They didn’t know where to start solving the problem, so they were slow to respond. Regulators could not ascertain how the risks were allocated. An even greater challenge was that securitization chains that seemed to make the entire sector more efficient, distributed risks in a way that no one could fully understand.īanks and other financial institutions were afraid to work with each other because they did not understand the exposure of other institutions. Home loans started to underperform, and the real problem was significant losses, especially on subprime loans. But the second shoe dropped in ’07, ’08 and ’09. The racial wealth gap was small, as was the racial housing gap. It seemed that securitization was helping people buy their first home. One of the biggest drawbacks is that as these chains get longer and more complex, we end up with fragility. There are shortcomings in our middleman economy. The goal is not to eliminate middlemen, but to understand the values they bring and the dangers they pose so that we can achieve a healthy balance. Intermediaries play an important role in making the flow of goods go from them to those who want them, and the flow of money. This does not mean that the current regime is optimal, but it is important to understand that intermediaries are here to stay. The middleman economy didn’t come from nowhere – it wasn’t imposed on us – rather, it was always a response to our demands for cheaper goods and always more convenience. It’s not a naive call to go straight to cut out middlemen, wherever they lie. Instead, they are made overseas and on a scale that justifies the separate production.” 2. “Goods are rarely made in the United States anymore. So, it is no longer happening in one factory, but in multiple nodes that can span continents. Instead, they are made overseas and on a scale that justifies separate production. The goods are now rarely made in the United States. But partly because of their scale, production has changed. They allow for incredible choice and convenience.
They are the two largest revenue producers in the country. Numbers one and two are on Amazon and Walmart Good luck 500. As a result, finding out where the grain was grown in your field is nearly impossible. But they are playing a big role in shaping the overall system. Cargill is the largest private company in the country, and other food giants, such as Nestle, are instrumental in facilitating the flow of food from farm to table. Most farms in the United States remain relatively small, family-controlled enterprises, but there are no middlemen. This has been enabled by commoditization – the standardization veneer that happened with home loans. Most of my cousins in Illinois feed corn and soy to animals in Asia. Today, farmers operate in a globally competitive market. In food, farmers mainly grew crops for local consumption. These two trends of larger intermediaries and longer, more complex supply chains dominated other sectors of the economy as well. We had much bigger banks, much more complex supply chains, and some real gains in terms of access to capital. It facilitated new sources of capital that provided a backbone that led to securitization, where loans were packaged with other loans and put into newly created entities that were funded by investors around the world. They used standardization and data to find out who is entitled to the loan. Not only did they get older, but they had a different way of taking out loans. Suddenly the four biggest banks came to dominate banking.
Then, in the early 1980s, a significant shift occurred as banks began to buy out other banks. They did this through people they knew, to whom they were lending money. They were small organizations taking money from local depositors and using it to make loans to small businesses and homeowners in the area.
It used to be that, in the United States, we had community banks spread across the country. There are a lot of middlemen in our economy, and they play a structural role in shaping the economy. Below, she shares 5 key insights from her new book, Direct: The Rise of the Middleman Economy and the Power of Going to the Source, Hear the audio version-read by Katherine herself-in the Next Big Idea app. Katherine Judge is a professor of law at Columbia University, much of her work is related to banking and finance.
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