Excerpts from Walden Bello, “Global Finance, Power and instability”, in Trans National Institute, State of Power 2019, https://www.tni.org/en/stateofpower2019
In the wake of the neoliberal programme of the 1980s, the interests and focuses of capitalism turned towards the financial sector. Finances became the driving force of the economy. International institutions like the World Bank and the IMF as well as the United States and other G7 countries, as part of the “Washington Consensus” prescriptions, pressed Global South countries to liberalize their financial sector and allow financial institutions to operate without much restraints. In the Glonal North, this expansion of the financial sector gave Wall Street and other centers of financial power a very large influence on macro economic policy, including fiscality, debt, government regulations, etc.). All of this led to a series of financial crises culminating in the 2007-08 global financial crisis from which the world is still recovering.
Over the last 30 years, finance capital has become dominant in the leading capitalist economies, outstripping the industrial elite in power and influence. This development has led to the increasing subjection of the productive sector to the volatile dynamics of the financial sector. The centrality of finance in today’s global economy is revealed by the increasing frequency of major financial crises, which have inevitably been followed by recessions. Indeed, the global economy is now said to be in the throes of ‘secular stagnation’ or a period of prolonged low growth, one of the key causes of which was the recent financial implosion.
The most distinctive process and feature of contemporary capitalism is said to be financialisation, which has several dimensions. It generally means that finance or the dynamics of the financial sector have become the central force driving the economy. It means that movements in the production and pricing of goods and services are increasingly conditioned not only by supply and demand in the real economy but by the increasingly autonomous movements in the values or prices of financial instruments tracking goods and services.
It also means that speculative transactions overshadow the process of production as the source of profits, leading to a situation in which the wealth of the financial elite in the banking and shadow-banking sectors eclipses the non-financial capitalist elites. Though it accounted for only 8 per cent of the US Gross Domestic Product (GDP), the financial sector raked in 30 per cent of the profits in recent years, with some analysts saying that the actual figure was 50 per cent.
What financialization means?
First, financialisation involved the massive creation of indebtedness in the population to substitute for stagnant incomes in order to create demand for goods and services. The main avenue taken by to create debt in the US was through the provision of so-called subprime housing loans to a huge swathe of the population. These were loans that were indiscriminately given to home buyers with little capacity to repay them, so that they were essentially ticking time bombs. With mortgages securitised they could be traded, leading to the disappearance of the original creditor–debtor relationship.
Second, financialisation involved so-called innovations in financial engineering that would facilitate liquidity. One of the most important – and eventually most damaging – was securitisation, which involved making traditionally immobile contracts such as mortgages liquid or mobile and tradable. When millions of owners of the original subprime mortgages could no longer service their payments owing to their low incomes, this development spread like a chain reaction to the trillions of mortgage-based securities being traded globally, impairing their quality and bankrupting those holding significant quantities of them, like the Wall Street investment bank Lehman Brothers.
The third key feature of financialisation was that many of the key actors, institutions, and products that were at the cutting edge of the process were either unregulated or poorly regulated. Thus there emerged the so-called ‘shadow banking industry’ alongside the regulated traditional banking industry, with non-traditional financial institutions like Goldman Sachs, Morgan Stanley, and American International Group (AIG) serving as the first massive wave of a tsunami that brought with it the introduction of securitisation, financial engineering, and novel products such as MBSs, collateralised debt obligations (CDOs), and credit default swaps (CDSs).
The Failure of Reform
When Barack Obama became the US president in 2008, one of his priorities was to fix the global financial system. Ten years later, it is evident that owing to a combination of timidity on the part of government and resistance on the part of finance capital, little reform took place under Obama and his counterparts in the rest of the world. The big banks that were rescued by the US government in 2008 because they were seen as too big to fail have become even more too big to fail, with the ‘Big Six’ US banks – JP Morgan Chase, Citigroup, Wells Fargo, Bank of America, Goldman Sachs, and Morgan Stanley – collectively having 43 per cent more deposits, 84 per cent more assets, and triple the amount of cash they held before the 2008 crisis. Essentially, they had doubled the risk that felled the banking system in 2008.
Second, the products that triggered the 2008 crisis are still being traded. This included around $6.7 trillion in mortgage-backed securities sloshing around, the value of which has been maintained only because the Federal Reserve bought $1.7 trillion of them.
Third, the new stars in the financial firmament – the institutional investors’ consortium made up of hedge funds, private equity funds, sovereign wealth funds, pension funds, and other investor entities – continue to roam the global network unchecked, operating from virtual bases called tax havens, looking for arbitrage opportunities in currencies or securities, or sizing up the profitability of corporations for possible stock purchases. Ownership of the estimated $100 trillion in the hands of these floating tax shelters for the super-rich is concentrated in 20 funds.
Fourth, financial operators are racking up profits in a sea of liquidity provided by central banks, whose releasing of cheap money in the name of ending the recession that followed the financial crisis has resulted in the issue of trillions of dollars of debt, pushing the global level of debt to $325 trillion, more than three times the size of global GDP. There is a consensus among economists along the political spectrum that this debt build-up cannot go on indefinitely without inviting catastrophe.
Fifth, instead of more tightly controlling the financial sector, some countries have followed the advanced capitalist economies in liberalising it. In China, the world’s second biggest economy, this has created a dangerous conjunction of factors that could lead to a financial implosion: a volatile stock market, a property bubble, and an unregulated shadow-banking sector. The number of vulnerable points in the world economy has increased and all are candidates for the next big crisis.
Walden Bello : 2019.
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