A term oftentimes associated with the concept of finance capitalism, whereby debt/ fiscal liability is monetized as income in the aggregated determination of GDP (Gross Domestic Product), and the commodification of outstanding monetary obligation yields the manufacture of financial instrumentation collateralized from market assets deemed to possess low-risk classification. Financialization exists as a pyramidal¹ appraisal of risk and market-derived speculative investiture that is predicated on the commutation of industrialism and innovation with articles of leverage and divergent modality as its principal method of profit engineering.
The use of this terminological descriptor possesses an innumerable host of interpretations, the most notable of which are listed accordingly:
Financialization refers to a “pattern of accumulation in which profit making occurs increasingly through financial channels rather than through trade and commodity production.”
Greta R. Kippner, Sociology Department, UCLA, Los Angeles, CA 90095-1551 - The Financialization of the American Economy | Socio-Economic Review 2005 3(2):173-208
Financialization refers to the increasing importance of financial markets, financial motives, financial institutions, and financial elites in the operation of the economy and its governing institutions, both at the national and international levels.
Gerald A. Epstein, Professional Editor, author of the 28-page introductory dissertation to the written contents of the book: Financialization and the World Economy
Financialization is a “lapse back into the pre-industrial usury and rent economy of European feudalism.”
“ …only debts grew exponentially, year after year, and they do so inexorably, even when–indeed, especially when–the economy slows down and its companies and people fall below break-even levels. As their debts grow, they siphon off the economic surplus for debt service (...) The problem is that the financial sector’s receipts are not turned into fixed capital formation to increase output. They build up increasingly on the opposite side of the balance sheet, as new loans, that is, debts and new claims on society’s output and income.”
“[Companies] are not able to invest in new physical capital equipment or buildings because they are obliged to use their operating revenue to pay their bankers and bondholders, as well as junk-bond holders. This is what I mean when I say that the economy is becoming financialized. Its aim is not to provide tangible capital formation or rising living standards, but to generate interest, financial fees for underwriting mergers and acquisitions, and capital gains that accrue mainly to insiders, headed by upper management and large financial institutions. The upshot is that the traditional business cycle has been overshadowed by a secular increase in debt. Instead of labor earning more, hourly earnings have declined in real terms. There has been a drop in net disposable income after paying taxes and withholding "forced saving" for social Security and medical insurance, pension-fund contributions and–most serious of all–debt service on credit cards, bank loans, mortgage loans, student loans, auto loans, home insurance premiums, life insurance, private medical insurance and other FIRE-sector charges. This diverts spending away from goods and services.”
Michael Hudson, Research Professor of Economics at the University of Missouri, Kansas City (UMKC), Research Associate at the Levy Economics Institute of Bard College, former Wall Street analyst, president and consultant of the Institute for the Study of Long-term Economic Trends (ISLET), and founding member of International Scholars Conference on Ancient Near Eastern Economies (ISCANEE)
The crisis of 2007–9 has cast fresh light on the ascendancy of finance in recent years, a process that is often described as financialization. The concept of financialization has emerged within Marxist political economy in an effort to relate booming finance to poorly performing production. Yet, there is no general agreement on what it means, as is shown in this article through a selective review of economic and sociological literature. The article puts forth an analysis of financialization that draws on classical Marxism while remaining mindful of the recent crisis. Financialization represents a systemic transformation of mature capitalist economies with three interrelated features. First, large corporations rely less on banks and have acquired financial capacities; second, banks have shifted their activities toward mediating in open financial markets and transacting with households; third, households have become increasingly involved in the operations of finance. The sources of capitalist profit have also changed accordingly. (Abstract excerpt from the article, Theorizing Financialization)
Costas Lapavitsas, Department of Economics, SOAS (School of Oriental and African Studies), Thornhaugh St, Russell Sq, London WC1 0XG, UK
Financialization may be defined as: “the increasing dominance of the finance industry in the sum total of economic activity, of financial controllers in the management of corporations, of financial assets among total assets, of marketised securities and particularly equities among financial assets, of the stock market as a market for corporate control in determining corporate strategies, and of fluctuations in the stock market as a determinant of business cycles.” (Excerpt from Dore’s 2002 publication: Stock Market Capitalism: Welfare Capitalism: Japan and Germany versus the Anglo-Saxons)
Ronald P. Dore, Associate of the Centre for Economic Performance at the London School of Economics and Political Science, Fellow of the British Academy, the Japan Academy, and the American Academy of Arts and Sciences
It is the current phase of accumulation, characterized by “the fusion of the interests of domestic and foreign financial capital in the state apparatus as the institutionalized priorities and overarching social logic guiding the actions of state managers and government elites, often to the detriment of labor."
Thomas Marois, Senior Lecturer in Development Studies, SOAS (School of Oriental and African Studies), University of London - in his assessment of emerging financial markets and the concept of financialization as an integral component of finance capitalism
Financialization is the mass commodification of debt and debt-based financial instruments collaterized by previously low-risk assets, a pyramiding of risk and speculative gains that is only possible in a massive expansion of low-cost credit and leverage. Financialization results when leverage and information asymmetry replace innovation and productive investment as the source of wealth creation.
Charles Hugh Smith, Author of the ‘Of Two Minds' written blog syndication - Ranked 7th in CNBC’s “The Best Alternative Financial Blogs”
More popular interpretations governing the term’s intrinsic meaning offer the following:
Financialization is understood to mean the vastly expanded role of financial motives, financial markets, financial actors, and financial institutions in the operation of domestic and international economies.
LINKED ARTICLES OF REFERENCE:
FINANCIALIZATION AND CAPITAL ACCUMULATION IN THE NON-FINANCIAL CORPORATE SECTOR | A Theoretical and Empirical Investigation of the U.S. Economy: 1973-2003
The Changing World of Work 2: Financialization = Insecurity, by Charles Hugh Smith
The following graphical representations accurately depict the gradual dichotomization of the income/ wealth distribution metrics applicable to individuals comprising the 10th quartile designation and those occupying positions within the 90th component in terms of annual wage or salary compensation (Notice how the linear projections of the aforementioned distinctions are diametrically inverse on a Cartesian-based system of coordinates. This is a trend, surmised by many analysts in the field of economic studies, that first occurred in 1913 with the passage of the Federal Reserve Act [though evidence exists substantiating the contention that the origins of this algorithmic parallel predate the stipulated mandate] - a pattern² that accelerated with the advent of market financialization in 1982, with socio-economic stratification experiencing a brief period of stagnation following a series of events that precipitated the Great Recession of 2007-2008 - later giving rise to the Federal Reserve’s QE³ and ZIRP4 strategies):
¹ In certain sectors of market finance, the use of the term ‘pyramidal’ as a descriptor, is oftentimes indicative of a Ponzi scheme whereby monetary or capital asset accumulation is concentrated at the apex of a visceral construct (the term ‘visceral’ being used to indicate the presence of a hierarchal system of jurisdiction - similar in context to what exists at the corporate level, with CEOs assuming the highest mantle of authority within a particular industry or firm), with those possessing base occupancy (those at the bottom of the pyramidal artifice) directly responsible (individuals at this level of an organization supply the funds necessary for the operation’s sustainability) for the continuance of mal-investiture.
² The pattern referenced in the parenthetic notation pertains to the inverse proportionality of the graph’s algorithmic sequence - where the earned income depreciation of those comprising the 90th centile, and of individuals occupying the 10% threshold (where the 0.1% assignation represents a theoretical wealth apex) appears to converge - a phenomenon found to have occurred on three separate occasions prior to the current market trend, a fact evidenced in the following graphic:
Figure 1. Notice how each of the areas of convergence stipulated in the above figure occur during a period of economic recession, then make note of the imminent intersection of these valuations following the recessionary cycle of 2007-2008, a point in time characterized by market instability and fluctuation.
³ Quantitative Easing (QE) - Monetary policy involving the purchase and eventual sale of government-issued bonds or securities from the market’s financial services division (financial sector) by various entities within the central banking industry - a convoluted process designed to mitigate the incidence of short-term interest rate fluctuation and effect an increase in the supply and availability of monetary assets. Ideally the funds received by the central banking institutions from the sale of these types of financial instruments would yield a sustained period of economic growth/ sustainability, however, when the numerical rate of interest approaches zero, the tendency of these organizations to purloin* the capital assets of businesses in commercial finance and the private sector - through their purchase and eventual sale to generate an additional source of revenue - becomes more apparent.
*NOTE - The theft of these articles of investment is made possible through the enactment of the aforementioned mandate, as proponents of the QE strategy (central banking institutions) utilize these low rates of interest as an instrument of opportunity - as any risk involving the purchase and eventual distribution of assets from various companies in both commercial finance, as well as the private sector (following an exhaustion of resources from large-scale businesses or corporate interests), is mitigated by the low yield interest designation. The imposition of QE monetary policy then becomes interchangeable with the ZIRP phenomena, as these titans of industry employ the use of both to their advantage, circumventing - what statistically becomes a barrier to the business practices of small-scale organizations, whose prior negotiated contracts of interest repayment (before the enactment of ZIRP or QE by the aforementioned central banking conglomerates) maintain their legal precedent - higher designated rates of interest accrual typical of the market environment BEFORE the advent of such measures.
In layman’s terms, the central banking authority, through its application of the QE methodology - and the eventual use of ZIRP - effect reduction in the overall rate of interest with regard to these promises or contractual agreements to repay, while, at the same time (oftentimes because of loopholes within the financial system that banking conglomerates and their corporate interests can more easily exploit, due to the fact that they are better able to afford and retain legal counsel specializing in such practices - a luxury not afforded to possible competitors), they are able to apply inflated rates of interest to those articles of purchase in their eventual market-based advertisement to prospective buyers. This practice is associated with the ‘creation of money from thin air,’ as additional funds, are, in fact, created by exploiting these legal loopholes and acquiring a significantly greater degree of capital from the sale of these assets than would have otherwise have been possible had the higher nominal rate of interest remained in effect.
4 Zero Interest-Rate Policy (ZIRP) - A macroeconomic concept synonymous with the emergence of a sustained period of low nominal interest rates of measure. The enactment of policy adopting this methodology as its principal mechanism of influence is designed, in theory, to function as a market deterrent away from inflationary cycles emblematic of currency devaluation.
CONCLUSION: The Market Financialization of 1982 functioned as a legislative precursor to what became, following the Recession of 2007-2008, the Federal Reserve’s institution of QE and the eventual mandate of ZIRP by central banking institutions. As illustrated in the graphical composites housed within the contents of this written account, this aspect of finance capitalism has invariably contributed to the 400% degree of separation between the earned income/ rate of compensation being experienced by the wealthiest 10% of the population and to the benefits ascribed to the theoretical 0.1% apex - this numerical equivalency is evident in the generational comparison encompassing the years of 1975 (where the top 0.1% accounted for 2.6% of the nation’s income) and 2008 (where the 0.1% accounted for 10.4% of the national aggregate) - a trend that continues unabated. Nowhere is this fact more evident than in the following:
Figure 2. Comparative analysis of Median CEO rate of compensation, corporate profit margin, and average rate of wage increase as a function of earned income - a market trend which exploded in 1982 with the advent of financialization.
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