Ours is, without a doubt, the age of finance—of the supremacy of financial actors, institutions, markets, and motives in the global capitalist economy. Working people in the advanced economies, for instance, increasingly have their (pension) savings invested in mutual funds and stock markets, while their mortgages and other debts are turned into securities and sold to global financial investors (Krippner 2011; Epstein 2018). At the same time, the ‘under-banked’ poor in the developing world have become entangled, or if one wishes, ‘financially included’, in the ‘web’ of global finance through their growing reliance on micro-loans, micro-insurance and M-Pesa-like ‘correspondent banking’ (Keucheyan 2018; Mader 2018). More generally, individual citizens everywhere are invited to “live by finance”, in Martin’s (2002, p. 17) evocative words, that is: to organize their daily lives around ‘investor logic’, active individual risk management, and involvement in global financial markets. Citizenship and rights are being re-conceptualized in terms of universal access to ‘safe’ and affordable financial products (Kear 2012)—redefining Descartes’ philosophical proof of existence as: ‘I am indebted, therefore I am’ (Graeber 2011). Financial markets are opening ‘new enclosures’ everywhere, deeply penetrating social space—as in the case of so-called ‘viaticals’, the third-party purchase of the rights to future payoffs of life insurance contracts from the terminally ill (Quinn 2008); or of ‘health care bonds’ issued by insurance companies to fund health-care interventions; the payoff to private investors in these bonds depends on the cost-savings arising from the health-care intervention for the insurers. Or what to think of ‘humanitarian impact bonds’ used to profitably finance physical rehabilitation services in countries affected by violence and conflict (Lavinas 2018); this latter instrument was created in 2017 by the International Red Cross in cooperation with insurer Munich Re and Bank Lombard Odier.
Conglomerate corporate entities, which used to provide long-term employment and stable retirement benefits, were broken up under pressure of financial markets and replaced by disaggregated global commodity-chain structures (Wade 2018), operating according to the principles of ‘shareholder value maximization’ (Lazonick 2014)—with the result that today real decision-making power is often to be found no longer in corporate boardrooms, but in global financial markets. As a result, accumulation—real capital formation which increases overall economic output—has slowed down in the U.S., the E.U. and India, as profit-owners, looking for the highest returns, reallocated their investments to more profitable financial markets (Jayadev, Mason and Schröder 2018).
An overabundance of (cash) finance is used primarily to fund a proliferation of short-term, high-risk (potentially high-return) investments in newly developed financial instruments, such as derivatives—Warren Buffet’s ‘financial weapons of mass destruction’ that blew up the global financial system in 2007-8. Financial actors (ranging from banks, bond investors, and pension funds to big insurers and speculative hedge funds) have taken much bigger roles on much larger geographic scales in markets of items essential to development such as food (Clapp and Isakson 2018), primary commodities, health care (insurance), education, and energy. These same actors hunt the globe for ‘passive’ unearthed assets which they can re-use as collateral for various purposes in the ‘shadow banking system’—the complex global chains of credit, liquidity and leverage with no systemic regulatory oversight that has become as large as the regulated ‘normal’ banking system (Pozsar and Singh 2011; Gabor 2018) and enjoys implicit state guarantees (Kane 2013, 2015).
Pressed by the international financial institutions and their own elites, states around the world have embraced finance-friendly policies which included reducing cross-border capital controls, promoting liquid domestic stock markets, reducing the taxation of wealth and capital gains, and rendering their central banks independent from political oversight (Bortz and Kaltenbrunner 2018; Wade 2018; Chandrasekhar and Ghosh 2018). What is most distinctive about the present era of finance, however, is the shift in financial intermediation from banks and other institutions to financial markets—a shift from the ‘visible hand’ of (often-times relationship) regulated banking to the axiomatic ‘invisible hand’ of supposedly anonymous, self-regulating, financial markets. This displacement of financial institutions by financial markets has had a pervasive influence on the motivations, choices and decisions made by households, firms and states as well as fundamental quantitative impacts on growth, inequality and poverty—far-reaching consequences which we are only beginning to understand.
Setting the Stage
... This view of the superiority of a ‘market-based’ financial system rests on Friedrich von Hayek’s grotesque epistemological claim that ‘the market’ is an omniscient way of knowing, one that radically exceeds the capacity of any individual mind or even the state. For Hayek, “the market constitutes the only legitimate form of knowledge, next to which all other modes of reflection are partial, in both senses of the word: they comprehend only a fragment of a whole and they plead on behalf of a special interest. Individually, our values are personal ones, or mere opinions; collectively, the market converts them into prices, or objective facts” (Metcalf 2017). After his ‘sudden illumination’ in 1936 that the market is the best possible and only legitimate form of social organisation, Hayek had to find an answer to the dilemma of how to reformulate the political and the social in a way compatible with the ‘rationality’ of the (unregulated) market economy. Hayek’s answer was that the ‘market’ should be applied to all domains of life. Homo œconomicus—the narrowly self-interested subject who, according to Foucault (2008, pp. 270-271), “is eminently governable ….” as he/she “accepts reality and responds systematically to systematic modifications artificially introduced into the environment—had to be universalized. This, in turn, could be achieved by the financialization of ‘everything in everyday life’, because financial logic and constraints would help to impose ‘market discipline and rationality’ on economic decision-makers. After all, borrowers compete with another for funds—and it is commercial (profit-oriented) banks and financial institutions which do the screening and selection of who gets funded. (...)
This Hayekian legacy underwrites, and quietly promotes, neoliberal narratives and discourses which advocate that authority—even sovereignty—be conceded to (in our case: financial) ‘markets’ which act as an ‘impartial and transparent judge’, collecting and processing information relevant to economic decision-making and coordinating these decisions, and as a ‘guardian’, impartially imposing ‘market discipline and market rationality’ on economic decision-makers—thus bringing about not just ‘socially efficient outcomes’ but social stability as well. This way, financialization constitutes progress—bringing “the advantages enjoyed by the clients of Wall Street to the customers of Wal-Mart”, as Nobel-Prize winning financial economist Robert Shiller (2003, p. x) writes. “We need to extend finance beyond our major financial capitals to the rest of the world. We need to extend the domain of finance beyond that of physical capital to human capital, and to cover the risks that really matter in our lives. Fortunately, the principles of financial management can now be expanded to include society as a whole.”
Attentive readers might argue that faith in the social efficiency of financial markets has waned—after all, Hayek’s grand epistemological claim was falsified, in a completely unambiguous manner, by the Great Financial Crisis of 2007-8 which brought the world economy to the brink of a systemic meltdown. Even staunch believers in the (social) efficiency of self-regulating financial markets, including most notably former Federal Reserve chair Alan Greenspan, had to admit a fundamental ‘flaw in their ideology’.
And yet, I beg to disagree. The economic ideology that created the crash remains intact and unchallenged. There has been no reckoning and no lessons were learned, as the banks and their shareholders were rescued, at the cost of about everyone else in society, by massive public bail-outs, zero interest rates and unprecedented liquidity creation by central banks. Finance staged a major come-back—profits, dividends, salaries and bonuses in the financial industry have rebounded to where they were before, while the re-regulation of finance became stuck in endless political negotiations. Stock markets, meanwhile, notched record highs (before the downward ‘correction’ of February 2018), derivative markets have been doing rather well and under-priced risk-taking in financial markets has gathered steam (again), this time especially so in the largest emerging economies of China, India and Brazil (BIS 2017; Gabor 2018). In the process, global finance has become more concentrated and even more integral to capitalist production and accumulation. The reason why even the Great Financial Crisis left the supremacy of financial interests and logic unchallenged, is simple: there is no acceptable alternative mode of social regulation to replace our financialized mode of co-ordination and decision-making.
‘Really-Existing’ Finance Capitalism
Financialization underwrites neoliberal narratives and discourses which emphasize individual responsibility, risk-taking and active investment for the benefit of the individual him-/herself—within the ‘neutral’ or even ‘natural’ constraints imposed by financial markets and financial norms of creditworthiness (Palma 2009; Kear 2012). This way, financialization morphs into a ‘technique of power’ to maintain a particular social order (Palma 2009; Saith 2011), in which the delicate task of balancing competing social claims and distributive outcomes is offloaded to the ‘invisible hand’ which operates through anonymous, ‘blind’ financial markets (Krippner 2005, 2011). This is perhaps illustrated clearest by Michael Hudson (2012, p. 223):
In this regime of social regulation, income and wealth became more concentrated in the hands of the rentier class (Saith 2011; Goda, Onaran and Stockhammer 2017) , and as a result, productive capital accumulation gave way before the increased speculative use of the ‘economic surplus of society’ in pursuit of ‘financial-capital’ gains through asset speculation (Davis and Kim 2015). This took the wind out of the sails of the ‘real’ economy, and firms responded by holding back investment, using their profits to pay out dividends to their shareholders and to buy back their own shares (Lazonick 2014). Because the rich own most financial assets, anything that causes the value of financial assets to rise rapidly made the rich richer (Taylor, Ömer and Rezai 2015).
In the U.S., arguably the most financialized economy in the world, the result of this was extreme income polarization, unseen after WWII (Piketty 2014; Palma 2011). The ‘American Dream’, writes Gabriel Palma (2009, p. 842), was “high jacked by a rather tiny minority—for the rest, it has only been available on credit!” Because that is what happened: lower- and middle-income groups took on more debt to finance spending on health care, education or housing, spurred by the deregulation of financial markets and changes in the tax code which made it easier and more attractive for households with modest incomes to borrow in order to spend. This debt-financed spending stimulated an otherwise almost comatose U.S. economy by spurring consumption (Cynamon and Fazzari 2015). In the twenty years before the Great Financial Crash, debts and ‘financial excess’—in the form of the asset price bubbles in ‘New Economy’ stocks, real estate markets and commodity (futures) markets— propped up aggregate demand and kept the U.S. and global economy growing. “We have,” Paul Krugman (2013) concludes, “an economy whose normal condition is one of inadequate demand—of at least mild depression—and which only gets anywhere close to full employment when it is being buoyed by bubbles.”
But it is not just the U.S. economy: the whole world has become addicted to debt. The borrowings of global households, governments and firms have risen from 246% of GDP in 2000 to 327%, or $ 217 trillion, today—which is $70 trillion higher than 10 years ago. It means that for every extra dollar of output, the world economy cranks out more than almost 10 extra dollars of debt. Forget about the synthetic opioid crisis, the world’s more dangerous addiction is to debt. China, which has been the engine of the global economy during most of the post-2008 period, has been piling up debt to keep its growth process going—the IMF (2017) expects China’s non-financial sector debt to exceed 290% of its GDP in 2022, up from around 140% (of GDP) in 2008, warning that China’s current credit trajectory is “dangerous with increasing risks of a disruptive adjustment.” China’s insatiable demand for debt fueled growth, but also led to a property bubble and a rapidly growing shadow banking system (Gabor 2018)—raising concerns that the economy may face a hard landing and send shockwaves through the world’s financial markets. The next global financial catastrophe may be just around the corner.
by Servaas Storm, Naked Capitalism via: Institute for New Economic Thinking | Read more:
Image: uncredited (INET)
Conglomerate corporate entities, which used to provide long-term employment and stable retirement benefits, were broken up under pressure of financial markets and replaced by disaggregated global commodity-chain structures (Wade 2018), operating according to the principles of ‘shareholder value maximization’ (Lazonick 2014)—with the result that today real decision-making power is often to be found no longer in corporate boardrooms, but in global financial markets. As a result, accumulation—real capital formation which increases overall economic output—has slowed down in the U.S., the E.U. and India, as profit-owners, looking for the highest returns, reallocated their investments to more profitable financial markets (Jayadev, Mason and Schröder 2018).An overabundance of (cash) finance is used primarily to fund a proliferation of short-term, high-risk (potentially high-return) investments in newly developed financial instruments, such as derivatives—Warren Buffet’s ‘financial weapons of mass destruction’ that blew up the global financial system in 2007-8. Financial actors (ranging from banks, bond investors, and pension funds to big insurers and speculative hedge funds) have taken much bigger roles on much larger geographic scales in markets of items essential to development such as food (Clapp and Isakson 2018), primary commodities, health care (insurance), education, and energy. These same actors hunt the globe for ‘passive’ unearthed assets which they can re-use as collateral for various purposes in the ‘shadow banking system’—the complex global chains of credit, liquidity and leverage with no systemic regulatory oversight that has become as large as the regulated ‘normal’ banking system (Pozsar and Singh 2011; Gabor 2018) and enjoys implicit state guarantees (Kane 2013, 2015).
Pressed by the international financial institutions and their own elites, states around the world have embraced finance-friendly policies which included reducing cross-border capital controls, promoting liquid domestic stock markets, reducing the taxation of wealth and capital gains, and rendering their central banks independent from political oversight (Bortz and Kaltenbrunner 2018; Wade 2018; Chandrasekhar and Ghosh 2018). What is most distinctive about the present era of finance, however, is the shift in financial intermediation from banks and other institutions to financial markets—a shift from the ‘visible hand’ of (often-times relationship) regulated banking to the axiomatic ‘invisible hand’ of supposedly anonymous, self-regulating, financial markets. This displacement of financial institutions by financial markets has had a pervasive influence on the motivations, choices and decisions made by households, firms and states as well as fundamental quantitative impacts on growth, inequality and poverty—far-reaching consequences which we are only beginning to understand.
Setting the Stage
... This view of the superiority of a ‘market-based’ financial system rests on Friedrich von Hayek’s grotesque epistemological claim that ‘the market’ is an omniscient way of knowing, one that radically exceeds the capacity of any individual mind or even the state. For Hayek, “the market constitutes the only legitimate form of knowledge, next to which all other modes of reflection are partial, in both senses of the word: they comprehend only a fragment of a whole and they plead on behalf of a special interest. Individually, our values are personal ones, or mere opinions; collectively, the market converts them into prices, or objective facts” (Metcalf 2017). After his ‘sudden illumination’ in 1936 that the market is the best possible and only legitimate form of social organisation, Hayek had to find an answer to the dilemma of how to reformulate the political and the social in a way compatible with the ‘rationality’ of the (unregulated) market economy. Hayek’s answer was that the ‘market’ should be applied to all domains of life. Homo œconomicus—the narrowly self-interested subject who, according to Foucault (2008, pp. 270-271), “is eminently governable ….” as he/she “accepts reality and responds systematically to systematic modifications artificially introduced into the environment—had to be universalized. This, in turn, could be achieved by the financialization of ‘everything in everyday life’, because financial logic and constraints would help to impose ‘market discipline and rationality’ on economic decision-makers. After all, borrowers compete with another for funds—and it is commercial (profit-oriented) banks and financial institutions which do the screening and selection of who gets funded. (...)
This Hayekian legacy underwrites, and quietly promotes, neoliberal narratives and discourses which advocate that authority—even sovereignty—be conceded to (in our case: financial) ‘markets’ which act as an ‘impartial and transparent judge’, collecting and processing information relevant to economic decision-making and coordinating these decisions, and as a ‘guardian’, impartially imposing ‘market discipline and market rationality’ on economic decision-makers—thus bringing about not just ‘socially efficient outcomes’ but social stability as well. This way, financialization constitutes progress—bringing “the advantages enjoyed by the clients of Wall Street to the customers of Wal-Mart”, as Nobel-Prize winning financial economist Robert Shiller (2003, p. x) writes. “We need to extend finance beyond our major financial capitals to the rest of the world. We need to extend the domain of finance beyond that of physical capital to human capital, and to cover the risks that really matter in our lives. Fortunately, the principles of financial management can now be expanded to include society as a whole.”
Attentive readers might argue that faith in the social efficiency of financial markets has waned—after all, Hayek’s grand epistemological claim was falsified, in a completely unambiguous manner, by the Great Financial Crisis of 2007-8 which brought the world economy to the brink of a systemic meltdown. Even staunch believers in the (social) efficiency of self-regulating financial markets, including most notably former Federal Reserve chair Alan Greenspan, had to admit a fundamental ‘flaw in their ideology’.
And yet, I beg to disagree. The economic ideology that created the crash remains intact and unchallenged. There has been no reckoning and no lessons were learned, as the banks and their shareholders were rescued, at the cost of about everyone else in society, by massive public bail-outs, zero interest rates and unprecedented liquidity creation by central banks. Finance staged a major come-back—profits, dividends, salaries and bonuses in the financial industry have rebounded to where they were before, while the re-regulation of finance became stuck in endless political negotiations. Stock markets, meanwhile, notched record highs (before the downward ‘correction’ of February 2018), derivative markets have been doing rather well and under-priced risk-taking in financial markets has gathered steam (again), this time especially so in the largest emerging economies of China, India and Brazil (BIS 2017; Gabor 2018). In the process, global finance has become more concentrated and even more integral to capitalist production and accumulation. The reason why even the Great Financial Crisis left the supremacy of financial interests and logic unchallenged, is simple: there is no acceptable alternative mode of social regulation to replace our financialized mode of co-ordination and decision-making.
‘Really-Existing’ Finance Capitalism
Financialization underwrites neoliberal narratives and discourses which emphasize individual responsibility, risk-taking and active investment for the benefit of the individual him-/herself—within the ‘neutral’ or even ‘natural’ constraints imposed by financial markets and financial norms of creditworthiness (Palma 2009; Kear 2012). This way, financialization morphs into a ‘technique of power’ to maintain a particular social order (Palma 2009; Saith 2011), in which the delicate task of balancing competing social claims and distributive outcomes is offloaded to the ‘invisible hand’ which operates through anonymous, ‘blind’ financial markets (Krippner 2005, 2011). This is perhaps illustrated clearest by Michael Hudson (2012, p. 223):
“Rising mortgage debt has made employees afraid to go on strike or even to complain about working conditions. Employees became more docile in a world where they are only one paycheck or so away from homelessness or, what threatens to become almost the same thing, missing a mortgage payment. This is the point at which they find themselves hooked on debt dependency.”Paul Krugman (2005) has called this a ‘debt-peonage society’—while J. Gabriel Palma (2009, p. 833) labelled it a ‘rentiers’ delight’ in which financialization sustains the rent-seeking practices of oligopolistic capital—as a system of discipline as well as exploitation, which is “difficult to reconcile with any acceptable definition of democracy” (Mann 2010, p. 18).
In this regime of social regulation, income and wealth became more concentrated in the hands of the rentier class (Saith 2011; Goda, Onaran and Stockhammer 2017) , and as a result, productive capital accumulation gave way before the increased speculative use of the ‘economic surplus of society’ in pursuit of ‘financial-capital’ gains through asset speculation (Davis and Kim 2015). This took the wind out of the sails of the ‘real’ economy, and firms responded by holding back investment, using their profits to pay out dividends to their shareholders and to buy back their own shares (Lazonick 2014). Because the rich own most financial assets, anything that causes the value of financial assets to rise rapidly made the rich richer (Taylor, Ömer and Rezai 2015).
In the U.S., arguably the most financialized economy in the world, the result of this was extreme income polarization, unseen after WWII (Piketty 2014; Palma 2011). The ‘American Dream’, writes Gabriel Palma (2009, p. 842), was “high jacked by a rather tiny minority—for the rest, it has only been available on credit!” Because that is what happened: lower- and middle-income groups took on more debt to finance spending on health care, education or housing, spurred by the deregulation of financial markets and changes in the tax code which made it easier and more attractive for households with modest incomes to borrow in order to spend. This debt-financed spending stimulated an otherwise almost comatose U.S. economy by spurring consumption (Cynamon and Fazzari 2015). In the twenty years before the Great Financial Crash, debts and ‘financial excess’—in the form of the asset price bubbles in ‘New Economy’ stocks, real estate markets and commodity (futures) markets— propped up aggregate demand and kept the U.S. and global economy growing. “We have,” Paul Krugman (2013) concludes, “an economy whose normal condition is one of inadequate demand—of at least mild depression—and which only gets anywhere close to full employment when it is being buoyed by bubbles.”
But it is not just the U.S. economy: the whole world has become addicted to debt. The borrowings of global households, governments and firms have risen from 246% of GDP in 2000 to 327%, or $ 217 trillion, today—which is $70 trillion higher than 10 years ago. It means that for every extra dollar of output, the world economy cranks out more than almost 10 extra dollars of debt. Forget about the synthetic opioid crisis, the world’s more dangerous addiction is to debt. China, which has been the engine of the global economy during most of the post-2008 period, has been piling up debt to keep its growth process going—the IMF (2017) expects China’s non-financial sector debt to exceed 290% of its GDP in 2022, up from around 140% (of GDP) in 2008, warning that China’s current credit trajectory is “dangerous with increasing risks of a disruptive adjustment.” China’s insatiable demand for debt fueled growth, but also led to a property bubble and a rapidly growing shadow banking system (Gabor 2018)—raising concerns that the economy may face a hard landing and send shockwaves through the world’s financial markets. The next global financial catastrophe may be just around the corner.
by Servaas Storm, Naked Capitalism via: Institute for New Economic Thinking | Read more:
Image: uncredited (INET)
