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Evidence that financialization represents a deep transformation of mature economies is offered by the global crisis of 2007-09. The crisis originated in the elephantine U.S. financial system, and was associated with speculation in housing. For a brief period it led to serious questioning of mainstream economic theory and policy: how to confront the turmoil, and what to do about the diseased financial system; are new economic theories needed? However, after six years it is clear that very little has changed. Financialization is here to stay.
Consider, for instance, the policies to confront the crisis. First, public funds were injected into banks to boost capital. Second, public liquidity was made available to banks to sustain their operations. Third, public interest rates were driven to zero to enable banks to make secure profits by lending to their own customers at higher rates.
This extraordinary public largesse towards private banks was matched by austerity and wage reductions for workers and households. As for restructuring finance, nothing fundamental has taken place. The behemoths that continue to dominate the global financial system operate in the knowledge that they enjoy an unspoken public guarantee. The unpalatable reality is that financialization will persist, despite its costs for society.
Financialization represents a historic and deep-seated transformation of mature capitalism. Big businesses have become «financialized» as they have ample profits to finance investment, rely less on banks for loans and play financial games with available funds. Big banks, in turn, have become more distant from big businesses, turning to profits from trading in open financial markets and from lending to households. Households have become «financialized» too, as public provision in housing, education, health, pensions and other vital areas has been partly replaced by private provision, access to which is mediated by the financial system. Not surprisingly, households have accumulated a tremendous volume of financial assets and liabilities over the past four decades.
The penetration of finance into the everyday life of households has not only created a range of dependencies on financial services, but also changed the outlook, mentality and even morality of daily life. Financial calculation evaluates everything in pennies and pounds, transforming the most basic goods — above all, housing — into «investments.» Its logic has affected even the young, who have traditionally been idealistic and scornful of pecuniary calculation. Fertile ground has been created for neoliberal ideology to preach the putative merits of the market.
Financialization has also created new forms of profit associated with financial markets and transactions. Financial profit can be made out of any income, or any sum of money that comes into contact with the financial sphere. Households, for example, generate profits for finance as debtors (mostly by paying interest on mortgages) but also as creditors (mostly by paying fees and charges on pension funds and insurance). Finance is not particular about how and where it makes its profits, and certainly does not limit itself to the sphere of production. It ranges far and wide, transforming every aspect of social life into a profit-making opportunity.
The traditional image of the person earning financial profits is the «rentier», the individual who invests funds in secure financial assets. In the contemporary financialized universe, however, those who earn vast returns are very different. They are often located within a financial institution, presumably work to provide financial services, and receive vast sums in the form of wages, or more often bonuses. Modern financial elites are prominent at the top of the income distribution, set trends in conspicuous consumption, shape the expensive end of the housing market, and transform the core of urban centres according to their own tastes.
Financialized capitalism is, thus, a deeply unequal system, prone to bubbles and crises — none greater than that of 2007-’09. What can be done about it? The most important point in this respect is that financialization does not represent an advance for humanity, and very little of it ought to be preserved. Financial markets are, for instance, able to mobilize advanced technology employing some of the best-trained physicists in the world to rebalance prices across the globe in milliseconds. This «progress» allows financiers to earn vast profits; but where is the commensurate benefit to society from committing such expensive resources to these tasks?
Financialization ought to be reversed. Yet such an entrenched system will never be reversed by regulation alone. Its reversal also requires the creation of public banking that would operate with a new spirit of public service. It also needs effective controls to be applied to private banking as well as to international flows of capital. Not least, it requires new methods of meeting the financial requirements of households, as well as of small and medium enterprises. There is an urgent need for communal and associational ways to provide housing, education, health and other basic goods and services for working people, breaking the hold of finance on everyday life.
Ultimately, financialization will not be reversed without an ambitious program to re-establish the superiority of the social over the private, and the collective over the individual in contemporary society. Reversing financialization is about reining in the rampant capitalism of our day.
Costas Lapavitsas is a professor of economics at the School of Oriental and African Studies, University of London, and a member of Research on Money and Finance; his latest book is «Profiting Without Producing: How Finance Exploits Us All» (Verso Books: 2014).