Financialisation has had an enormous impact on the global economy. The current era of financialisation bears many of the hallmarks of pre-Great Depression era laissez faire capitalism. In 1944, after the Great Depression and World War II, delegates from 44 countries held a conference in New Hampshire, USA, called the Bretton Woods Conference. It was an effort to regulate a chaotic and increasingly profligate international monetary system that had arguably caused both the depression and the following war. Between 1944 and 1971, the policies agreed upon at the conference seemed successful in bringing financial stability within a rules-based, regulated monetary order.
However, the system designed at the Bretton Woods Conference ultimately failed, despite its successes. “Under an analysis of nine variables (rate of inflation, real per capita growth, money growth, short- and long-term nominal interest rates, short- and long-term real interest rates, and the absolute rates of change of nominal and real exchange rates), the Bretton Woods regime exhibited the best overall macro performance in comparison to the gold standard (1881-1913), interwar partially backed gold standard (1919-38), and the float exchange (1974-1989) (Singh, 2014).”
The failure of Bretton Woods was underscored by the “Nixon Shock” in 1971, which revealed flaws in the system’s architecture and brought into question its stated goals and long-term viability, particularly in the United States. Aside from issues such as wage stagnation, rising unemployment, and declining profitability during the 1970s (a discussion too complex for the purposes of this brief essay), banks and other financial institutions began to complain about the restrictions imposed on their activities. By 1982, financial deregulation had begun, and modern neoliberal ideology was in full swing by the end of that decade. Corporate capitalism was returning to its 19th century origins, and modern era digital technologies provided a catapult for dominance of the financial sector, and its increasing separation from nonfinancial activity.
So, what does financialisation mean in the 21st century? Gerald Epstein, in his book, Financialization and the World Economy, broadly defines it as “the increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of the domestic and international economies” (Epstein, 2005). Neoliberal restructuring of political and economic institutions over the last 30 years has allowed financiers to increase the power of wealthy elites through complex financial mechanisms that are independent of nonfinancial activity. It has placed financial ‘products’ in a dominant economic position, so much so that corporations whose historical means of profit-making were in the production and distribution of tangible goods, have shifted their primary business into that of finance and financial products.
Through these financial products, debt itself can be a commodity to be bought and sold among financial gamblers, betting on a debtor’s ability to pay and the profits that can be gained even when a debtor cannot pay – such as from foreclosures. It has also led to the rise of a “rentier” class who are able to extract vast amounts of profit with little to no real contribution to society. Despite the early promises of neoliberalisation to improve competition and innovation, financialisation has arguably created the opposite through concentrated economic power causing monopolies and monopsonies in the global market.
All of this has had a very marked effect on the “social structure of accumulation” (SSA). Powerful wealthy elites have maintained hegemony through opaque financial ‘jiggery-pokery’, such as those revealed by the Libor scandal, and the subprime mortgage lending that contributed heavily to the Global Financial Crisis of 2007.
Financialisation has arguably created a culture where workers earn less, carry more debt in every aspect of their lives, and have little ability to be upwardly mobile. This is often through no fault of their own, but through the syphoning of wealth from the means of production into shareholders and corporate hands via a powerful, speculative financial sector. It has facilitated and exacerbated wealth inequality.
As public trust in political and financial institutions erode, those who feel most harmed by “the system” often look for answers in the wrong places. Populist leaders are on the rise, offering scapegoats and solutions; none of which address the “structural violence (Burtle, 2013)” inherent in neoliberal financial institutions or their direct social effects. Consequently, until there is political will to restructure the financial sector at an institutional level, no amount of regulation or deregulation can achieve much in alleviating the boom – bust cycles that currently exist (Kay, 2016). We may be heading for cataclysmic events like what was experienced in the 1930s, and we would be foolhardy to ignore those with such concerns.
References
Burtle, A., 2013. Structural Violence. [Online]
Available at: http://www.structuralviolence.org/structural-violence/
[Accessed 3 April 2018].
Epstein, G. A., 2005. Financialization and the World Economy. Cheltenham and Northampton: Harvard University Press.
Kay, J., 2016. Other People’s Money: The Financialisation of the Economy. Maastricht: School of Business and Economics.
Singh, S., 2014. Monetary Collapse: Why Did Bretton Woods Fail?. [Online]
Available at: http://columbiaeconreview.com/2014/06/09/monetary-collapse-why-did-bretton-woods-fail/
[Accessed 2 April 2014].