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.

Lars P. Syll: Shiller & Roubini's Fears of Swedish Housing Bubble Justified

By Lars P. Syll

The Swedish Riksbank has according to Lars E.O. Svensson been pursuing a policy during the last fifteen years that in reality has made inflation on average more than half a percentage units lower than the goal set by the Riksbank. The Phillips Curve he estimates shows that unemployment as a result of this overly “austere” inflation level has been almost 1% higher than if one had stuck to the set inflation goal of 2%. What Svensson is saying, without so many words, is that the Swedish Fed for no reason at all has made people unemployed. As a consequence of a faulty monetary policy the unemployment is considerably higher than it would have been if the Swedish Fed had done its job adequately. So far, so good — I have no problem with Svensson’s argument about the inadequacy of the Swedish inflation targeting policies. However, what makes the picture more complicated is that we do have a housing bubble in Sweden — it’s not just a figment of imagination the “bad guys” use to intimidate us with. [That said, I, of course, in no way want to imply that central bank interest rate targeting (and/or accommodations) is the best way to counteract housing bubbles. Far from it.]

Read the rest here.

Jan Kregel: The Continuing Risk of Derivatives

Implications of Financial Capitalism for Employment Relations Research

New paper by Eileen Appelbaum, Rose Batt and Ian Clark of CEPR

Increasing share of the economy is organized around financial capitalism, where capital market actors actively manage their claims on wealth creation and distribution to maximize shareholder value. Drawing on four case studies of private equity buyouts, this article published in the British Journal of Industrial Relations challenges agency theory interpretations that they are ‘welfare neutral’ and show that an alternative source of shareholder value is breach of trust and implicit contracts. It also shows why management and employment relations scholars need to investigate the mechanisms of financial capitalism to provide a more accurate analysis of the emergence of new forms of class relations and to help us move beyond the limits of the varieties of capitalism approach to comparative institutional analysis.

See here (subscription required).

"The Endless Crisis" reviewed in Marxist Sociology Section (ASA) Newsletter

 

Book Review: The Endless Crisis: How Monopoly-Finance Capital Produces Stagnation and Upheaval from the USA to China, by John Bellamy Foster and Robert W. McChesney

Review by David Fields and Daniel Auerbach

The Monthly Review, since its inception, has been carrying on some of the best works in Marxism. The analytical foundations of what has come to be called the Monthly Review School were set out by the economists Paul Baran, Paul Sweezy, and Harry Magdoff. The lucidly rich works like Monopoly Capital by Baran & Sweezy and Magdoff’s piece on Imperialism (along with Harry Braverman’s work on Labor and Monopoly Capital) have sustained Marx’s invaluable insights into the twentieth and twenty-first centuries.

Read rest here.

Growing Indebtedness

I have posted here on growing indebtedness and financialization. The table below comes from Duménil and Lévy's recent book The Crisis of Neoliberalism.

As they note (p. 104) in regard to the table, one can see: "the rise of the debts of all US sectors as a percentage of GDP. This growth remained moderate after World War II, from 126 percent in 1952 to 155 percent in 1980, and exploded during the neoliberal decades, up to 353 percent in 2008." Yet, between 1952 and 1980 public sector debt fell from 68 to 37, and the moderate increase was all in private debt. Further, note the explosion of the financial sector debt increasing six-fold in the three decades after 1980. Over the whole period, the financial sector debt as a share of GDP grew by almost 40 times. In their words again: "the indebtedness of the financial sector is a new and spectacular phenomenon, typical of the neoliberal decades."

Phase A, Phase B, and American Power

Endless accumulation of capital in the world-system rests on the dependence of historically specific hegemonic institutions for constant realization of surplus value to be sustained. Given that the capitalist world economy has never culminated into a distinct world empire, the structure of the axial international social division of labor has centered on unequally powerful states competing for resources in the name of national interests to secure monopoly rents. The evolution of hegemons provide the spatial temporal fixes for setting norms and rules of world order and system level solutions to condition, to a certain degree, some level of word-systemic stability.

Hegemonies, it is argued in the literature (see here)  are not permanent entities. The world economy is prone to structural crises due to institutional inertia stemming from overaccumulation, class antagonisms, and essentially the nature anarchy of in global production—all of which eventually contradict the long-run sustainability of hegemonies. The rise and fall of hegemonies are systemic cycles of accumulation (SCA'S) defined in terms of Kondratieff long waves, which are periods of approximately 40-60 years, separated by A phases and B phases (see here). The A phase is marked by the concentration of heightened economic activity translating into commercial primacy and political/military strength.

Inevitably, it is contended, there is a contradiction which marks a turning point. This is when, it is pressuposed, the unquestioned supremacy of material production of the dominant state is essentially contested, undermining profit rates for the capitalist world economy, as a whole, and leading to stagnation and bifurcation. It is perceived that the hegemon's capacity to provide system-level organizational solutions wanes. This is phase B of the Kondratieff long wave. What ensues is a conscious innovative restructuring, marked by financial expansion, in which capricious rent-seeking predominates.

Phase B is the belle époque of a declining hegemony, in which vulture capitalism reins in and casino capitalism on the world stage nefariously transfers purchasing power from strata with high marginal propensities to consume to strata with low marginal propensity to consume. Social compromises allowing for some sort of broadly shared prosperity throughout the world is fastidiously phased out. ‘An increasing mass of money capital sets itself free from its commodity form, and accumulation proceeds through financial deals’ (Arrighi 1994: 6).  Financialisation appears to create renewed prosperity for the hegemon, but this is illusory; it is ‘a sign of autumn’ – it conceal crises of over accumulation and foreshadows, in the short-run, the deathknell of hegemonic power.

Does the age of American-led global financialisation mark such a precipitous fall? In my view, specifically with respect to American hegemony, Phase B manifests prepotence. As Strange (see here) once argued:

America has the ability […] to exert predominant influence for good or ill over the creation of credit in the world’s monetary system. […] The United States is the only government capable of creating dollar assets that are accepted and salable word-wide. […] In most countries, whether the balance of payments is in surplus or deficit indicates the strength or weakness of its financial position.  With the United States, the exact converse can be true.  Indeed, to run a persistent deficit for a quarter of a century with impunity indicates not American weakness, but rather American [structural] power in the [world] system.

Globalization: A Fetish of (Post) Modernity

Throughout the enormous literature on ‘globalization’ there is a common theme that worldwide social, political, and economic transformations have contributed to reconfigurations and re-articulations of the world-system. The contention is that due to to recent technological revolutions in communication, media, and transportation, a ‘new international division of labor' has ensued a unique 'global' sociological imagination; the national 'state' as a principle of structuration is unsatisfactory for the social scientist - the 'space of flows' has replaced the 'space of places' (Ruggie, 1993). Dynamic connective configurations beget 'transnational' corporations omnipresent vertically disintegrated and horizontally integrated in an irresistible Gramscian transnational historic bloc of 'neoliberalism'.

This approach downplays the primary force driving globalization, which is financialization - the international transformation of future streams of (profit, dividend, or interest) income into tradeable financial assets.  The systemic power and importance of financial markets, financial motives, financial institutions, and financial élites manifestly delink the national state from perceived social, political, and economic processes. Given US hegemony in the world-system (cf. Fields & Vernengo, 2012),  however, the US Federal Reserve (along with the US Treasury and Wall Street) sets the conditions for financialization, since it acts as a safety valve for mass amounts of international liquidity necessary the transnationalisation of corporate power (Arrighi, 1999: 223).

US monetary policy is the international transmission mechanism for global economic activity. As such, to suggest that methodological nationalism is not befitting, because it blinds social science to the multi-dimensional process of change that has irreversibly transformed the very nature of the social world and the place of states within it, is a ‘just so’ story of prejudgement that overlooks how the world-system operates within a particular institutional setting.

As Bertell Ollman (see here) notes:

"There is also a related tendency to overestimate the speed of change, along with a corresponding tendency to underestimate all that is holding it back. Thus, relatively minor cracks on the surface of capitalist reality are too easily mistaken for gaping chasms on the verge of becoming earthquakes. [...] non-dialectical thinking leads people to be surprised whenever a major change occurs, because they aren't looking for it and don't expect it, because it isn't an internal part of how they conceive of the world at this moment [...]" 

The Bain Model

Matt Taibbi wrote an incredibly important article on Bain Capital. Not so much because it explains what Romney did to get his fortune, which it does, but more importantly as a general explanation of the process of financialization. Bain is an equity firm. Taibbi basically tells you what equity firms do. In his words:

"A private equity firm like Bain typically seeks out floundering businesses with good cash flows. It then puts down a relatively small amount of its own money and runs to a big bank like Goldman Sachs or Citigroup for the rest of the financing. (Most leveraged buyouts are financed with 60 to 90 percent borrowed cash.) The takeover firm then uses that borrowed money to buy a controlling stake in the target company, either with or without its consent.

When Bain borrows all of that money from the bank, it's the target company that ends up on the hook for all of the debt.

Once all that debt is added, one of two things can happen. The company can fire workers and slash benefits to pay off all its new obligations to Goldman Sachs and Bain, leaving it ripe to be resold by Bain at a huge profit. Or it can go bankrupt – this happens after about seven percent of all private equity buyouts – leaving behind one or more shuttered factory towns. Either way, Bain wins. By power-sucking cash value from even the most rapidly dying firms, private equity raiders like Bain almost always get their cash out before a target goes belly up."

A win-win as they say, unless you actually work in a company acquired by an equity firm. Here is an example of an actual company.

"Take a typical Bain transaction involving an Indiana-based company called American Pad and Paper. Bain bought Ampad in 1992 for just $5 million, financing the rest of the deal with borrowed cash. Within three years, Ampad was paying $60 million in annual debt payments, plus an additional $7 million in management fees. A year later, Bain led Ampad to go public, cashed out about $50 million in stock for itself and its investors, charged the firm $2 million for arranging the IPO and pocketed another $5 million in "management" fees. Ampad wound up going bankrupt, and hundreds of workers lost their jobs, but Bain and Romney weren't crying: They'd made more than $100 million on a $5 million investment."

This is not only legal, but it is also possible because of a tax loophole that allows deductions on the interest on the money borrowed to take over productive firms. As Matt Taibbi tells us:

"The entire business of leveraged buyouts wouldn't be possible without a provision in the federal code that allows companies like Bain to deduct the interest on the debt they use to acquire and loot their targets."

So Taibbi is right when he says that Romney complaining about excessive debt is ironic, to say the least.