Wall Street is catching hell from the left and the right during this U.S. presidential campaign.  “No one should be too big to jail,” notes Hillary Clinton, and Donald Trump believes “the hedge fund guys get away with murder.” Yet finance performs essential functions that businesses and citizens need — from safekeeping our money to facilitating payments to mitigating risk.  Perhaps the most important is what is known as “intermediation,” or, as the third Lord Rothschild put it, “taking money from point A where it is, to point B where it is needed.”  This can mean pooling savings to fund a mortgage, helping build an efficient power plant, or facilitating retirement savings.  In other words, finance is a service business.  Finance provides neither food nor shelter, but without it, we could have neither, at least not at a scale appropriate for the modern world.

So why is there such a strong belief that financial types reap an unfair share of the financial rewards without a care for the rest of us?  Perhaps because finance has lost its sense of purpose, and serves itself at least as much as it does the real economy.

It costs about 2% to move money from point A to point B. That doesn’t sound like much, but it has cost the same 2% since the age of the railroads. In those 130 years, we have invented computers, cars, and telephones; landed people on the moon, eradicated diseases; increased life expectancy. In almost every human endeavor, we have become more productive. Except in finance.

Partially as a result of that lack of efficiency, almost one out of every 12 dollars in the U.S. economy finds its way into the pockets of the financial sector.

This is not to say there have been no efficiencies at all. We have electronic payments, automatic teller machines, affordable mortgages, efficient trading markets, and a host of other improvements. But, the benefits of these efficiencies have stayed within the financial sector. Why? A number of explanations are relevant, but two have pride of place.

First, the number of financial intermediaries has grown exponentially. One study shows that it takes 16 intermediaries to escort your money from A to B. Each intermediary needs to be paid, so that while each transaction may be more efficient, the aggregate is not. This adds up. Consider, for example, that British banks make about $7 trillion in loans each year. But only $2 trillion of that is with non-financial borrowers, or, as economist John Kay terms it, “businesses that do things.”  The remaining $5 trillion is intra-financial sector, and in each of those transactions, finance people get paid. Ultimately, the real economy pays fees on $7 trillion, but gets $2 trillion of service.

The second reason is that there are misalignments between the financial system and the needs of the real economy. For example, there are 79,669 mutual funds in the world. I do not know the optimal number, but I am pretty sure it’s less than 79,669.  Why so many? They serve an important marketing purpose. But the lack of economies of scale makes investing more expensive.  High frequency trading is another example.  Some argue that it increases liquidity in the market. Even if you accept that premise — and my opinion is that it increases liquidity for large capitalization stocks during quiet markets, where and when extra liquidity is needed least — it is hard to see what benefit the real economy gets from being able to trade shares of Apple 3,000 times a minute.

Make no mistake about it: The people who work in finance are largely hard-working and decent. But they work in a system that has become inwardly focused on the needs of the intermediaries. The question is how to realign it so that efficiencies accrue outwardly, to benefit us all.

Here are three pragmatic ideas which can do just that. They, and scores of other ideas, are detailed in our new book, What They Do With Your Money: How the Financial System Fails Us and How to Fix It.

  • Reduce the number of agents: Large asset owners, such as a number of Canadian pension plans, are increasingly making direct investments into “businesses that do things,” rather than going through intermediaries.
  • Make the fees we pay explicit: Markets move on information. Making fees transparent encourages investors and borrowers to select lower cost alternatives. Denmark and Holland passed legislation forcing pension managers to say exactly how much is being taken out of their account — not in percentage terms, but krone and euro. The U.S. Department of Labor estimates that a similar “financial nutritional label” would save U.S. citizens some $1.2 billion a year … and that is just from savers not having to search for the data. That $1.2 billion in savings doesn’t even include what would be saved from our making more informed decisions.
  • Stop advantaging high frequency trading by providing it faster, differentiated access to order flow.

In sum, we can “fix” finance. We can cut that two percent incremental cost of capital. And that would increase economic growth, create jobs, and provide a tailwind in financing the infrastructure of the future.  It’s time to refocus finance on its purpose: Serving the real economy.

Jon Lukomnik is the co-author of What They Do with Your Money: How the Financial System Fails Us and How to Fix It and executive director of the Investor Responsibility Research Center Institute.