Financialization: Myth and Reality

Capitalism fails the vast majority of people.  The Global Financial Crisis of 2007 made this clear and the increasingly predatory and parasitic explosion of finance reaffirms this fact.  We see this played out not just in Greece where the savagery of German finance capital crushes what little is left of the Greek social state, but also in the United States where President Obama’s “economic recovery” translates to wealth gains for the top 1% and increased economic precariousness for the rest.  Average working class Americans see with unusual clarity the injustice in the current system. 

Writing for the Huffington Post, Peter Dreier compiled a list of poll results of Americans’ opinions on the current state of things.  Here are some of the results:

  • About three-quarters (74 percent) of Americans–including 84 percent of Democrats, 72 percent of independents, and 62 percent of Republicans–believe that corporations have too much influence on American life and politics today, according to a recent New York Times/CBS News poll. In contrast, only 37 percent think that labor unions exercise too much influence.
  • The Pew Research Center discovered that 60 percent of Americans–including 75 percent of Democrats–believe that “the economic system in this country unfairly favors the wealthy.”
  • Fifty-eight percent of Americans say they would support breaking up “big banks like Citigroup,” a key plank of Sanders’ platform and the goal of a bill that Sanders sponsored in the Senate.
  • Seventy-three percent of Americans favor tougher rules for Wall Street financial companies, versus 17 percent who oppose stronger regulation.
  • A strong majority (66 percent) say that wealth should be more evenly divided and that it is a problem that should be addressed urgently.
  • Ninety-two percent of Americans want a society with far less income disparity than currently exists in the United States. Americans prefer some inequality to perfect equality, according to the professors at the Harvard Business School and Duke University who conducted the survey. But when asked to pick an ideal level of income disparity, Americans prefer the more egalitarian level similar to the one in Sweden (although without identifying the country by name) to that in the U.S. What’s more, the rich and the poor, and Democrats and Republicans, are almost equally likely to choose the Swedish model. For example, 93.5 percent of Democrats and 90.2 percent of Republicans preferred the level of income distribution that exists in Sweden.

None of this should be surprising for anyone who has been paying attention for the past few decades.  Americans have consistently polled in favor of policies similar to the social democratic New Deal, even as Republicans and Democrats (yes, and Democrats) were hard at work dismantling them.  It’s not too shocking then that those who are exploited by neoliberal policies wish for something different.  What comes as more of a surprise is when the rich elites who run the economy buy into their own ideological myths.

Karl Marx used to remark that on the pages of The Economist, the ruling class is “talking to itself.”  This made good sense.  The quasi-religious justifications and rationalizations for widely unjust laissez-faire policies were meant to be read, absorbed, and repeated by the masses.  After all, the powerless, exploited proletariat did not need to know how to the economy actually worked.  For the elites who ran the country, such mystification is dangerous as a bad policy could lead to an awakening of the revolutionary potential of the proletariat.  So it was with a wink of an eye that the capitalist elites passed on the Noble Lie of laissez-faire capitalism to the people, while simultaneously engaging in state subsidies, protectionist trade policies, and an increase in government power that went far beyond the purported support for a Lockean minimal state.

We have come a long time since the class conscious rich talked honestly among one another.  To quote the Hungarian philosopher István Mészáros:

When the system fails to cope with the manifestations of dissent, while at the same time it is incapable of dealing with their causal foundations, not only do fantasy figures and remedies appear on the stage but also the “realists” of a repressive rejection of all criticism.  (The Structural Crisis of Capital, 76).

In Foreign Affairs, a class conscious elite magazine which does for international affairs what The Economist once did for economics, we find a peculiarly mystifying article.  Andrew Palmer, a Business Affairs Editor at The Economist, wrote an article lamenting at the recent criticisms of finance capital titled In Defense of Financial Innovation: Creative Finance Helps Everyone — Not Just the Rich.

Palmer begins his article with noting a shift of public perception: “In the decade before the [2007-08] meltdown, bankers were lionized.  Policymakers applauded the efficiency of financial markets, and widespread praise of financial innovation drowned out any criticism.”  Two things are worth pointing out.  First, the group of people who “lionized” the great financial institutions: policymakers.  Palmer predictably makes no mention of the polls before the Global Financial Crisis that repeatedly showed Americans discontent with the growing economic and political power of financial institutions.  Second, as we can already see, Palmer addresses himself not to criticism by the masses of disenfranchised and exploited people, but rather to some anonymous angry group of policymakers.  In light of several bailouts of hundreds of billions of dollars and gutted financial regulations, we might wonder to whom and what Palmer could possibly refer.

What immediately follows this sob story about “the new consensus” which “now portrays bankers as villains whose irresponsible practices and shady techniques unleashed disaster” is the admission that “finance certainly did a bad job of applying itself to big problems in the run-up to the crisis.”  No mention of exactly of what that bad job consists. No mention of those who lost their jobs, or “the 4-5 million full-time jobs [that] were converted to part-time status throughout 2008” or the reduction of wages and benefits that “included reducing paid leaves, initiating non-paid forced time off several days each month (called furloughs), eliminating or cutting employer contributions to pensions, reducing the employer’s share of health benefit costs, shutting down operations for a week or more at a time without pay (unpaid vacations), requiring those on salary to work longer hours in addition to taking pay cuts” and so on (Jack Rasmus, Epic Recession, 237).  No mention of the millions of people whose homes were fraudulently foreclosed, tricked into taking predatory loans by their banks, or who are now stuck with a house the current market value of which is a mere fraction of the total outstanding mortgage.

Those are the mere concerns of citizens, not policymakers.  Moving on, Palmer wants to remind his presumably elite readership that “Innovative financiers are currently helping solve an array of socioeconomic problems” including strengthening the social safety net, “the poor’s ability to save, and the capacity of the elderly to support themselves.”  This is a strange thing to brag about.  After all, Palmer (and possibly most of the readership of Foreign Affairs) doesn’t ask why financial institutions have to help solve these socioeconomic problems.

Why does the social safety net need strengthening?  Why do the poor not have enough to save?  Why is Social Security not adequate to help the elderly?  The very neoliberal policies that helped birth the explosion of finance in the 1970s and 1980s were accompanied by a reduction of the benefits provided by the social democratic welfare state.  The stagnation of the real economy created the conditions that set the stage for the ensuing financialization.  Deregulation, privatization, debt accumulation, and liberalization of the flow of capital across borders (i.e. free trade agreements) were the weapons by which the corporate elites waged class warfare on the working class.  To say that the cause of the problem is now suddenly its solution is ideological rationalization at its best.

The rest of Andrew Palmer’s article reads like the diary of a teenaged libertarian with all its severe misunderstandings and ignorance of history, anthropology, and (dare I say) political economy.  Palmer seriously credits capitalist finance with “the invention of money.”  This is not a quote pulled out of context.  Here is the complete paragraph:

Even the most ardent critics of Wall Street do not dispute the value of financial innovation over the long sweep of human history.  The invention of money, the use of derivative contracts, and the creation of stock exchanges all represent smart responses to real-world problems.  These advances helped foster trade, create companies, and build infrastructure.  The modern world needed finance to come into being.

Event the most mainstream of anthropologists and historians understand that money is not some invention of capitalist finance.  Currency in a variety of forms has been used throughout history under widely different socio-economic systems.  Some readers might be shocked how a leading Business Affairs Editor of one of the most prestigious business journals can show such a flagrant display of economic ignorance.  Perhaps even more astonishing is how he characterizes his critics’ position: Obviously derivatives (one of the main causes in the 2007 financial collapse) and stock exchanges (whose volatility increases annually) are good things.

This shocks us only if we forget that by “ardent critics” he really means “policymakers” — the same policymakers who participate in the revolving door between corporations and government.  Absent entirely from this account are the critics from the Left and ordinary people themselves who do not share in the glowing adoration of parasitic monopoly-finance capital.  Such people constituting roughly 99% of the population do not figure into Palmers’s perception of the public.  The public in “the profound shift in public attitudes” to which Palmer refers is not the public in any meaningful definition of a well-functioning democracy.  In truth, public for Palmer means the elite policymakers and their corporate backers, a subtle admission which can be easily missed if one is not well practiced in reading the Orwellian terminology employed by the ruling class and their plethora of enthusiastic apologists.

Turning from ideological fiction to reality, we find a much different picture.  Far from being the herald of good times, financialization represents a return to the brutal and explicit exploitation of the vast majority of the world’s population.  From the New Deal to about the mid-1970s, it was understood that the mass dissent and radicalization of the majority of the working population experienced in lead-up to and aftermath of the Great Depression can be contained with some minor concessions in the form of the welfare state.

The immediate postwar era saw unprecedented rates of growth.  Western Europe and Japan had been destroyed in the war and posed no serious economic competition.  Capital accumulation occurred with relative ease.  All of this began to change by the mid-1970s.  With the changing global economic conditions and the war in Southeast Asia no longer providing for as much profitable outlet for capital surplus absorption, the American economy began to stagnate.  As I explain elsewhere, stagnation in the economy occurs when the rate of capital accumulation outpaces the number of areas for profitable reinvestment.  Stagnation appears in the form of low growth, increased unemployment, unused productive capacity, and increased wasteful spending (i.e. spending not used for investment in productive sectors of the economy).

Originally, the American economy overcame postwar stagnation by a combination of extraordinary circumstances (the lack of serious global capitalist competitors) and increased military spending.  By the mid-1970s, the surplus of capital was so large that increased military expenditures failed to absorb it all.  In order to overcome the problem of the overaccumulation of capital, either existing capital had to be destroyed (literally through war or through a depression) or a new outlet for surplus absorption had to be found.  The result was the turn towards financialization of the economy.

Capital is attracted to finance for a few reasons.  The motto for capital is essentially “profit for profit’s sake.”  In order for capital to realize profit in the marketplace, the commodity must be sold.  And in order for a product to be sold, it must have some use value for the buyer.  Marxists traditionally depict the circuit of capital as M-C-P-C’-M’, where money capital purchases commodities (labor power and means of production) in order to produce a new commodity with a higher value than the simple addition of its constituent parts.  Capitalists would love to get rid of the middle parts of the equation and reduce the above to: M-M’, money that magically makes more money.

Finance appears to be the proverbial goose that lays a golden egg.  Capitalists put money (an estimated $156 trillion globally, though that number might be low) into a complicated array of financial products and more money seemingly appears out of thin air.  What was forgotten but was harshly reminded of with the 2007 Global Financial Crisis is that finance is a superstructure built upon the real, productive economy.  As John Bellamy Foster writes in the recent edition of Monthly Review, financialization “led to an enormous increase in the fragility of the entire capitalist world economy, which became dependent on the growth of the financial superstructure relative to its productive base, with the result that the system was increasingly prone to asset bubbles that periodically burst, threatening the stability of global capitalism as a whole.”

The financialization of the economy did not just mean an increase in the wealth and power of the large financial institutions like Citigroup, JP Morgan & Chase, and Goldman Sachs.  Even corporations like General Electric turned to making profits via finance.  GE Capital, the financial wing of GE, before 2007 made about as much money in financial speculation as the production part of the corporation.  This came at the cost of increasing financial fragility which we can roughly measure with the debt servicing ratio (i.e. the ratio between outstanding debt and profits).

What we see is financial fragility came along with financialization. Economist Jack Rasmus estimates that in 1980 the total domestic finance industry cash flow was $34 billion with an outstanding debt of $574 billion (a profits-to-debt ratio of 1:17).  Likewise, total corporate (i.e. non-financial institutions) cash flow stood at $271 billion to $1.48 trillion (1:5.5).  By 2008, the profit-to-debt ratio of both financial institutions and non-financial corporations exploded.  Financial institutions found themselves with a ratio of 1:61.4 ($278 billion of profits to $17 trillion in debt) and non-financial corporations at 1:15.8 ($1.4 trillion profits to $23 trillion in debt).  This is surely one the greater innovations of finance to which Palmer must be referring.

Clearly financialization led to a massive increase in financial fragility that infected the real economy.  Amidst wage stagnation and precarious employment conditions, workers have taken on more debt in order to maintain a modest standard of living.  In addition, student debt now stands at $1.2 trillion, eclipsing the $887 billion in total outstanding credit card debt.  What little protections and benefits won through mass working class struggle eroded. In its place, we have a highly unstable global financial system where the masters of finance enrich themselves parasitically on the backs of toiling masses.

So it is a little more than a sick joke when we read on the pages of Foreign Affairs, Andrew Palmer seriously saying that finance “has been providing ingenious answers” to the problems of individuals “facing an enormous financial squeeze.”  What is this ingenious solution arose from the masterful intellectual power of the lords of finance?  “Getting more Americans to save for retirement by enrolling them in 401(k) pension plans automatically.”  Once again Palmer neglects to mention, that the 401(k) was a business tool to pass out scraps instead of a quality universal state subsidized pension plan funded by taxes on corporate profits.  But that’s how the minds of all lords and their apologists throughout history have worked.  To fix the problems of their own creation, the (financial) lords must devise plans to pass out scraps to the peasants without addressing any root cause.

Fortunately,  the average American shows more grasp of understanding economic reality than the Business Affairs Editor of The Economist.  Perhaps, we approach now a pivotal moment in history where the elites buy into their own Noble Lie while the working class emerges as a political force with real class consciousness.  Such a moment provides a unique opportunity that we cannot fail to exploit.  We can demand more than the scraps fallen off the plates of the financial aristocracy, going far beyond “even the most ardent critics of Wall Street.”

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