We live in an era where pervasive dogmas about State Intervention and the free markets dominate our common culture and the messages conveyed by mass media. It has become “common knowledge” (barred from critical discussion) that financial markets tend to a natural balance and that the goals of our society shall be met with more efficiency if financial activities are deregulated and the “job creators” (viewed as rich individuals and major corporations) are unburdened by taxation.
As a counterpoint to the progressive numbness of social democracy in the World, we have watched a slow but sure rise of an ideology that upholds a transversal deregulation of all markets, an aggressive liberalization of the labour market, a diminishment – until irrelevance – of collective bargaining and, above all, the idea of the need for the destruction of a strong and interventionist State in order to achieve growth and prosperity. We can track this ideology all across OECD countries, with their public policy makers arguing ferociously that growth and prosperity are menaced if these policies are not followed and implemented.
Oddly enough, the impact of the financial sector on countries growth and development is never questioned, particularly when we experienced two decades of a changing economy given the progressive and gargantuan financialization.
What does this jargon mean? GRETA KRIPPNER has defined financialization as “a pattern of accumulation in which profits accrue primarily through financial channels than through trade and commodity production”.[1] GEORGE EPSTEIN, although recognized the value of KRIPPNER’s definition, drawn a wider notion of financialization, referring to it as “the increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of the domestic and international economies”.[2]
In order for one to be aware of the weight of financialization in the world economy, note that in 2007 the ratio of financial assets to World GDP was about 400%, i.e., for each unit of real economy there were five units of purely financial economy.[3] [4]
Since the fall of Bretton Woods and the progressive evolution to a frontierless and globalized financial system, we have witnessed a concentration or conglomeration of financial institutions, which became truly international and global entities. In 2000, more than 80% of assets of the biggest financial institutions were held by financial conglomerates.[5] If we took only in account Banking Institutions, namely the 50 largest, we would realize that already in the year 2000 the ratio of assets detained by financial conglomerates were in the range of 94%.[6] To widen our disbelief, the 25 biggest global banks raised their ratios of financial assets vs World GDP from 30% in 1990 to 77% in 2009%.[7]
In the wake of the financial markets deregulation, specially throughout the 90’s with the enactement of Gramm-Leach-Bliley Financial Services Modernization Act, which dismantled the remaining pieces of Glass-Steagall Act, we have witnessed a calculated destruction of territorial frontiers for financial markets, which accomplishes, on one hand, a global unification of financial markets and, on the other hand, the progressive destruction of legal frontiers between countries or states (in USA) . All these changes were justified by the growing international banking competition and the fact that securitization and international financial products were not limited by strict regulations. Consequently, a flow of financialization of national economies began.[8]
In this game, no one wanted to be left behind. Firstly, Countries viewed this competition as strategic. Countries centrally fuelled expansions, mergers and aggressive international acquisitions of local institutions, aiding and supporting the creation of financial institutions of disproportionate size in comparison to their local economies. This phenomenon was particularly visible in EU: the banking sector vs EU GDP ratio was 274% in 2010, being 304% in Germany, 418% in UK e 493% in Switzerland. [9]
This financialization phenomenon transferred a huge amount of power and freedom to the financial system, offering it a more opaque, deregulated and politically sponsored status, with the public sphere holding only a mirage of control and regulation. The financialization of the economy was only made possible by the pervasive general belief on the theory that financial markets are naturally efficient and balanced, which defends that the price set by the market is an efficient evaluation of the assets value, allocating capital for the most profitable projects[10]. This dogma has been safe from critical discussion in the last decades, especially when we talk about currents goods. But how is this relevant?
We tend to smother the public space with discussions about the impact of the dimension of the public sector in growth but, simultaneously, neglect to question the impact of financialization in growth or even promote any relevant reforms of the financial sector that was largely and directly implicated in the awakening of the global financial crisis.
According to a recent working paper by STEPHEN G CECCHETTI and ENISSE KHARROUBI, “Reassessing the impact of finance on growth”, the financial sector size has an inverted U-shaped effect on productivity growth. In this view, and taking to account all of the above, we would like to stress the conclusion of the authors that “there comes a point where further enlargement of the financial system can reduce real growth”. The authors also concluded that the financial sector growth is found to be a drag on productivity growth, given that financial sector competes with the rest of the economy for scarce resources, which makes financial booms generally not growth enhancing.[11]
The authors conclude their study with a simple and evident proposal: taking into account the recent experience during the financial crisis, there” is a pressing need to reassess the relationship of finance and real growth in modern economic systems. More finance is definitely not always better.”
Besides this reassessment, the culture and goals of finance in our current society should also be questioned to the fullest. Our question is: what are our political leaders waiting for to bring real change (and hope) to this game?
_______________________________
[1] KRIPPNER, Greta R., “The financialization of the American economy” in Socio – Economic Review, 2005, available @ http://cas.umkc.edu/econ/economics/faculty/wray/631Wray/Week%207/Krippner.pdf
[2] EPSTEIN, Gerald E., “The Financialization and the World Economy”, http://www.peri.umass.edu/fileadmin/pdf/programs/globalization/financialization/chapter1.pdf
[3] PALMA, João Gabriel, “The revenge of the market on the rentiers. Why neo-liberal reports of the end of history turned out to be premature” Cambridge Journal of Economics 2009, 33, 829–869, @ http://cje.oxfordjournals.org/content/33/4/829.abstract
[4] RODRIGUES, Jorge Nascimento, article dated August 14th, 2009, published in the Portuguese newspaper “Expresso”, available @ http://newsplex.expresso.pt/economistas-desencantados-com-alta-financa=f530957; and GOYAL, Rishi, MARSH, Chris, RAMAN, Narayanan, WANG, Shengzu, and AHMED, Swarnali, “Financial Deepening and International Monetary Stability”, @ http://www.imf.org/external/pubs/ft/sdn/2011/sdn1116.pdf
[5] “A financial conglomerate is an entity containing two or more different types of regulated financial firms (bank, securities firm, insurance company). Financial conglomerates are therefore exposed to two or more sector-based regulatory regimes”. Read more @ http://www.fsa.gov.uk/library/communication/speeches/2005/0602_th.shtml
[6] HUERTAS, Thomas F., “Dealing with Distress in Financial Conglomerates”, @ siteresources.worldbank.org
[7] GOLDSTEIN, M. and VÉRON, N. (2011), “Too Big To Fail: The Transatlantic Debate”, Peterson Institute for International Economics Working Paper 11-2, Washington, D.C., @ http://piie.com/publications/wp/wp11-2.pdf
[8] “Unless soon repealed, the archaic statutory barriers to efficiency could undermine the competitiveness of our financial institutions, their ability to innovate and to provide the best and broadest possible services to US consumers and, ultimately, the global dominance of American finance”(Greenspan, 1999).
[9] CARMASSI, Jacob e MICOSSI, Stefano, “Time to Set Banking Regulation Right”, Centre for European Policy Studies, Brussels, 2012, @ http://www.ceps.eu/book/time-set-banking-regulation-right
[10] Several reputed economists defend that what is true of the markets of consumer goods is also of the markets for factors of production and capital. But is it?
[11] Working Paper n.º 381, Bank of International Settlements, 2012, available @ http://www.bis.org/publ/work381.pdf
Room With a Legal View 