Dean Baker on The Promotion of Waste & Inequality By US Finance

By Dean Baker

In the crazy years of the housing boom the financial sector was a gigantic cesspool of excess and corruption. There was big money in pushing and packaging fraudulent mortgages. The country paid a huge price for the financial sector's sleaze. Unfortunately, because of the Obama administration's soft on crime approach to the bankers who became rich in the process; the industry is still a cesspool of excess and greed. Just to be clear, knowingly issuing and packaging a fraudulent mortgage is a crime, the sort of thing for which people go to jail. But thanks to the political power of the Wall Street, none of them went to jail, and in fact they got to keep the money.

Read rest here.

For more on the long-run macroeconomic causes, implications, and effects of US financialization, see recent articles here, here (subscription required) , here, here, here (subscription required), and here (subscription required); for a pertinent sociological analysis, see here

Iren Levina: A Puzzling Rise in Financial Profits and the Role of Capital Gain-Like Revenues

New PERI working paper by my friend & colleague Iren Levina - From the abstract:

The paper provides an explanation for the puzzling decoupling between the rate of growth of financial profits and GDP in the 2000s. Drawing on the insights from Keynes, Minsky, and Hilferding, the paper identifies a peculiar type of profit – capital gain-like revenues that take the form of profits from underwriting, mergers and acquisitions, securitization, and trade in financial assets. These capital gain-like revenues come from the redistribution of monetary assets and lack a counterpart in current GDP. They can be thought of as wealth transfers. Based on an empirical analysis of revenues of U.S. bank holding companies, these capital gain-like revenues are shown to have contributed significantly to the decoupling between the rate of growth of financial profits and GDP. The paper identifies characteristics of these revenues that explain the puzzles around this decoupling – its very possibility, sustainability over long time, and lack of losses sufficient to offset the pre-crisis financial gains. These characteristics of capital gain-like revenues also allow one to reconcile two seemingly incompatible approaches to a rise in financial profits – as transfers (rent) and as an illusion (mirage). 

Read rest here. 

New Working Paper By Passarella & Sawyer: Financialisation in the circuit

From The Abstract:

The relationships between financial systems and the macro-economy with emphasis on the saving-investment relationships and the nature of money are set out. A circuitist framework is extended to reflect some major features of the era of financialisation circa 1980.

Read the rest here.

* FESSUD is a multidisciplinary, pluralistic project which aims to forge alliances across the social sciences, so as to understand how finance can better serve economic, social and environmental needs. For more on the project, see here.

Dean Baker on the corruption of the economics profession

By Dean Baker

Most of us are willing to believe the direct opposite of what we can see with our own eyes because we accept the analysis of the solar system developed by astronomers through many centuries of careful observation. The overwhelming majority of people will never go through the measurements and reproduce the calculations. Rather, our belief that the earth revolves around the sun depends on our confidence in the competence and integrity of astronomers. If they all tell us that the earth in fact orbits the sun, we are prepared to accept this view. Unfortunately the economics profession cannot claim to have a similar stature. This is both good and bad. It is good because it doesn’t deserve that stature. Economists too often work as hired guns for those with money and power. It is bad because the public needs expertise in economics, just as it needs expertise in medicine and other areas.

Read rest here.

PS: A post on why the current crisis has not undermined the mainstream can be seen here.

Prabhat Patnaik - Finance and Growth Under Capitalism

By Prabhat Patnaik

Once we reject Say’s Law and recognize that capitalism is prone to deficiency in aggregate demand, we have to accept that sustained growth in this system requires exogenous stimuli. By exogenous stimuli I mean a set of factors which raise aggregate demand but are not themselves dependent upon the fact that growth has been occurring in the system; that is, they operate irrespective of whether or not growth has been occurring in the system. Moreover, they raise aggregate demand by a magnitude that increases with the size of the economy, for instance with the size of the capital stock. They are in other words different from “erratic shocks” on the one hand, and “endogenous stimuli”, such as the multiplier‐accelerator mechanism, on the other: the latter can perpetuate or accelerate growth only if it has been occurring anyway.

Read rest here.