The Financialization of the Economy and its Democratic Deficiency

“The financial economy is essentially a collection of assets, like stocks, bonds, loans, and mortgages. These are all claims against the real economy. Every dollar one person owes as debt is held by someone else as an asset. Equity in companies works similarly; stockholders have a claim against company earnings.”

Marjorie Kelly and Ted Howard (2019:104) The Making of a Democratic Economy. Building Prosperity for the Many, Not Just the Few. [Emphasize added]

Collins defines and explains ‘financialiization’ as follows:

“the growing scale and profitability of the finance sector at the expense of the rest of the economy and the shrinking regulation of its rules and returns.

Since the 1980s, the financial industry has pursued short term financial returns over long term goals such as technology and product development investments.. Wall Street followed their capitalist instincts and saw that there was more profit in making money from money rather than in engineered products. They wanted quick returns of financial instruments and software rather than investing in the brick and mortar of expensive factories.”

Mike Collins (2015): Wall Street And The Financializatiíbon Of The Economy  [emphasize added]

Kelly and Howard 2019, refers to the financial deregulation under Reagan and Thatcher in the 1980’s which ‘encouraged the finance, insurance, and real estate sectors..to interweave so tightly as to be deemed a single sector’:

“In 1990, private sector financial assets (securities, loans, equities, pensions, insurance) were about four times GDP. The debt load was four times as big as the economy that supported it. But as financial extraction revved into high gear—more mortgages, more profits, more debt—the sum of financial claims ballooned. By the year 2006, this debt load had swollen to double its previous size in relation to GDP. Now the sphere of debt was eight times as big as the economy supporting it.

 This set the stage for the 2008 collapse. As mortgage lenders ran out of reasonable mortgages to write, they began to issue reckless ones that could never be paid back. The house of financial wealth was becoming too large. Yet because the system’s essence was insatiability, its logic could not comprehend the idea of too much financial wealth. Thus more claims—and more absurd claims—were manufactured until the debt load exceeded the load-bearing capacity of the real economy.”

                                                                                                                                                                   Kelly and Ted Howard (ibid.:105)

Quigley and Gerard Roemers (2017) notes that:

“although the economy continues to grow, it has become increasingly prone to shattering financial crises which disproportionately affect the poor and middle class. There is growing consensus that this is a direct consequence of the way our current financial system is designed. Our euros and dollars are based on interest-bearing debt. This interest incentivizes speculation and rent-seeking (i.e. earning profits without providing any benefit to society) [1], and has fuelled the ‘financialization’ of our economy.

 When the financial sector grows faster than the “real” economy, this causes bubbles in financial markets, which in turn increases the risk of recessions.. just before the financial crisis of 2008, the total exposure (i.e. the amount of money that is at risk of loss) of the financial sector was 40 to 45 percent of America’s national income, and the total exposure of Deutsche Bank, Germany’s largest investment bank, was 50 times Germany’s national income.”

Seadna Quigley and Gerard Roemers (December 2017): How alternative currencies can enable a circular economy [emphasize added]

Well before this, Lietaer (1997), summarized as follows:

“Today’s official monetary system has almost nothing to do with the real economy. Just to give you an idea, 1995 statistics indicate that the volume of currency exchanged on the global level is $1.3 trillion per day. This is 30 times more than the daily gross domestic product (GDP) of all of the developed countries (OECD) together. The annual GDP of the United States is turned in the market every three days!

 Of that volume, only 2 or 3 percent has to do with real trade or investment; the remainder takes place in the speculative global cyber-casino. This means that the real economy has become relegated to a mere frosting on the speculative cake, an exact reversal of how it was just two decades ago.

 Power has shifted irrevocably away from governments toward the financial markets. … So a few hundred people, who are not elected by anybody and have no collective responsibility whatsoever, decide what your pension fund is worth – among other things.

 ..I see it now as about a 50/50 chance [that there will be a crash] over the next five or 10 years.”  [This was written in 1997, 11 years before the 2008 finance crash].

Bernard Lietaer (1997) Beyond Greed and Scarcity http://www.lietaer.com/images/Interview_Yes!.pdf  [Emphasize and text in brackets added]

 

Notes:

[1]  “The word “rent” does not refer specifically to payment on a lease but rather to Adam Smith’s division of incomes into profit, wage, and rent. The origin of the term refers to gaining control of land or other natural resources.” See more at: https://en.wikipedia.org/wiki/Rent-seeking.