The trouble with financialization

July 01, 2010  

By Michael Lewitt

The increasing dependence of the U.S. economy on both financialization and consumption, rather than on the expansion of production, is what haunts the U.S. economy today.

Where financialization has taken hold, the financial economy drives the real economy rather than vice versa. The result has been a world replete with too much debt, too much unused capacity, too much labor, and central banks continuing to produce too much money as they attempt to keep the entire system afloat. In virtually every instance, this regime is unsustainable and unhealthy for long-term economic growth.

History is replete with examples of financialized economies that came crashing down on the heads of their financiers and government enablers, forcing governments to resort to radical policy actions that were designed to prop up short-term growth but failed to create the proper foundations for long-term growth. Financialization is a sign that economic policies have failed to create the conditions for robust organic growth—instead, an economy that is dominated by finance capital is characterized by a dependence on debt rather than equity finance and speculative rather than productive investments. These activities result from highly distorted incentives written into the law by politicians who are directly or indirectly beholden to the agents of financialization while they are in government and after they retire into private sector sinecures.

Financialization creates an insidious cycle of unproductive economic activity that must feed on itself because, creating nothing productive itself, it has nothing else to feed on.

In this sense, financialization also can be understood as the "monetization of values" whereby all conduct is measured by whether it produces a profit, not whether it is economically or socially productive or consistent with traditional laws or morality. Conduct such as Wall Street analysts' touting stocks that they were privately trashing during the Internet bubble, or mortgage lenders' extending credit to borrowers whom they knew could not repay it during the housing bubble, were tolerated and even encouraged by their supervisors, who stood to earn enormous profits from this unethical behavior. Moreover, this conduct was an open secret in business and regulatory circles, creating a culture of tolerance of illegality and immorality. Even worse, this culture was further encouraged by the public statements of business and government leaders such as Alan Greenspan, who publicly praised the wonders of computer technology and adjustable rate mortgages (the latter comment being sufficiently loony as to render it fair to ask whether there should be age limits for certain federal employees). Complicity was rampant at every level of the financial and political system.

In economic terms, financialization was the stage that capitalism reached at the end of the 20th century and the beginning of the 21st century when commodity production became merged with aesthetic production. The collapse of the gold standard was the first step in setting loose radically destabilizing measures of value in the global economy. These forces would not have been become as destructively destabilizing as they became had prudent and nonpoliticized regulation been put in place to govern them. But unsurprisingly, the interests that served to profit from the new regime, what I have been calling the financial-political-media complex, used their power and influence to manipulate legislation and regulation to serve their short-term goals at the expense of the longer-term interests of the system.

This is an age-old story, and as the world digs out from the ruins of the economic crisis of 2008, these forces are back at work, trying to gain advantages regardless of the longer-term health of the system. Active lobbying against financial industry reforms, such as the regulation of credit default swaps and pay caps on egregiously overpaid and socially unproductive investment bankers and traders, are the latest examples of the embedded moneyed powers clinging to their advantages. Proper resolution of the debate—reasonable reforms that place the interests of the system ahead of those of self-serving individuals—will need to take into account the pernicious influence of financialization on the hearts and minds of virtually every member of society.

Michael Lewitt is the president of Harch Capital Management. This column is excerpted from his book, The Death of Capital.

Related Articles

Latest Poll

How will hedge funds finish 2017?

 - 72%
 - 10%
 - 17%

View previous results