Review of Keynesian Economics issue on Financialization

Volume 9, Issue 4 of the Review of Keynesian Economics is now available. The issue is devoted to the twin topics of “financialization” and the “macroeconomics of international finance”. The first paper by Michael Hudson analyzes the impact on distributional outcomes of adding capital gains to and subtracting rent seeking activity from GDP. The second paper examines financialization’s rolling sector dynamics whereby it loads the economy with debt. The third paper by Esteban Pérez Caldentey and Matias Vernengo explores how financialization has fostered premature deindustrialization in Latin America. The fourth paper by Biagio Bossone looks at the implications of the actions of international portfolio actors for policy sovereignty. The fifth paper empirically examines the effectiveness of controls on international financial capital flows. The last paper explores whether recent developments regarding China’s currency reflect capital flight or internationalization of the renminbi.

Financialization revisited: the economics and political economy of the vampire squid economy

New paper by Thomas Palley. From the abstract:

This paper explores the economics and political economy of financialization using Matt Taibbi’s vampire squid metaphor to characterize it. The paper makes five innovations. First, it focuses on the mechanics of the “vampire squid” process whereby financialization rotates through the economy loading sector balance sheets with debt. Second, it identifies the critical role of government budget deficits for the financialization process. Third, it identifies the critical role of central banks, which are the lynchpin of the system and now serve as de facto guarantors of the value and liquidity of private sector liabilities. Fourth, the paper argues financialization imposes a form of policy lock-in. Fifth, it argues financialization transforms popular attitudes and understandings, thereby generating political support despite poor economic outcomes. In effect, there is a politics of financialization that goes hand-in-hand with the economics. The paper concludes with some observations on why mainstream macroeconomics has no equivalent construct to financialization and discusses the disquieting unexplored terrain that the economy is now in. 

Read rest here.

Financialization, Deindustrialization, and Instability in Latin America

New working paper at the Political Economy Research Institute (PERI). From the abstract:

The paper analyzes the relation between premature deindustrialization in Latin America with what is termed premature financialization. Premature financialization is defined as a turn to finance, organized as an industrial concern, which is a vehicle for accumulation before the process of industrialization has reached maturity. This contrasts with developed countries where financialization occurs after an advanced stage of economic and social development is reached, and where the growth of the financial sector, beyond a certain threshold, can be detrimental to economic activity. The paper examines the consequences of premature financialization for investment, growth, and financial stability.

Read full paper here.

The effects of financialization in Latin America: Is there space for monetary policy?

For those in Bogota next Tuesday. I'll link to the live stream, which I think will be available.

Financialization and the low burden of public debt

Financialization is a fuzzy concept. There are many definitions, and none is clear cut, at least to characterize the changes of the last 40 years or so, which is the period most authors associate with financialization. I'm not suggesting it's not a useful concept though.* In some sense, financialization refers to the last phase in the capitalist system (even if there are ways in which one might argue that capitalism was always financialized).

At any rate, going to the point I wanted to make, the financial burden of public debt went down in the 2000s, but that is not necessarily a good sign. I was trying to check the financial burden of public debt (i.e. the total spending on interests, out of total current spending) in the United States. The figure above shows that the financialization (ha, another possible definition) of the budget started with the Volcker shock, and ended more or less with the collapse of the dot-com bubble in the early 2000s.

The hike in interest rates in the late 1970s increased the financial burden of public debt, and with the lower output growth -- associated not just to higher interest rates and its effects on consumption, but also higher unemployment and lower wages which additionally impacted private demand -- debt dynamics was on the unstable side of the Domar rule (r > g) and public debt increased significantly in a peaceful period that was for the most part prosperous.

Public debt normally increased in periods of crises or of external threats (wars). In other words, public debt was an instrument for the preservation of society for the most part. There was also an agreement that public debt was a necessary instrument for the accumulation of capital, and it provided a secure asset for the functioning of the financial system. Btw, that was a point that was contentious, and not everybody accepted the Hamiltonian notion that public debt could be, to some degree, a blessing. Think of Andrew Jackson's payment of debt, and the various modern Cassandras afraid about the debt burden on future generations.

The rise of public debt since the 1980s (with the minor decrease in the late 90s) has served a very different purpose. While part of it can be seen as the reaffirmation of American Hegemony, with the increased military spending of the Reagan years (still low if compared to the heights of war, hot or cold), much of it was the result of lower taxes for the wealthy. The accumulation of debt was, like the hike in interest, necessary to discipline the labor class and control inflation.

In part, the result of that perverse use of public debt accumulation is that private agents have ramped up private debt in order to compensate for income stagnation. Think about college kids accumulating more debt to compensate the reduced public support for public universities. That of course goes hand in hand with the fact that most booms now are associated with some bubble (stock market, dot-com, housing, etc), or in the absence of a bubble we end up with a moderate lack luster recovery (the last decade), and what is confusedly described as 'secular stagnation.' The flip side is that the low burden of debt on this side of the 2000s, is not benign like the one from the 1950s to the 1970s, which was closer to what Keynes' notion of the euthanasia of the rentier.

It reflects the needs of the economy to maintain private debt under control in a relatively unstable economy. Something that is still necessary to the extent that labor is still very much being disciplined by macro and micro policies that keep wages under control.

* For a relatively recent discussion of the meaning of financialization and its relevance see Epstein (2015) here, and for an older discussion see Palley (2007) here.

Financialization in Latin America

New book edited by Martín Abeles, Esteban Pérez Caldentey and Sebastían Valdecantos. From the description:
The chapters in the book analyze the logic and effects of financialization in developing economies, peripheral financialization so to speak, in particular in Latin America. The first chapters look at the topic from a historical and conceptual angles, and then the latter chapters concentrate on specific manifestations like the influence of financialization on productive investment, spending on Research and Development (R&D), the characteristics of Foreign Direct Investment (FDI), monetary policy management, and the composition of foreign debt. The variety of approaches utilized in this volume reflect ECLAC's historical preoccupation of analyzing the condition that would make possible a macroeconomics at the service of economic development.

A Short Account of The Rise of Neoliberalism

By David Fields

Between roughly the early 1940’s and early 1970’s, the financial architecture of the world economy centered on a US engineered Keynesian accumulation agenda, as a response to the devastation wrought by the Great Depression. The capitalist institutional structure, or social structure of accumulation (Kotz, McDonough, and Reich, 1994), rested on finance being subservient to the promotion of  industrial enterprise. With socially-engineered capital-labor compromises in core-capitalist countries, neo-colonial governing institutions in the periphery, and the Bretton Woods system (along with the Marshall Plan), the immediate post-World War II era was a so-called ‘golden age’ of ‘regulated capitalism’.

By the late 1960’s, nevertheless, capital movements began to undermine the Bretton Woods preoccupation with capital controls, as US officials began actively encouraging the growth of the Euromarket—the pool of unregulated dollar reserves concentrated in the City of London. Moreover, with traditionally marginalized segments of the population in core capitalist countries demanding social, political, and economic rights, and national liberation movements in the periphery overthrowing oppressive governments, calls for expanded role of the state in meeting citizen’s needs dramatically circumscribed global capital accumulation. Pressures for higher nominal wages spawned wage-price spirals. Consequently, the rate of profit fell in core capitalist countries (Dumenil and Levy, 2004: 24).

The globalization of finance became the means for international financial markets to allow industrial enterprise to rebuild the conditions for future profitability. From the 1970’s, activity in financial markets began to rise relative to non-financial economic activity, reflecting not international traded goods and services, but speculative capital flows. Foreign exchange transactions in the world economy rose from $15 billion per day in 1973 to $80 billion in 1980 and $1,260 billion in 1995 (Kotz, 2008). In this sense, the inherent conflict between financial and non-financial capital became relatively obsolete.

Speculative capital flows, however, began to undermine the capacity for the US to guarantee the convertibility of dollars into gold at fixed parity (Triffin, 1960). In 1974, Nixon closed the gold window and loosened capital controls. This marked the end of the Bretton Woods arrangement and the breakdown of the social structure of accumulation that specifically rested on material expansion.

The deregulation of financial markets established a global market of mobile financial capital, yet Keynesian inspired institutional arrangements remained intact, especially the maintenance of cheap money policy for aggregate demand management. As such, hyper-inflationary crises stemming from labor militancy, coupled with international capital movements, turned real rates of interest negative by the mid 1970’s. Although the US became a financial hegemon (cf. Fields & Vernengo, 2013), so to speak, in the sense that its currency became a global fiat money standard, allowing the US to borrow in international markets in its own currency (and essentially perform macroeconomic policy on a global scale), without the friction of gold, price instability undermined real rate of return. As a result, global commitment to deflationary policies was marked by the appointment of Paul Volker as the chairman of the US Federal Reserve in 1979.

The Volker ‘shock’, as it came to be known, reflected the complete shift from finance subservient to industry to industry subservient to finance with the imposition of fiscal and monetary discipline as the means to constrain the capacity of national governments to pursue expansionary policies (that ultimately favor the working class). The high real interest rates set in motion an increasing financial-market orientation of US-led global capitalism. As interest payments, as a factor in capitalist investment (with respect to expected future earnings), rose substantially from 1980 to 1982, leading to the worst recession (at the time) since the Great Depression, a new organization of capitalism was introduced. Capital would no longer rest on production, sales, and growth, but on a speculative strategy of ‘downsize and distribute’ for immediate short-term maximization of shareholder value (Campbell, 2004; Lozonick & O’Sullivan, 2000).

If the monetary authority increases and maintains high interest rates for long periods of time, then for given nominal wages and given nominal exchange rates, there will be falls in real wage and appreciations in the domestic currency. Tight monetary policy will be sustainable, if, and only if, the depression of real wages is accepted, i.e. there is an absence of real wage resistance, and if exporting industries affected by currency appreciation do not have the power to react. The US was victorious in this capacity through successful attacks on labor, along with institutionalizing the so-called Washington Consensus (cf. Meeropol, 1998; cf. Pollin, 2005).

Originally posted on URPE Blog.

References:

Campbell, A. (2004): “The Birth of Neoliberalism in the US: A Reorganization of Capitalism.” in A. Saad-Filho & D. Johnston (ed.) Neoliberalism: A Critical Reader. London and Ann Arbor, MI: Pluto Press

Duménil, G. & D. Lévy (2004): Capital Resurgent. Boston: Harvard University Press.

Fields, D. & M. Vernengo (2013): “Hegemonic Currencies during the Crisis: The Dollar versus the Euro in a Cartalist Perspective.” Review of International Political Economy, 20(4): 740-759

Lazonick, W. & M. O’Sullivan (2000): “Maximizing shareholder value: a new ideology for corporate governance.” Economy and Society, 29(1): 13-35

Kotz, D. (2008): “Neoliberalism and Financialization.” Political Economy Research Institute, University of Massachusetts Amherst, mimeo

Kotz, D., McDonough, T. and Reich, M. (1994) (eds.): Social structures of accumulation: The political economy of growth and crisis. Cambridge: Cambridge University Press.

Meeropol, M. (1998): Surrender: How the Clinton Administration Completed The Reagan Revolution. Ann Arbor, MI: University of Michigan Press

Pollin, R. (2005): Contours of Descent: U.S. Economic Fractures and the Landscape of Global Austerity. London and New York: Verso

Triffin, R. (1960): Gold and the Dollar Crisis: The Future of Convertibility. New Haven, CT: Yale University Press

Financial sector hypertrophy and financial transaction tax

The volume of financial transactions has stabilized since the Global Financial Crisis of 2008, but remans at very high levels, as shown in the figure below. With GDP at about 18 trillions the volume of financial transactions is about 25 times the size of GDP. The potential problems associated to a hypertrophied financial sector.

Yuge!

The source is this paper that discusses the possibilities of a financial transactions tax (FTT), something that has been proposed by Bernie Sanders. And as the authors note: "The revenue potential of a FTT stems from the enormous volume of nancial transactions, which have a value many times GDP."

Book Review of Foster & McChesney's "The Endless Crisis: How Monopoly-Finance Capital Produces Stagnation and Upheaval from the USA to China"

The Endless Crisis: How Monopoly-Finance Capital Produces Stagnation and Upheaval from the USA to China. John Bellamy Foster & Robert W. McChesney Hardcover: 224 pages. Publisher: Monthly Review Press (September 1, 2012). Language: English. ISBN-13: 978-1583673133

By David Fields

Over-accumulation stemming from the so-called golden age of global capitalism has ensued an era of underconsumption as exemplified by low profit rates and chronic excess capacity. As such, what has taken place is an historical transformation towards the process of financialization. With an inability to absorb effectively economic surpluses, concerning the promotion of rising wages along with productivity, NFCs, or non-financial corporations, are coerced to paying a larger share of their internal funds, specifically via debt leveraging (including consumers), to financial institutions. These financial institutions, which are increasingly concentrated in the hands of fewer and fewer people, have become some of the most powerful actors. Increasing concentration of control within the financial sector lends credence to Marx's (1894: 544-45) argument that what Foster & McChesney call the age of monopoly finance capital is one in which

[t]he credit system, which as its focus in the so-called national banks and the big money lenders and usurers surrounding them, constitutes enormous centralization, and gives this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner-and this gang knows nothing about production and has nothing to do with it.

Read rest here.

Al Campbell on Neoliberalism as an Attack on Labor

Izmir University Department of Economics Workshop on “The Great Meltdown of 2008: Systemic, Conjunctural or Policy-created?"

Financialization and the Resource Curse in Brazil

"Financialization and the Resource Curse: The Challenge of Exchange Rate Management in Brazil"

By Kevin P. Gallagher and Daniela Magalhães Prates

Indeed, Brazil has been blessed and cursed with high commodity prices (from 2003 to mid-2008 and 2009-2011) and low interest rates in the core economies after the 2008 global financial crisis. Such an environment, coupled with the high domestic policy rate and the sophistication of the Brazilian financial system, has made Brazil a much sought after destination for carry trade operations through short-term financial flows that are largely transmitted through the foreign exchange derivatives market. Speculative operations into this market have accentuated the upward pressure on the exchange rate, which has come with higher commodities prices, leading to what we refer to here as a financialization of the resource curse (pp. 2).

Read rest here.

Ben Fine on the Material Culture of Financialisation

A FESSUD Working paper by Ben Fine.

From the abstract:

The purpose of this paper is threefold. First is to comment upon the nature of financialisation. Second is to frame how this leads financialisation to be understood whether consciously or otherwise. And, third, is to draw out implications for surveying households as their experiences and understandings of, and reactions to, financialisation without specifically designing a questionnaire itself for this purpose. As should already be apparent, underpinning this contribution is the presumption that financialisation is a characteristic of contemporary capitalism (and that the term is also an appropriate category for representing this characteristic). The material culture of financialisation is addressed by drawing upon the 10 Cs approach that was developed for the study of consumption, highlighting how it is Constructed, Construed, Commodified, Conforming, Contextual, Contradictory, Closed, Contested, Collective, and Chaotic.

Read rest here.

William K. Tabb on the Criminality of Wall Street

By William K. Tabb

The current stage of capitalism is characterized by the increased power of finance capital. How to understand the economics of this shift and its political implications is now central for both the left and the larger society. There can be little doubt that a signature development of our time is the growth of finance and monopoly power. In 1980 the nominal value of global financial assets almost equaled global GDP. In 2005 they were more than three times global GDP. The nominal value of foreign exchange trading increased from eleven times the value of global trade in 1980 to seventy-three times in 2009. Of course it is not certain what this increase means, since such nominal values can fluctuate widely, as we saw in the Great Financial Crisis. They cannot be compared directly and without all sorts of qualifications to the value added in the real economy. But they do give an impressionistic sense of the enormous magnitude by which finance grew and came to dominate the economy. Between 1980 and 2007, derivative contracts of all kinds expanded from $1 trillion globally to $600 trillion. Hedge funds and private equity groups, special investment vehicles, and mega-bank holding companies changed the face of Western capitalism. They also brought on the collapse from which we still suffer. Ordinary people may not be acquainted with the numbers (and even those best informed are not sure of their significance), but people generally understand in different and often deep ways what has been happening: namely, an ongoing process of financialization that has come to dwarf production.

Read rest here.

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

New Book: Private Equity at Work, When Wall Street Manages Main Street

By Eileen Appelbaum and Rosemary Batt

Prior research on private equity has focused almost exclusively on the financial performance of private equity funds and the returns to their investors. Private Equity at Work provides a new roadmap to the largely hidden internal operations of these firms, showing how their business strategies disproportionately benefit the partners in private equity firms at the expense of other stakeholders and taxpayers. In the 1980s, leveraged buyouts by private equity firms saw high returns and were widely considered the solution to corporate wastefulness and mismanagement. And since 2000, nearly 11,500 companies—representing almost 8 million employees—have been purchased by private equity firms. As their role in the economy has increased, they have come under fire from labor unions and community advocates who argue that the proliferation of leveraged buyouts destroys jobs, causes wages to stagnate, saddles otherwise healthy companies with debt, and leads to subsidies from taxpayers. Appelbaum and Batt show that private equity firms’ financial strategies are designed to extract maximum value from the companies they buy and sell, often to the detriment of those companies and their employees and suppliers. Their risky decisions include buying companies and extracting dividends by loading them with high levels of debt and selling assets. These actions often lead to financial distress and a disproportionate focus on cost-cutting, outsourcing, and wage and benefit losses for workers, especially if they are unionized.

See here.

Galbraith on capitalism, economic policy and inequality

Jamie Galbraith on how policy, rather than capitalism per se, is the real cause of inequality. In other words, a more equalitarian version of capitalism is possible (anybody remembers the Golden Age?). He says:

"Finance has driven income inequality, because credit booms accelerate economic growth and because bankers tend to be rich. In the US income inequalities sharpened in the information-technology boom in 2000, again in the housing-finance bubble in 2007, and yet again as the banks and the stock market recovered after 2010.

Across the world, income inequality became more marked in the two decades from 1980. The trend started with the global debt crisis in Latin America and Africa, swept through central and eastern Europe, and moved on to Asia. Only countries that were outside the global financial system (notably China and India) were largely unaffected in the 1980s – though in the 1990s inequality rose with market reforms in both places. Worldwide, as a very broad generalisation, it seems that inequality peaked in 2000.

Political structures matter: social democracies are more egalitarian. Institutional changes matter: military coups (Chile in 1973, Argentina in 1976) precipitated rising inequality. Revolution (Iran in 1979) brought a sharp fall. The rise in the 1980s and 1990s was stronger in countries with weak institutions and weaker in countries with strong ones."

Neoliberalism was the culprit. There is much nuance lost in the current debate on Piketty's Capital. Read rest here (subscrition required).

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. 

Tokunaga & Epstein - Endogenous Finance of a Dollar-Based World-System: A Minskian Approach

Junji Tokunaga & Gerald Epstein 

From the Abstract:

Global financing patterns have been at the center of debates on the global financial crisis in recent years. The global imbalance view, a prominent hypothesis, attributes the financial crisis to excess saving over investment in emerging market countries which have run current account surplus since the end of the 1990s. The excess saving flowed into advanced countries running current account deficits, particularly the U.S., thus depressing long-term interest rates and fuelling a credit boom there in the 2000s. According to this view, the financial crisis was triggered by an external and exogenous shock that resulted from excess saving in emerging market countries, not the shadow banking system in advanced countries which was the epicenter of the financial crisis. Instead, we argue that a key cause of the global financial crisis was the dynamic expansion of balance sheets at large complex financial institutions (LCFIs)(Borio and Disyatat [2011] and Shin [2012]), driven by the endogenously elastic finance of global dollar funding in the global shadow banking system. The endogenously elastic finance of the global dollar contributed to the buildup of global financial fragility that led to the global financial crisis. Importantly, the supreme position of U.S. dollar as debt- financing currency, underpinned by the dominant role of the dollar in the development of new financial innovations and instruments, and was a driving force in this endogenously dynamic and ultimately destructive process.

Read rest here 

Malcolm Sawyer - Financial Development, Financialization and Economic Growth

 

Read rest here