Financialisation of capital and financial crises

• Descriptor of a wider transformation in economy and society, whereby the financial sector and markets come to occupy a dominant/quasi-dominant position in countries such as the US and UK
  • Finance led economic systems, wealth based growth regime
• Employed in a narrower sense to describe processes and effects of growing power of financial values and technologies on corporations, individuals and households
  • Rising discourse of shareholder value
  • Expectations of institutional investors (e.g. pension funds) for constant asset price appreciation
• A new regime - "A pattern of accumulation in which profits accrue primarily through financial channels rather than trade and commodity production" (Krippner, 2005)
• A deep, structural change in how the economy works
• "Increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of the domestic and international economies" (Epstein, 2005)

• Share of finance in total value added (share of GDP contributed by finance sector)
  • In 1970, only two OECD countries (France and Mexico) had more than 1/5 of value added from finance
  • By 2008, 28/34 OECD countries had finance shares exceeding 20% (15 exceeded 25%)
  • Israel, France, US, UK, Australia and NZ had more than 30% of value added from finance
• Employment in finance as a share of total employment
  • 1970-94 : no OECD country had more than 10% of workforce in finance
  • By 2008, 23 OECD countries had more than 10% of workforce employed in finance
• Share of profits
  • Financial sector began to capture an increasing share of overall corporate profits in UK and US

• Financial hub was located in London
  • Turnover in global foreign exchange market dramatically increases between 1988 and 2008
  • Trading in UK in excess of 35% of the total making it the largest centre

• Fordism: mechanised production, economies of scale
  • Compromise between capital and labour allowing for productivity rises and increases in wages
  • Economic management by an interventionist, regulatory state in search of full employment (Keynesianism)
• BUT...internal contradictions
  • Limits to productivity increases
  • Shifts in consumer demand to greater variety
  • Structural rigidities, inflexible labour unions
  • Growth of low cost foreign competitors
  • Oil price shocks of 1970s, collapse of Bretton Woods system
• Replaced by Post-Fordism - flexible manufacturing and third party outsourcing
  • Rise of offshore production centres (e.g. Special Economic Zones)
  • Rise of New Economy - telecommunication revolutions driving global connectivity
  • Globalisations
  • Hypermobile capital
• Big Bang (1986) linked London and New York and other financial markets into one trading system
  • Banks could operate freely across borders, reduced technical barriers to capital flows

• Growth of financial markets and intermediaries
  • Financial interests deepening and widening, pervading the 'agency, spaces and place of existing and new actors and sites' (Pike and Pollard, 2010)
• The exacerbation of uneveness - greater inequality
  • Growing divide between those who are able to participate wisely in financial capitalism and those who lack assets or financial literacy, who are excluded
• Risk, uncertainty and volatility
  • Use of sophisticated methods and instruments to profit from the management of risk - hedge funds, short selling etc
  • Moral hazard as profiting from risk?

• 1980s - 'Footloose' financial capital, financed by 'Eurodollars' and 'Petrodollars' - rise of commercial lending to Third World
• August 1982 - Mexico defaulted and unable to pay creditors (who were commercial banks)
• Background factors
  • Late 1970s - rise of monetarism, tight money supply and high interest rates (9.2% in 1978 to 16.63% in 1981)
  • Appreciation of the dollar between 1980 and 1985
  • General decline in value of developing country commodity exports between 1979-87
• Immediate triggers
  • More short term lending and borrowing
  • Falklands War of 1982
  • Decline in net lending to Latin American after 1981
• 20 countries negotiated debt to bilateral creditors between 1979 and 1983
• Banks rescued leading to structural adjustment policies in the Third World as a price
  • There have been relatively recent campaigns to cancel debt for third world countries e.g. Justice Debt Campaign - still not been successful 
• Third World countries face the brunt of the crises - banks get off easily (e.g. nationalisation of Northern Rock - first bank run in 150 years, one before was Overend, Gurney and Company in 866 which wasn't bailed out and this impacted multiple other industries/lives)
  • Led to other events e.g. Federal takeover of Fannie Mae and Freddie Mac in 2008
• This reveals systemic moral hazard
  • 'Save the banks and put the screws on the people'; 'Banks behave badly because they do not have to be responsible for the negative consequences of high risk behaviour' (Harvey, 2010)
• Banks are so interconnected and important that they are 'too big to fail'

• Capital controls to prevent excess volatility
• 'Robin Hood' tax - levy on financial transactions to slow down speculative capital flows and raise funds for public investment in recovery
• European Financial Transactions Tax - agreed by France, Germany and 9 other countries representing 2/3 of total output (rejected by UK and 15 others)
• Additional measures: role of ratings agencies, regulation of complex financial iinstruments and separate retail and investment banking

"Financial crises serve to rationalise the irrationalities of capitalism, typically leading to reconfigurations, new models of development, new spheres of investment and new forms of class power" (Harvey)

"Each crisis of capitalism doesn't simply threaten to bring down the dominant economic model, but the institutions that govern politics and society too. When people no longer expect to be made better off by the status quo, they withdraw their support for it" (Blakeley, 2019)