By Jomo Kwame Sundaram, a former economics professor, who was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought and Michael Lim Mah Hui. Originally published at the Inter Press Service
The 1971 Bretton Woods (BW) system collapse opened the way for financial globalization and transnational financialization. Before the 1980s, most economies had similar shares of trade and financial openness, but cross-border financial transactions have been increasingly unrelated to trade since then.
Although Covid-19 recessions have rather different causes and manifestations from the financially driven crises of recent decades, financialization continues to constrain, shape and thus stunt government responses with deep short-, medium- and long-term consequences.
It is thus necessary to revisit and contain the virus of financialization wreaking long-term havoc in developing, especially emerging market economies. No one is financing work on a vaccine, while all too many with influence seek to infect us all as the virus is touted as the miracle cure to contemporary society’s deep malaise, rather than exposed for the threats it actually poses.
Financialization
Global financialization has spread, deepened and morphed with a changing cast of banks, institutional investors, asset managers, investment funds and other shadow banks. Transborder financialization has thus been transforming national finance and economies.
The changing preferences of financial market investors have been reshaping the uneven spread of market finance across assets, borders, currencies and regulatory regimes. To preserve and enhance their value, new financial asset classes and relationships have been created.
Within borders, banks and shadow banks are lending to households, companies and one another, while national frontiers do not matter for securities and derivative markets, often financed via wholesale money markets.
Over the last four decades, the scope, size and concentration of finance have grown and changed as mainly national regulatory authorities try to keep up with recent financial innovations and their typically transnational consequences.
Managing Discontents
Financialization has involved reorganizing finance, the economy, and even aspects of society, to enable investors to get more from financial market investments, effectively undermining sustainable growth, full employment and fairer wealth distribution. The following measures should help slow financialization and limit some of its adverse effects:
Strengthen international financial regulation
While financialization has become transnational, financial regulation remains largely national, albeit with some transborder effects of the most powerful, e.g., US tax rules and Fed requirements. Transnational finance has often successfully taken advantage of loopholes and ‘arbitrage’ to great profit.
Multilateral cooperation to strengthen effective and equitable regulation will be difficult to secure as voting power in the only multilateral institution, the IMF, remains heavily biased against developing countries.
Strengthen national capital account management
Transnational financialization has made developing countries more vulnerable to transnational finance and its rent-gouging practices, while also causing greater instability, and limiting policy space for development.
Although the IMF’s Article 6 guarantees the national right to capital account management, all too many national authorities in developing countries, especially emerging markets, have been deterred from exercising their rights effectively.
Improve national regulation of finance
Improving effective, equitable and progressive national regulation of finance, particularly market-based finance, remains challenging, especially in emerging market economies where typically divergent, if not contradictory, banking and capital market interests seek to influence reforms differently in their own specific interests.
Make finance accountable
Instead of improving regulations to achieve these objectives, the growth and greater influence of finance have led to regulatory capture, with reforms enabling, not hindering financialization, including its adverse consequences. Political financing reforms are also urgently needed to limit the influence of finance in politics.
Promote collective, not asset-based welfare
Financialization has been enabled by the reduced role of government. Nationalizing or renationalizing pension funds and improved government ‘social provisioning’ of health, education and infrastructure would reduce the power and influence of institutional investors and asset managers.
Ensure finance serves the real economy
The original and primary role of finance – to provide credit to accelerate productive investments and to finance trade – has been increasingly eclipsed by financial institutions, including banks, engaging in securities and derivatives trading and other types of financial speculation.
Such trading and speculative activities must be subjected to much higher and more appropriate regulatory and capital requirements, with commercial or retail banking insulated from investment or merchant banking activities, e.g., insulating Main Street from Wall Street, or High Street from the City of London, instead of the recent trend towards ‘universal’ banking.
Promote patient banking, not short-termist profiteering
National financial authorities should introduce appropriate incentives and disincentives to encourage banks to finance productive investments and trading activities, and deter them from pursuing higher short-term profits, especially from daily changes in securities and derivatives prices.
This can be achieved with appropriate regulations and deterrent taxes on securities and derivatives financing transactions. An alternative framework for banking and finance should promote long-term investment over short-term speculation, e.g., by introducing an incremental capital gains tax where the rate is higher the shorter the holding period.
Ensure equitable financial inclusion
While financial exclusion has deprived many of the needy of affordable credit, new modes of financial inclusion which truly enhance their welfare must be enabled and promoted.
Ostensible financial inclusion could extend exploitative and abusive financial services to those previously excluded. In some emerging market economies, for example, levels of personal and household debt have risen rapidly, largely due to inclusive finance initiatives.
New financial technologies
Financial houses are profitably using new digital technologies to capture higher rents. While technological innovations can advance financial inclusion and other progressive development and welfare goals, thus far, they have largely served financial rent-gouging and other such exploitive and regressive purposes.
For example, while big data has been used to track, anticipate and stop the spread of infectious diseases, it has also been more commonly abused for commercial and political purposes.
National regulators must be vigilant that ostensibly philanthropic foundations and businesses are actively promoting ‘fintech’ in developing countries without sufficient transparency, let alone consideration of its mixed purposes, implications and potential.
Minimize tax avoidance
Besides curtailing and penalizing tax avoidance practices at the national level, tax accountants, lawyers and others who greatly enable and facilitate tax evasion and related abuses should be much more effectively deterred.
Strengthen multilateral cooperation to equitably enhance national fiscal capacities
Governments must cooperate better multilaterally to more effectively and equitably tax transnational corporations and high net worth individuals. Such cooperation should effectively check illicit financial flows with strict regulations to deter private banking, banking secrecy, tax havens and other international facilitation of tax evasion.
Existing initiatives need to be far more inclusive of, sensitive to and supportive of developing country governments. OECD led initiatives previously excluded developing countries, but their recent inclusion, while an advance, remains biased against them.
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“It is thus necessary to revisit and contain the virus of financialization wreaking long-term havoc in developing, especially emerging market economies. No one is financing work on a vaccine, while all too many with influence seek to infect us all as the virus is touted as the miracle cure to contemporary society’s deep malaise, rather than exposed for the threats it actually poses.”
I have listened to Existential Threat Experts on numerous occasions and have yet to hear any of them refer to Financialization as a threat or even as a symptom of what may be coming down the road when they ramp up General Intelligence or Super Artificial Intelligence. This is either willful ignorance or blindness.
I view Financialization as a precursor to the havoc and destruction that will be wreaked by the dawn of General Intelligence. We are possibly there already. There are certainly signs about us like the chaos and destruction of truth and fact by Facebook, etc. which should be more property called anti-social media, And, therefore, anti-human.
This is probably the most important subject of our time yet it is ignored by our experts. Only a very few realize the danger.
Charlie Stross recognized it in his book Accelerando, although he is a computer scientist and scifi author, not a financial guy. In the book, capitalism goes AI and eats everything. My favorite bit is the avatar of one particularly nasty AI corporation being a giant slug.
The book was written a while ago now and if the near future parts don’t match current reality, they most definitely rhyme.
…capitalism goes AI…
Sort of like the neolib belief that ‘“The market” is an information processor, and the most efficient one possible—more efficient than any government or any single human ever could be. ‘ -Mirowski
Maybe capitalism, or “The Market” (genuflects), has already gone AI. /not quite a snark
Yeaaaaaa, tell that to the Biden voters. People arent interested in definancialisation judging by their voting patterns. So lets chill and enjoy the show
Vote Blue no Matter who. Financialization is what makes the Congress function.
Sundaran and Hui have certainly addressed some of the many issues of financialization which need to be addressed. Unfortunately, what is missing here is how to go about addressing the various governments around the world which have been totally corrupted by big finance, their minions and lobbyists who brook no interference in the “enhancement” of financial “efficiency” that is financialization. Unless and until governments are forced by their citizens to change course; or, the financialized economies finally collapse under their own corrupt weight, nothing will change.
I don’t fully understand why most Americans buy into the big lie that a booming Wall St is good for our economy. The fact is it indicates that the economy is more heavily burdened by non productive financial profits. Wall St grows like cancer: at the expense of the host economy. The health of the FIRE Sector is a measure of the rate of concentration of wealth with the ruling elite class and their principal servants. It’s long past time to stop paying homage to he parasitic disease of compound interest and capital gains.
I know I’ve merely asserted conclusions. Anyone who’s really paying attention and has thought about how the economy works knows the inevitability of a bad end for capitalism. I’ve written about it and covered most of the evidence and reasoning that proves it as have many before me, especially in the past two hundred years. Hell, Moses wasn’t the only Mesopotamian leader to acknowledge, write about and prescribe cures for the economy killing concentration of wealth by compound interest. (Is only implied in the Biblical version. Aristotle, Jesus and Mohammad spoke more dynamically on the subject.) It doesn’t take a genius to see that the exponential growth of money and profits, without an expansion of production and consumption, can only be caused by the inflation of a bubble that must eventually burst. That’s all banking, insurance, investment and real estate market have ever been.
I’ve read with deep interest works by Costas Lapavitsas, Michael Hudson, Mariana Mazzucato, Gabriel Zucman, Robert Skidelsky, Hyman Minsky. Your statements resonate with the diverse conclusions these and many others draw. So many of our current ills, particularly in the US, seem to have their origin in the growth of the FIRE sector, beginning in the late 70s — early 80s, at the expense of almost everything else. This parasitic growth (and there really is no better term) has become an enormous millstone hung about the neck of the real US economy. If I can see this, and I’m not even an economist by training (earth scientist), why does this simple fact so elude most people?
Here is a quote from an article that popped up in my browser this morning.
“In the United States, then-Treasury Secretary Timothy Geithner made the rescue of the banking system the centerpiece of President Barack Obama’s economic legacy, while both Treasury and Congress conspired to starve states of the funds required for necessary public investment. From 2008 to 2016, government investment as a percentage of GDP in the United States sunk to its lowest level since records began in 1947, as infrastructure budgets that had once connected the country with highways, airports, and bridges were slashed.”
https://getpocket.com/explore/item/the-west-has-a-resentment-epidemic
One might be more sympathetic to a large US financial industry if it allocated society’s capital well, but in this century alone, the USA financial industry has supported the shifting of much USA manufacturing overseas, supported/promoted the Internet Bubble, supported/promoted the housing bubble , supported/promoted private equity business asset stripping, supported/promoted the education bubble and benefited from the FED QE supported asset bubble.
And when trouble happens the USA financial industry it IS always the first to be rescued, with the most golden, few to no-strings attached rescue packages in 2009 and 2020.
The seems to be no self correcting feedback loop in place as the financial industry grows ever more politically powerful despite serving the commonweal very poorly.
And former financial industry water-carrier Joe Biden may be the next US president.
“I have a plan that seems very simple, but I know it will be successful. All we have to do is to hang a bell about the Cat’s neck. When we hear the bell ringing we will know immediately that our enemy is coming.”
Nice wish list there. Might as well add sparkle ponies for everyone. That’s just about as likely to happen as any of the suggested remedies.
That’s the sad truth.
If we’re going to create an anti-financialization wish list, I would add changing prevailing western legal systems from form based to substance based. Tax laws are almost universally substance based since otherwise taxes could be easily avoided by substituting the legal form of an activity or investment. US bankruptcy law is also largely substance based which has driven a preference for English law among international financiers. English law outside of taxation almost always respects the legal form which allows broad scope for arbitrage of contractual terms to produce the desired result.
I don’t know much about legal systems but have a sense that you may be pointing to a fundamental system characteristic here — could you expound a little more what you mean regarding the difference betw substance vs legal form based legal systems?
What is the reason for a different treatment in English law of tax law vs the rest? What is the mechanism by which this allows unconstrained financialization?
I think the article is at best a wish list devoid of serious insight and context (unlike similar analysis by say Prof. Hudson) – but your comment may have made it worth coming for.
I have a feeling that climate crises will intersect disastrously with many financial crises to come and there will be a tussle between the two. If finance wins our good time on earth will end; if the climate wins then we will have learned through desperate times how to live within our means and everyone will make do with less of most things. The question is: Just how many billionaires will it take to win the game? In any case, human beings do not seem to mind living on an erupting volcano whether it is a climatic one or a monetary one.
Shortest version:
More money is made from investing in debt production than investing in productive assets.
Also refer to Nicholas Shaxson’s books. There are enough examples to provide some visceral punch to the messages, and that would be necessary to cut through the fog and FUD that typically surrounds such discussions.
Show people what is happening, not in some tabloidish or cartoon way, but in a relatable way so that they don’t just get put off and tune out or retreat into self-medication. In my view, that issue represents one of the failures of meaningful communication to people about their worlds. People will respond if addressed as adults who can handle honest presentation without spin, moralizing, cancel culture threats or other manipulations that isolate and marginalize.
Thanks very much for this post.
Standing on an ocean beach shore an oncoming tidal wave is mostly un-discernable; its only when you turn your back and idly continue strolling along the waters edge that you suddenly look up and the wave itself blocks out the sun…..then it’s too late to run.
“Pure” unbridled capitalism is like a hungry animal. There is almost no slating its thirst or search for more vulnerable food.
Decades ago too many Americans and their elected leaders swallowed the “free market” mantra and escalated the attack on “regulatory capitalism”.
Today we see the results. There is no going back now. It’s too late.
Those who are “supping” at the table will not feel the knife across their throats when the play ends.
You don’t have to be a genius economist (an oxymoron in any case) to see what is coming.
The escalating debt has gone from a molehill to a giant mountain range slippery in ice.
Just don’t get caught when the “fire and ice” avalanche comes down.
How not to?
Just don’t play the game.
Why were there so many financial crises in the neoliberal era?
(Globalisation never really stood a chance)
Shall we start with the basics?
Banks – What is the idea?
The idea is that banks lend into business and industry to increase the productive capacity of the economy.
Business and industry don’t have to wait until they have the money to expand. They can borrow the money and use it to expand today, and then pay that money back in the future.
The economy can then grow more rapidly than it would without banks.
Debt grows with GDP and there are no problems.
Financial liberalisation – That’s a really bad idea.
The UK used to be the great financial superpower and it looks as though we understood this in the past.
https://www.housepricecrash.co.uk/forum/uploads/monthly_2018_02/Screen-Shot-2017-04-21-at-13_53_09.png.e32e8fee4ffd68b566ed5235dc1266c2.png
What happened in 1979?
The UK eliminated corset controls on banking in 1979, the banks invaded the mortgage market and this is where the problem starts.
The transfer of existing assets, like real estate, doesn’t add to GDP, so debt rises faster than GDP until you get a financial crisis.
Before 1980 – banks lending into the right places that result in GDP growth (business and industry, creating new products and services in the economy)
Debt grows with GDP
After 1980 – banks lending into the wrong places that don’t result in GDP growth (real estate and financial speculation)
Debt rises faster than GDP
2008 – Minsky Moment, the financial crisis where debt has over whelmed the economy
After 2008 – Balance sheet recession and the economy struggles as debt repayments to banks destroy money. We are making the repayments on the debt we built up from 1980 – 2008.
Japan has been like this since 1991.
None of this whackadoodle debt is going to paid back in our lifetimes or even by “Gen Z’s” lifetime.
The debt is used as a form of control.
Basically, future generations have to realize all of this is batsh– crazy economics and find something better to with their lives other than worry about debts run up to subsidize billionaires and wars way in the past.
Another if anybody’s still reading comment: global financialization would have been much more difficult, if not impossible, without the technological ‘advances’ and innovations gifted to the world by Silicon Valley. Yep, the same technology that puts so much news and whatever sort of music, art, and photography we might want at our literal fingertips has been a, if not the key enabler of an political-economic calamity.