The financial industry has been on life support for decades. The time has come to evaluate and reform this industry, since it has the potential to wreak considerable havoc with the underlying health of the global economy.

Following World War II, the Bretton Woods agreement established a global monetary framework that fixed the price of gold relative to the U.S. dollar at $35 per ounce. In addition, most foreign currencies were essentially pegged to the U.S. dollar, permitting very small fluctuations in relative values of these currencies and gold.

This was a grave mistake.

Instead of fixed prices for gold and global currencies, a market-based mechanism would permit more stable monetary creation and smoother balance in the long term.

Why?

Demand for U.S. dollars following World War II was strong, since the United States was the preeminent military and economic power at that time. However, its currency was unable to fully appreciate relative to other foreign currencies under the fixed regime established at Bretton Woods in 1944.

U.S. imports of foreign goods and services along with investment abroad created a large surplus of U.S. dollars in foreign hands. Since the price of gold remained constant in dollar terms and nearly constant relative to foreign currencies, the U.S. dollar and gold became a very attractive foreign investment.

This led to huge gold outflows. By the early 1970s, the quantity of U.S. dollars abroad exceeded the value of gold in the United States at the fixed price. In 1971, President Nixon disbanded the gold standard policy.

From 1944 through 1971, the financial industry as a whole had a positive net worth ranging from approximately $15 billion to $30 billion on an annualized basis. There were a handful of quarters in which net worth was negative, most hovering around $5 billion, with the largest two in the second and fourth quarter of 1968, at $26 billion and $18 billion, respectively, according to the St. Louis Federal Reserve Bank.

However, once we left the gold standard completely in 1971, credit and debt were able to form more readily, since they did not need to be backed by a real resource produced with an efficient allocation of land, labor and capital.

From 1971 through 2008, total private and public debt as a share of the economy skyrocketed, from approximately 160 percent to 360 percent. By 2007, the value of financial assets were 10 times that of the entire economy, a 150 percent rise since 1980. Direct private investment as a share of GDP fell nearly 40 percent during this time.

Low levels of investment and high levels of debt caused the turnover of money to fall approximately 77 percent during the past 34 years to a historic low. This stalled the growth of annual inflation-adjusted median household incomes and substantially widened wealth and income disparities, which are near the historic highs last seen at the beginning of the 20th century.

As the market for financial assets heated up, the net worth of financial business also skyrocketed, from $9.8 billion at the end of March 1971 to a peak of $711 billion by the end of 1990.

However, this party could last only so long.

By the third quarter of 1996, net worth had torpedoed to $63.3 billion. At the end of the year, it sunk to negative $401 billion. This significant move followed an address on Dec. 5, 1996 by then-Chairman of the Federal Reserve Bank Alan Greenspan to the American Enterprise Institute in which he proclaimed "irrational exuberance" in the financial community had taken hold.

However, this significant divergence from positive equity to negative was not an isolated, outlying event. In fact, it was the beginning of a tragic decline in the health of our financial system.

The net worth of the financial industry continued to tailspin, reaching negative $1.3 trillion at the end of March 1998. For 10 years, it hovered between negative $400 billion and negative $1.2 trillion, hitting its nadir of negative $1.4 trillion in December 2006.

This period coincided with the repeal of Glass-Steagall in 1999 and the deregulation of derivatives in 2000. These policies left the financial industry even more severely undercapitalized.

Following the Great Recession of 2008, $29 trillion of credit was injected into the financial industry by the federal government and the Federal Reserve, permitting a rise in net worth to nearly $2 trillion by the end of 2009. However, this "period of prosperity" did not last long. Currently, the industry has a negative net worth of $435 billion.

More alarming is the fact that the financial industry maintains such a large presence in our overall economy. By 2007, at the precipice of the Great Recession, the financial industry represented nearly 8 percent of GDP, up from 5 percent in 1980, according to Robin Greenwood and David Scharfstein of Harvard Business School. They claim "the enormous growth of asset management after 1997 was driven by high-fee alternative investments, with little direct evidence of much social benefit, and potentially large distortions in the allocation of talent."

Moreover, nearly 20 percent of all corporate profits are received by the financial industry, according to the Fed. This is in addition to the highly lucrative employee compensation packages that exist for this industry on average.

In addition, the financial industry has too large an impact on monetary policy. This represents a serious conflict of interest, one that benefits the few at the expense of the many.

Currently, each of the 12 regional Fed Banks is governed by a nine-member Board of Directors. However, six of the nine directors are selected by private member banks and the remaining three are approved by Fed Governors, who tend to invite high-profile financial industry operators.

The presidents of the 12 regional banks are typically veteran financial industry personnel. Even worse, the activities of the Fed Banks are not readily transparent to the public, since a timely and frequent audit of their activities are not permitted.

How can an industry with such extraordinary net negative worth, substantial concentration in our economy and unfettered access to monetary policy creation serve our country effectively?

It can't.

The financial industry seems to be a structural impediment to our future economic vitality. A prudent approach to monetary policy should include the following:

• Permit stable, long-term monetary growth based on a flexible, market-based, asset-backed standard.
• Audit the Federal Reserve Bank on a regular basis, perhaps by the Office of the Comptroller of the Currency.
• Create a strong separation between the financial industry and the Fed to permit more objective monetary policy creation.

As we speak, monetary policy is experiencing a liquidity trap, where increases in the money supply do not adequately reduce interest rates, since money tends to be saved, not invested or spent on financial assets, such as bonds and equities.

As a result, direct business investment, employment and income growth remain tepid, enabling further disparities in wealth and income. While this disproportionately impacts the lower- and middle-income households, it will eventually impact the well-to-do when the masses can no longer afford the products they provide.

Therefore, in order to jumpstart our economy more effectively, fiscal reform is necessary. My tax proposal would balance the budget at current spending levels, increase employment and income and minimize inflation to maintain strong purchasing power.

We need to reform the financial industry as we know it.