Financialization

What about the idea of the financial industry “crowding out” the rest of the economy? They hoover in increasing percentages of the GDP and then lock it up in kind of tombstone sandstone filled with domestic manufacturing and production fossils. This is the drive for owners of existing firms to close their facilities, sell whatever equipment possible to Asia, and outsource/offshore production. In essence becoming a financial entity with maybe some intellectual property operations.

Exactly what do we mean by Financialization? It is the process by which Finance as a sector that was previously serving other industries and individuals had morphed into an industry serving mostly itself. In the US, financialization was accompanied by:

  1. A significant elevation of finance that caused
  2. a dramatic increase in overall debt, systemic leverage leading to
  3. broad transfers of revenue and profits from the “real” economy to the financial sector and
  4. a significantly greater policy influence by Wall Street bankers (as well as capital markets). This culminated in
  5. the Credit Crisis and
  6. TARP and the Wall Street bailouts of 2008-09.

We can debate the details, but speaking broadly, this came about due to the combination of massive financial leverage, increased corporate debt, decreased cost of capital, and regulatory capture by the industry. The net result of this was finance became an outsized portion of the S&P500 profits, rising from 12% to 23% over a few decades. Bill Black points out that over forty years, “our real economy grew better with a financial sector that received one-twentieth as large a percentage of total profits (2%) than does the current financial sector (40%).”

via The New Nonsense: Leaving Finance | The Big Picture.