THE emergence and growth of financialisation from the 1980s has been driven by several factors operating at various levels – national and international, ideological and political, and technological. The 1971 collapse of the Bretton Woods (BW) monetary system arguably paved the way for financial globalisation.
Cross-border financing
The BW dollar-gold standard had provided the basis for the relatively stable post-World War II exchange rate system; “regulated” capital flows of the BW system gave way to a new international financial order based on free-floating exchange rates and freer cross-border capital flows.
These developments changed banking in two ways. First, banks became more globalised, with international banking taking off in the 1970s. In the 1950s, only three major US banks had foreign branches. In 1965, only US$9 billion, or 2% of total US banking loans, were foreign. By 1976, foreign loans had risen to US$219 billion as the 10 largest US banks made half their profits from international banking.
Second, with floating exchange rates, transnational companies’ (TNCs) profits were exposed to currency risks. Fluctuating rates generated more profits from foreign exchange trading, accounting for growing bank revenues and profits.
Hedging and speculation
As banks increasingly served TNC “hedging” needs, forex trading for speculation became more important than supporting the real economy. Although total world trade in 2007 was only worth US$15 trillion, forex trading averaged US$5 trillion daily, or over a quadrillion in the year!
Derivatives allowed banks and their clients to hedge and speculate, with greatly increasing leverage magnifying risks, to the parties involved and the financial system.
At the international level, governments have permitted the proliferation of tax havens for corporations and individuals to evade taxes, “recycle” and hide illicit funds, supported by bankers, lawyers, accountants and other enablers. Such illicit flows in 2014 were estimated at between US$1.4 trillion and US$2.5 trillion.
Thus, financial globalisation involves mutating networks of financial institutions, both banks and non-bank financial institutions such as institutional investors, asset managers, investment funds and other “shadow banks”.
It involves lending to companies, households and individuals, for trading on securities and derivative markets within and across borders. Financial globalisation has been enabled by innovations resulting from improvements in computing capability.
Hélène Rey argues synchronised financial trends constitute a “global financial cycle” due to the growing interconnectivity of securities and equity markets, capital flows and credit cycles, ultimately influenced by US Fed policies. Greater integration and synchronisation of financial markets have exacerbated financial instability and fragility.
From state to individual
But rapid global financialisation is not only due to the expansive power of financial innovation, but also to deliberate policy choices, beginning in the US with financial liberalisation and banking deregulation from the 1980s. Interstate banking was allowed, and interest rate controls lifted, with commercial banks eventually allowed to underwrite and trade securities.
The US and other powerful financial interests “globalised” financial liberalisation and financialisation in the rest of the world, pressuring economies to lift exchange rate controls and open financial markets to foreign banks and investors, leading to Japan’s financial “big bang” in 1990-1991 and the 1997-1998 East Asian crises.
The 1980s also saw the erosion of progressive taxation with more tax breaks for the rich and exaggeration of supposed funding crises for social security and public pensions.
Governments have favoured finance with generous tax breaks for interest income, with capital gains taxed much less than wages. These were invoked to legitimise the shift from future provisioning via the welfare state to self-provisioning via market investments.
Investment risks have shifted from employers and governments to future pensioners investing individually via private pension funds, insurers and asset management corporations, ie, changing from “defined benefits” to “defined contributions’.
Ideological drivers
Financialisation has been supported by the rise of shareholder activism, invoking economic value added arguments to maximise shareholder value instead of serving stakeholders including employees, customers, suppliers and the public, or allowing managerial abuse of the “principal-agent” problem, as managers serve their own interests, rather than investors.
Short-termist maximisation of share prices via quarterly earnings, eg, through mergers and acquisitions, is thus prioritised instead of long-term considerations. This paved the way for the mergers and acquisitions wave of the 1980s and 1990s, immensely profiting Wall Street and anointing financiers as the new “masters of the universe”. – IPS
