Arrighi, Giovanni, “The social and political economy of global turbulence,” New Left Review, 20, . Epstein, editor, Financialization and the World Economy. Financialization and the World Economy. Edited by Gerald A. Epstein, Professor of Economics and Co-Director, Political Economy Research Institute (PERI). Epstein () in his introduction to his edited book Financialization and the World Economy. 'here we will cast the net widely and define financialization.
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In the last thirty years, the economies of the world have undergone profound transformations. Some of musicmarkup.info). To take another example, holders of financial wealth (Epstein and Jayadev, Chapter 3). In a majority of. By Gerald A. Epstein; Abstract: Financialization – the increasing importance of financial markets, institutions and motives in the world economy – is. http://www musicmarkup.info (application/pdf). Related works. Financialization and the. World Economy. Edited by. Gerald A. Epstein. Professor of Economics and Co-Director ofthe. Political Economy Research Institute.
Changes in capitalism over the last three decades have been commonly characterized using a trio of terms: neoliberalism, globalization, and financialization. Although a lot has been written on the first two of these, much less attention has been given to the third. The financialization of capitalism—the shift in gravity of economic activity from production and even from much of the growing service sector to finance—is thus one of the key issues of our time. More than any other phenomenon it raises the question: has capitalism entered a new stage? I will argue that although the system has changed as a result of financialization, this falls short of a whole new stage of capitalism, since the basic problem of accumulation within production remains the same.
Since the global credit derivatives market the global market in credit risk transfer instruments has grown at a rate of over percent per year. Although studies have shown that the profits of financial corporations have grown relative to nonfinancial corporations in the United States in recent decades, there is no easy divide between the two since nonfinancial corporations are also heavily involved in capital and money markets.
Yet, the coalescence of nonfinancial and financial corporations makes it difficult to see this as constituting a division within capital itself. The gap between the top and the bottom of society in financial wealth and income has now reached astronomical proportions. In the United States in the top 1 percent of holders of financial wealth which excludes equity in owner-occupied houses owned more than four times as much as the bottom 80 percent of the population.
Recent history suggests that rapid increases in inequality have become built-in necessities of the monopoly-finance capital phase of the system.
This requires heightened exploitation and a more unequal distribution of income and wealth, intensifying the overall stagnation problem. This has allowed homeowners to maintain their lifestyles to a considerable extent despite stagnant real wages by borrowing against growing home equity.
Today the pricking of the housing bubble has become a major source of instability in the U. Consumer debt service ratios have been rising, while the soaring house values on which consumers have depended to service their debts have disappeared at present. So crucial has the housing bubble been as a counter to stagnation and a basis for financialization, and so closely related is it to the basic well-being of U.
Further rises in interest rates have the potential to generate a vicious circle of stagnant or even falling home values and burgeoning consumer debt service ratios leading to a flood of defaults. The fact that U. This artificial world state is a power with no base in society.
It is answerable instead to the financial markets and the mammoth business undertakings that are its masters. The result is that the real states in the real world are becoming societies with no power base.
And it is getting worse all the time. Such views, however, have little real basis. While the financialization of the world economy is undeniable, to see this as the creation of a new international of capital is to make a huge leap in logic. Global monopoly-finance capitalism remains an unstable and divided system.
They remain under the control of the leading imperial states and their economic interests. The rules of these institutions are applied asymmetrically—least of all where such rules interfere with U. Hence, the growth of neoliberalism as the hegemonic economic ideology beginning in the Thatcher and Reagan periods reflected to some extent the new imperatives of capital brought on by financial globalization.
One concrete example is Brazil where the first priority of the economy during the last couple of decades under the domination of global monopoly-finance capital has been to attract foreign primarily portfolio investment and to pay off external debts to international capital, including the IMF. Today the fears of those charged with the responsibility for establishing some modicum of stability in global financial relations are palpable.
One scarcely has to read far in its various issues to get a clear sense of the growing volatility and instability of the system. It is characteristic of speculative bubbles that once they stop expanding they burst. Continual increase of risk and more and more cash infusions into the financial system therefore become stronger imperatives the more fragile the financial structure becomes.
In the September Global Financial Stability Report the IMF executive board directors expressed worries that the rapid growth of hedge funds and credit derivatives could have a systemic impact on financial stability, and that a slowdown of the U.
Reality has gotten out of hand. The demons of greed are loose.
The Chinese have been singled out in this regard. The United States has been running a trade deficit since ; until , the largest was with Japan. Since then China has been the major exporter although to a significant extent it finished its products by using Japanese and other East Asian parts. There has been a mutually self-reinforcing interaction between the global value chain and financialization.
Even those emerging markets that resisted financial liberalization experi- enced a rapid growth of financial assets. The ratio of financial assets to GDP is significantly lower than the core countries and growth rates are significantly faster.
Financiers based in New York and London have moved to position themselves to gain from such prospects. Imbalances built up in the years preceding the Global Financial Crisis were caused on the deficit side by low savings rates, asset-price booms, and large financial investment speculation drawing in foreign capital and on the surplus side from countries with savings rates exceeding domestic investment. In the long list of factors a number of critics pointed not only to the use of high leverage and derivative transactions that obscured the debt levels of banks and national governments but short-term capital flows that had not long before been celebrated as contributing to the efficiency of financial markets.
Lin cites the examples of the successful development trajectories of Japan, South Korea, and China, which adhered to sim- ple banking systems, did not integrate their finances with global markets, and did not even build stock markets until late in the development process.
Many develop- ing nations hold large foreign reserves, overwhelmingly in US dollar-denominated government securities as a buffer against foreign exchange crises and speculator attacks on their currencies.
This is not a benign process because investment funds continue to flow into financial markets, requiring these governments to hold more low-interest foreign reserves while foreign speculators earn high short-term profits from currency appreciation as funds flood into their markets. Core-based institutions give increased weight to the emerging market econo- mies for opportunity because these economies are expected to account for three- quarters of growth in global output in coming years.
Peripheral financialization grows as emerging economies attract hedge funds and private equity fund money even as locals who have grown wealthy are drawn to speculative investments. High-risk corporate bonds are not currently allowed in China but the pressure toward allowing more financial risk taking is growing.
China is being urged by, among others, Guo Shuqing, the chairman of the state-con- trolled China Reconstruction Bank, to introduce junk bonds in order to provide companies with growth capital. Conclusion Approaching an understanding of the Global Financial Crisis through a view of financialization allows a counternarrative to the dominant orthodoxy and better explains the sources, nature, and trajectory of global financial flows.
The Global Financial Crisis and the manner in which it has been addressed raises questions not only of the sustainability of financialization-led growth in the core economies and the extent to which emerging market economies will resist or embrace a financialization path. It would be presumptuous to speculate overly on the shape of financialization, but it is difficult to envision new regulation at national and global levels, which will make more than a dent in crisis-prone financialization of the world economy despite new regulatory initiatives such as Basel III and, in the United States, the Dodd-Frank Wall Street Reform and Consumer Protection Act Tabb, , chapter 6.
One can easily envision capacity to avoid social control in further allow- ing a tightening of the oligopolistic grip of the firms atop global finance so that the bailouts necessitated the last time will be inevitable the next time around, despite steps taken to specify mechanisms needed to wind down failed, system- ically significant financial institutions.
At the end of the 10 biggest banks accounted for 70 percent of global banking assets, up from 59 percent three years earlier. While regulatory reform would influence the nature of future growth of financialization, and tougher regulatory restrictions could destroy the value of banking franchises as funding costs rose and banks need more capital, it is likely that the performance of players in the industry will continue to diverge, increasing concentration further.
Asian banks and those in emerging markets can be expected to grow more rapidly Bowers, Hamoir, and Marrs, , as will the number and riches of East Asians, oil and other commodity exporters, and sovereign wealth funds, further complicating the complexity of crises and the resolution mechanisms following major defaults.
Regulators and legislators who do not take the cost of ever-expanding financialization and the logic of short-term financial speculation seriously enough in designing assertive policies to more substantially limit the freedom of the speculator herd may come to rue their decision. The implications of the dramatic increase in financialization with its crea- tion of extreme leveraged debt positions has been to increase system fragility and economic instability. The punishing austerity and forced internal devalua- tion through falling wages, public spending, and widespread working class suf- fering forced on the euro debtor countries and others cannot be sustained and will in any event hardly lead to the growth necessary for debt repayment.
What is seen as a financial and fiscal crisis is best understood as an intensification of class struggle over who shall bear the cost of the crisis the banks and other financial speculators have caused with the acquiescence and often encourage- ment of politicians and regulators who have promoted a social structure of accumulation premised on corporate-led globalization and financialization that cannot be sustained.
The current global depression signals the need for a new regulatory regime for the world system. There is no technical fix to what is a political struggle with enormous consequences. Epstein, ed.
Northampton, MA: Edward Elgar. Arrighi, Giovanni and Beverly J. Silver Chaos and Governance in the Modern World System. Minneapolis: University of Minnesota Press. Ben S. Blecker, Robert A. Bloomberg Businessweek. Cookson, Robert. Dallery, Thomas.
Epstein, Gerald. Epstein, Gerald A. Hall, Peter A. Kaufman, Frederick. Lapavitsas, Costas. Lazonick, William. Lin, Justin. Malinowitz, Stanley. Kotz, eds. New York: Cambridge University Press. Milberg, William.
Monk, Ashby H. Obstfelt, Maurice, Jay C.
Shambaugh, and Alan M. Rose, Andrew K. Hu, and Moira S.
McKinsey Global Institute. Schularick, Moritz. The way to extend the good life to more people is not to shrink finance nor restrain financial innovation, writes Robert Shiller in a book entitled Finance and the Good Society, but instead to release it.
This is perhaps illustrated most clearly by iconoclast economist Michael Hudson : : Rising mortgage debt has made employees afraid to go on strike or even to complain about working conditions. Employees became more docile in a world where they are only one paycheck or so away from homelessness or, what threatens to become almost the same thing, missing a mortgage payment. This is the point at which they find themselves hooked on debt dependency. In the USA, arguably the most financialized economy in the world, the result of this was extreme income polarization, unseen after World War II Palma, ; Piketty, But it is not just the US economy: the whole world has become addicted to debt.
See: www. Forget about the synthetic opioid crisis: the world's more dangerous addiction is to debt. China's insatiable demand for debt fuelled growth, but also led to a property bubble and a rapidly growing shadow banking system Gabor, this issue , raising concerns that its economy may face a hard landing and send shockwaves through the world's financial markets.
The next global financial catastrophe may be just around the corner. OTC derivatives consist mainly of interest rate swaps with a share of 57 per cent in the notional value of OTC trading in the second quarter of , foreign exchange and currency swaps 13 per cent and credit default swaps 2 per cent , in addition to options with a share of 9 per cent. In the Appendix to this article, the logic of naked interest rate swaps, the biggest financial derivative, is explained in greater detail.
And so on. What then is securitization? As Davis and Kim argue, securitization represents a fundamental shift in how finance is done. This is the essence of the shift in financial intermediation from banks to financial markets.
This systemic importance to the financial system, that is by far exceeds the value of these loans to the actual borrowers; it has led — and is still leading — to an overdose of finance, with ruinous consequences. We can add a fourth law to Zuboff's Laws , namely that anything which can be collateralized, will be collateralized.
That is, the banks and financial institutions participating in these markets know that they are too big to fail and too big for jail, and will be bailed out in case of a financial market collapse.
Perverse incentives, excessive risk taking, fictitious financial instruments — it appears finance capitalism has reached its nadir.
Modern finance has been cannibalizing the rest of the economy, in other words. Finance is asserting its power in Europe in similar ways, but there is one difference. The results have been disastrous: an unsustainable credit boom, driven by the largest European banks, followed by a crash and collapsing economies in Southern Europe.