constituents they serve- from water customers to students attending public colleges- without breaking their shrinking budgets, they can become susceptible to financing schemes peddled by the financial industry.

Banks have pushed a variety of financial products, such as interest rate swaps, auction rate securities, and capital appreciation bonds, that are risky to borrowers and invariably deliver massive returns to the financial institutions selling them. Many of these deals have gone horribly wrong for public borrowers, draining even more money out their diminishing budgets.

The combination of austerity politics and a financial industry with an increasingly predatory business model has created a vicious cycle of decreased revenues, budget cuts, increased reliance on borrowing, the use of risky financial products in an attempt to save money, big losses on those risky deals, and more austerity.

Roosevelt and ReFund America Project recently released a report about the impact of toxic financial deals like interest rate swaps on colleges and universities across the country. We looked at 19 schools, from community colleges and public four-year universities to elite private schools, and found swap cost them a combined total of $2.7 billion.

Swaps, which were intended to create a synthetic fixed rate on variable rate bonds, were pitched to borrowers as a way to borrow more cheaply. But these deals turned out to be disastrous for many colleges- just as they have been for the cities, school districts, state governments, transit agencies, and water departments that also got mixed up with them.

The public colleges we looked at in our report – like public colleges around the nation- have all seen huge decreases in state funding in recent decades, and they have all tried to bridge the funding gap by raising fees and tuition on students. This disinvestment in a vital public good parallels decreases in funding for other vital infrastructure- most notably, public water and wastewater systems.

Federal funding for local water infrastructure projects has decreased almost fourfold in the last 3 decades. At the same, water systems have been aging and deteriorating to the point where most of the nation’s water infrastructure is desperately in need of repair or replacement. The problems include sewage leaking into waterways, an estimated 25% of drinking water lost to leaks, and crumbling pipes leaching lead into drinking water.

Many local water systems, facing decreased federal funding and crumbling systems, have issued bonds to invest in infrastructure projects- sometimes as part of complying with EPA consent decrees issued after an investigation of, for example, wastewater pollution of a local body of water.

Like the colleges in our recent report, many of these local water systems got stuck in risky deals that proved to be financially disastrous, leading to huge spikes in water bills for customers, water shut offs for people who couldn’t pay their skyrocketing bills, and even less money for necessary projects.

In Detroit and Baltimore, people have even lost their homes to foreclosure because of late water bills. In some cases, the end result has been a move towards private control of the water systems as a “solution” to the financing crisis. This is classic disaster capitalism.

We are seeing this across our economy. The affordability and accessibility crisis in higher education is paralleled by similar crises in water infrastructure and other forms of public goods we rely on to make our country work. These crises have direct roots in the financialization of our economy and the power the financial industry has over our political system. The consequences affect all of us.

The good news is that we have an opportunity to build an intersectional movement of ordinary people to demand a more just and fair system and to hold Wall Street and the politicians they control accountable to we the people.

Carrie Sloan is the ReFund America Project's Senior Research Analyst.