Financialization

What is financialization

 * Financialisation brought several changes for the financial sector: it led to a shift away from financing business to mortgage finance, a shift towards fee generating activities (‘securitisation’) and a rise of non-bank financial institutions (shadow banking)
 * Financing of financial asset transactions and real estate transactions rather than financing business.
 * The accumulation of interest-bearing capital in its fictitious form
 * Increasing financial profits as a share of total profits
 * Rising debt relative to GDP
 * The growth of FIRE (finance, insurance, and real estate) as a share of national income
 * The proliferation of exotic and opaque financial instruments
 * The expanding role of financial bubbles. Financial bubbles can be designated as short periods of extraordinarily rapid asset-price inflation within the financial superstructure of the economy—overshooting growth in the underlying productive base
 * In 1957 manufacturing accounted for 27% of U.S. GDP, while FIRE accounted for only 13 percent. By 2008 the relationship had reversed, with the share of manufacturing dropping to 12 % and FIRE rising to 20 percent
 * For “every dollar of real income growth that was generated in the United States between 1976 and 2007, 58 cents went to the top 1 percent of households.”
 * Financial innovation is mostly about underpricing risk

Theory of financialization

 * Mirrored in neoliberalism as the ideology of finance (free capital flows, strong state intervention, wage flexibility)
 * Two different pricing structures in the modern economy: (1) the pricing of current real output, and (2) the pricing of financial (and real estate) assets. More and more, the speculative asset-pricing structure, related to the inflation (or deflation) of paper titles to wealth, has come to hold sway over the “real” pricing structure associated with output (GDP).
 * Spontaneous, structural emergence of financialization since the 1970s + technological & institutional/political changes → low productivity (unlike Industrial Revolution productivity gains), dominance of MNCs (and intra-firm trade), transformation of process of work, no reliable world money, free capital flows, global financial derivative markets, big business less reliant on banks and more on retained earnings(because they don't invest)/open markets while SME have difficulty obtaining finance
 * Banks responded with engaging in: financial market mediation (investment banking; becoming brokers through securitization), money-dealing operations, lending to housholds. Monitoing function has been subcontracted such that relational information has been lost
 * Withdrawal of public provision from housing, pensions, health education: finance formerly as intermediation now becomes a form of social provisions/satisfying basic welfare needs of households → finance as not only economically important but socially important
 * The state: bonds still benchmark for financial markets; drove savings to capital markets; intervention in crisis
 * CCFCC
 * Commodification
 * Commodity form: securitization
 * Calculation: usu the money form/logic to calculate even when there is no money (e.g. PPP; calculating benefit payments through quantifying disability)

Capital flows

 * Capital flow types (i.e. appear in the capital account):
 * Official aid
 * Bank loans
 * Bond finance
 * Equity flows
 * FDI
 * Periods of capital flows:
 * 1920s-1930s: private bond issue was key; NY replaces London; US firms would underwrite bond issues (by dev. countries issuers); biggest issuers were reconstructing European countries; funds were used to finance current expenditures rather than investments; US had low interest rates hence increasing supply; CB liabilities were usually 2-3 times the gold reserves (i.e. constrained); 1928/9s the Fed increases interest rates, worsens trade conditions of borrowers, US stock market crashes; Germany tried to depreciate currency-defaults began in 1931, gold standard collapses in 1931; countries withdraw from international system, import-substituted industrialization; debt restructuring was difficult because bond holders were widely dispersed
 * 1940-1970s: limited finance, global capital flows were less important than official finance; flows to DC resume in 1960s and became significant in 1970s; bank lending through recycling petro dollars into Latin America, Asia (i.e. bank lending to sovereign borrowers); 2nd oils shock, Mexican crisis 1982, lost decades; Brady Plan; drastic fiscal tightening followed, reductions in inflation, neoliberal agenda
 * 1980s-1990s: after Mexico, commercial banks skeptical of lending to sovereigns; lending picks up in the 1990s: sovereign funds, pension funds, mutual funds seek to place themselves in 'emerging markets', falling interest rates in the 1990s in the US also helped this process; bonds were still important and larger than equity but capital flows in the form of FDI becomes even more important; internationalization of production; in this period, FDI went mainly to South-east Asia; 1994 Mexican crisis due to rising US interest rates and sudden/dramatic drying up of capital flows; 1997 Thai crisis also through reversal of capital flows, in contrast to Mexico (consumption) trade deficit was due to excess of investment over savings; largest borrower in this period became the US
 * The expansion of capital flows in the context of floating exchange rates limits policy space. Capital flow management:
 * Sterilized intervention: prevent/dampen foreign exchange appreciation by intervening in the FX market (buy foregin reserves); CB buys foreign currency from domestic agents (hence accumulating reserves and providing domestic banks with domestic currency liabilities/assets for them at the CB)-danger of exploding domestic currency supply-therefore sterilized intervention (through open market operations/money market); evidence on effectiveness of this intervention is mixed
 * FX policy: capital inflows increase X-rate (hence preventing money supply), adjustment through X-rate rather than inflaiton)
 * Fiscal policy: tight fiscal policy; reduce expenditures/raise taxes to dampen demand and hence reduce capital inflows
 * Capital account measures (administrative measures): liberalize outflows but control inflows of short-term funds; Tobin tax; prudential regulation (banning swaps);
 * Financial liberalization initially didn't include capital accounts, with the Washington Consensus it did
 * In the 2000s, foreign bank entry into middle-income countries.
 * The 4 categories of capital flows: private (FDI & portfolio), official (aid), current account, reserves, making the net capital flow
 * For D-ing countries in the 2000s, increase in private inflows made possible the repaying of official aid; favorable commodity prices (+ China) were contributing to D-ing current account surplus (reliance on exports); reserve accumulation was in effect a capital outflow for D-ing countries
 * Reserve accumulation as capital flow management tool/self-insurance (China had 2300 billion dollars as reserves). Reserve accumulation as the counterpart of private against borrowing abroad
 * The ratio of reserves/imports enough to buffer suddden outflows
 * reserves/short-term external debt enough to cover dealing with short-term debt over 12 months
 * Reserves/money supply enough to deal with sudden outflow of capital (20% of M2)
 * Between 1996-2006, US assets (in the form of US gov. bonds) held by foregin financial institutions as a % of US GDP increased from 10 to 20%. Official agents (CB) of D-ing countries were accumulating promises to pay by the Fed/US government
 * D-ing CB issued domestic paper (with domestic interest rates) to acquire foreign assets (with foreign interest rates) - spread. In the process, D-ing CBs create domestic financial markets
 * Foreign banks have brought to D-ing countries the know-how for household-focused finance (in contrast to developed countries' household debt - due to mortgage - for D-ing households the debt is aimed at consumption/replacing income)
 * Since the crisis, capital flows have been smaller between developed countries. For D-ing countries: current account surplus has contracted, private (bonds have slumped, FDI has continued), official is positive again (D-ing have stopped repaying aid), reserves are now much smaller

CBI

 * The theoretical rationale for CBI:
 * It is postulated that an equilibrium natural output exists from which current output diverges only temporarily
 * Itis assumed that current inflation depends on the rate of growth of the money supply, that is, the quantity theory of money is valid
 * Macroeconomic policy is fundamentally a choice between, on the one hand, the level of current inflation and, on the other, the difference between current and desired output
 * Therefore, if monetary policy was exclusively assigned to a central bank that was kept independent of political interference, there would be fewer instances of purposeful acceleration of inflation temporarily to boost output.
 * The policy problem, and hence the mismanagement of money as a unit of account in the 1970s but also more generally, is assumed to originate in the preferences of policymakers, namely the predilection of elected politicians for higher current inflation.
 * This way, the measuring function of money (unit of account) would be preserved