Remember the 1990’s? Remember how CEO salaries bloomed ever larger while the ordinary working class guy got paid less in an inflationary economy? Remember the CEO golden parachutes with million dollar severance packages for departing CEO’s even when they left under a black cloud? Remember the “hostile takeovers”, what we now more euphemistically call “mergers and acquisitions” that liquidated so many American enterprises? Remember the outsourcing and increasing job insecurity? These events are connected to a process of change in the financial world called “financialization.”
In 2005, a sociologist named Greta Krippner wrote an essay in the Socio-Economic Review, entitled, “The Financialization of the American Economy.” She wrote, “I define financialization as a pattern of accumulation in which profits accrue primarily through financial channels rather than through trade and commodity production…’Financialization’ here refers to activities relating to the provision (or transfer) of liquid capital in expectation of future interest, dividends, or capital gains.”
Here are some of the policy changes in the U.S. that accelerated financialization here:
(1) The Nixon Shock (1971): when the U.S. abandoned the managed gold system and adopted a floating fiat monetary system where capital valuations would be determined by capital trades on the forex market; this change increased the money supply and expanded the potential for more debt.
(2) Securitization started with VA loans in the 1970’s. Securitization is when a loan is turned into a tradable commodity. That removes the risk of default from the lender and means that lenders can make riskier loans.
(3) Securitization led to the further innovation of derivative trading where a bet can be made on a change in value of an asset without owning the asset. Derivatives have increased market risk. The Commodities Futures Modernization Trading Act (2000) prevented the regulation of derivatives.
(4) Easy money policies of the Federal Reserve made capital loans cheap and enabled the hostile takeover environment.
(5) Government tax reprieves for debt encouraged greater debt.
(6) Finance grew; according to Terrence Casey, finance grew from making 15% of corporate profits in 1980 to making 27% of corporate profits in 2006.
(7) As finance grew, the influence of bankers on corporate boards grew and that led to even more emphasis on short-term gains in capital.
(8) The emphasis on capital growth through investment instead of through production undermined the ability of labor to negotiate for desirable outcomes like better salaries and benefits and along with hostile takeovers and outsourcing led to job losses.
(9) Financial industry deregulation led to the repeal of the Glass Steagall provision of the Banking Act of 1933 (the final step in a gradual repeal process was The Graham Leach Bliley Act of 1999). The repeal of Glass Steagall ended the separation between commercial and investment banks. Re-combining investment and commercial banks led to fewer larger banks that became too big to fail and highly risk prone.
(10) The Greenspan Put (from Alan Greenspan, chairman of the Federal Reserve) promised Wall Street that the Federal Reserve would help in the case of an emergency.
(11) These changes and even lower interest rates (easy money) led to enormous corporate and bank debts and a fragile economy that produces mal-investment bubbles routinely, wasting economic resources.
Sources: Greta Krippner, The Socio-Economic Review (2005) 3, 173-208, “The Financialization of the American Economy,” Sociology Department, University of California, Los Angeles, cad.wnkc.edu/econ/economics/faculty/ wray/631Wray/Week%207/Krippner.pdf, accessed 2013.
Terrence Casey, “Financialization and the Future of the Neoliberal Growth Model,” Rose-Hulman Institute of Technology, Paper presented at the Political Studies Association Annual Conference, April 2011, http//www.psa.ac.uk/journals/pdf/5/2011/6_5.pdf, accessed 2013.
Bethany McLean and Joe Nocera, All the Devils Are Here: the Hidden History of the Financial Crisis, (Penguin Books Ltd., New York, 2010), 5, 109.
Other references cited can be found in: Mel Scanlan Stahl, Political Catsup with Economy Fries: Liberalism, Pragmatism, Opportunism, (Fast Car Publishing, Spokane, 2015).
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Political Catsup with Economy Fries: Liberalism, Pragmatism, Opportunism 