EPSTEIN FINANCIALIZATION AND THE WORLD ECONOMY PDF

News about central banks, interest rates, and debt appear to be everywhere. But it was not always the case that the financial sector and financial institutions were considered so important. Public policy in general was not always designed with a focus toward propping up banks, keeping interest rates low, and ensuring an ever greater flow of cheap and easy loans. But that is where we are now. Scholars have suggested many causes for financialization, but they often end up just blaming markets. In fact, the true cause is decades of government and central bank policy devoted to inflating asset prices in financial markets and bailing out the financial sector again and again.

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News about central banks, interest rates, and debt appear to be everywhere. But it was not always the case that the financial sector and financial institutions were considered so important. Public policy in general was not always designed with a focus toward propping up banks, keeping interest rates low, and ensuring an ever greater flow of cheap and easy loans.

But that is where we are now. Scholars have suggested many causes for financialization, but they often end up just blaming markets. In fact, the true cause is decades of government and central bank policy devoted to inflating asset prices in financial markets and bailing out the financial sector again and again. What Is Financialization? The two authors analyze the ratio between the financial income sum of interest, dividends, and capital gains and profits for manufacturing as well as all non-financial firms in the United States….

They discover that between and , US firms have become more and more financially driven, obtaining an increasingly smaller share of their income from the sale of goods and services, and about four times as much revenues from financial activities compared to Perhaps the most commonly given example of financialization is the expansion of the financial arms of US automobile manufacturers : General Motors established its financial arm General Motors Acceptance Corporation GMAC in and Ford established its financial service provider Ford Motor Credit in Before the s, the main function of these financial institutions was to provide their automotive customers access to credit to increase car sales.

Starting in the s, these firms broadened their portfolio. GMAC entered mortgage lending in In the same year, Ford purchased First Nationwide Financial Corporation, the first thrift that operated at the national level, to enter the savings and residential loan markets. Historians of financialization typically place its origins in the late s or during the s. Sociologist Frank Dobbin, for example, concludes , We saw a rapid shift in the core business of the United States, from manufacturing not to service so much as to finance per se.

Krippner notes: An increasing trend indicates a higher share of revenues coming from financial relative to non-financial sources of income…The ratio is remarkably stable in the s and s, but begins to climb upward in the s and then increases sharply over the course of the s. In the late s, the ratio peaks at a level that is approximately five times the levels typical of the immediate post-war decades. Nor was this trend specific to the United States.

The comparative data shows that most wealthy countries underwent similar transformations. According to Dobbin : It happened in liberal market economies and coordinated market economies. It happened in economies with strong welfare states and weak welfare states.

It happened in places where neoliberals took power early and places where neoliberals never quite ran the show. It happened regardless of the partisan coloration of government. And so on. The comparative data also give us something quite close to a natural experiment. There was one rich democratic country that escaped the fiscal crisis of the state in this period by the lucky expedient of discovering oil. That country was Norway.

And—apart from the banking enclaves of Switzerland and Luxembourg, which did not financialize only because they were already so dependent on finance—Norway appears to be the only rich democratic country that did not undergo financialization in this period.

The causes of financialization have long been debated. Some causes suggested by scholars are economics based, and some are sociological and cultural. Financialization as Endemic to Late-Stage Capitalism In many cases, the charge that financialization is part of the natural evolution of markets has its roots in Marxism.

Faced with new competition, corporations abandoned their previous social role and concentrated instead on shareholder value. This new corporate landscape was one in which shareholders frequently bought and sold their stock and corporations were forced to compete more fiercely to provide larger dividends and stock price growth.

Consequently, financialization increased as investors and business owners increasingly adopted the idea that the sole purpose of a company is to increase shareholder value rather than production and market share.

Although skillful production and growing market share can contribute to shareholder value, other methods could prove easier. In any case, production of nonfinancial products and services took a back seat. Or so the story goes. Speculative Manias A third theory states that speculative manias have over time fostered market demand for ever larger numbers of financial instruments that allow investors to make bets on nearly everything under the sun.

These theories were popularized in part by economists Hyman Minsky and Charles Kindleberger , who held that once markets meet some levels of success, they have a tendency to drive overconfidence in financial markets for future investments. Financialization results. But these theories fail to explain the root causes of how the financial sector came to be seen as a safe and profitable haven for so much capital.

The failure to identify the root cause has many implications for policy. These policies tend to be geared most toward the financial sector, so the risk of investing in financial sector institutions is reduced for those who hope to benefit from full or partial bailouts and easy borrowing in case of crisis.

For example, although Minsky and Kindleberger contended that speculative manias have their roots in markets, they nonetheless admitted that these manias often were made far worse by the presence of a central bank acting as a lender of last resort.

The stock market crashed in Had markets been allowed to function, this would have been a signal to markets that risky investments come with a downside for the specific investors involved.

Continental Illinois was bailed out when the US government essentially nationalized the bank, protecting its shareholders. While financial sector institutions could reap the rewards of good times, they would be rescued by taxpayers when times turned bad.

Under Greenspan, the central bank was there to bail the financial sector out repeatedly through various means. We witnessed this with the Mexican financial crisis, the Asian financial crisis of the late s, and the bailouts that followed the Dot-com bust. Greenspan was at the center of inflating the housing bubble after It was continued in various forms by all his successors. Even when dramatic and targeted bailouts are not the the goal, repeated efforts by central banks to inject more liquidity into markets through new money creation has favored the financial sector relative to other sectors of the economy.

This means that price increases in financial assets like stocks further inflate the perceived value of the financial sector relative to other sectors. All of this drives financialization well beyond what would occur in an unhampered market.

Even if cultural changes, new investment instruments, or a lack of government regulation allowed for new investment avenues in the financial sector, there is no reason to believe that the very real human fear of monetary loss has fundamentally changed. In a functioning market the promise of immense profit through investment in the financial sector is tempered by the fear of taking a loss.

At the heart of the issue is government intervention designed to provide the investor class with greater gains and fewer losses. Thanks to decades of government-fueled financialization, the stakes climb ever higher. But perhaps the most unfortuante part of it all is that as the crises mount, markets get the blame for what would never have happened had markets actually been allowed to function.

Right now, these companies make up The current weight of financial services is almost double that of industrial company stocks and more than triple that of energy shares. All of these companies have big financial operations that have contributed significantly to their earnings in recent years. Gerland F. Krippner, Capitalizing on Crisis, p.

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Financialization and the world economy

Specific academic approaches[ edit ] Various definitions, focusing on specific aspects and interpretations, have been used: Greta Krippner of the University of Michigan writes that financialization refers to a "pattern of accumulation in which profit making occurs increasingly through financial channels rather than through trade and commodity production. Epstein wrote that some scholars have insisted on a much narrower use of the term: the ascendancy of shareholder value as a mode of corporate governance , or the growing dominance of capital market financial systems over bank-based financial systems. Pierre-Yves Gomez and Harry Korine, in their book Entrepreneurs and Democracy: A Political Theory of Corporate Governance, have identified a long-term trend in the evolution of corporate governance of large corporations and have shown that financialization is one step in this process. Michael Hudson described financialization as "a lapse back into the pre-industrial usury and rent economy of European feudalism " in a interview: [2] "only debts grew exponentially, year after year, and they do so inexorably, even when—indeed, especially when—the economy slows down and its companies and people fall below break-even levels. As their debts grow, they siphon off the economic surplus for debt service This is what I mean when I say that the economy is becoming financialized. Its aim is not to provide tangible capital formation or rising living standards, but to generate interest, financial fees for underwriting mergers and acquisitions, and capital gains that accrue mainly to insiders, headed by upper management and large financial institutions.

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Financialization

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