WE CAN say first of all that this was a global crisis. If you look at the data, towards the end of 2008 all mature economies dived together. So, there is no question this was a global crisis, although it affected mostly mature capitalist countries rather than newly emerging ones.
The second thing we can say is it was systemic. Clearly, it was something to do with the way finance, production and distribution were woven together. It wasn’t an accidental event. It wasn’t an isolated event. It was systemic and it was structural as well. Something was deeply wrong with the accumulation of capital and how the financial system interacted with the accumulation. That was clear.
The next thing we can say about the crisis is that it emanated from the financial system. This wasn’t a crisis that emanated from the productive sector. There’s no evidence during that period that we had some major malfunctioning of production. There are plenty of things wrong with production, of course, and I will mention them, but the crisis emanated from the financial system, the US financial system in the first instance, and the British financial system and other major financial systems closely related to the US.
Next, and things are now becoming increasingly strange, the crisis came out of loans made to the poorest section of the US working class. These were loans made to people without any assets, without any income, without any credit history, who were often black or Latino and lived in urban areas of the United States that were previously off-limits to banks and credit.
That’s a very strange development. Never before has a global crisis of capitalism emerged connected to loans made to the poorest section of the working class. It would have been unthinkable to Classical Economists or Marxists that something like this could ever have taken place.
The last thing we can say about the crisis is that it was fed by enormous financial speculation, financial innovation as they call it, but really speculation. It was the creation of paper on the back of paper, to create even more paper, to result in profits not from lending, but from dealing in paper, from transacting in paper, from buying and selling paper among the financial institutions to generate fees, commissions and all the other profits that the dealers in these financial assets secure for themselves as they trade in the markets.
How was the crisis dealt with? Think about it. Who dealt with it? The state. Quite clearly in the absence of the state there would have been total collapse in the summer of 2008. There wouldn’t have been a major bank standing in the United States and quite possibly in this country too. Whether the banks were directly involved in the speculation that I mentioned, or not, there wouldn’t have been a major bank standing because healthy banks also fall when problematic banks go under.
So the crisis was dealt with through intervention by the state. And it is this intervention that requires thinking about, because it shows how the state and contemporary capitalism are connected. What was the major thing that the state did? It drove interest rates down to zero. That’s the most decisive policy undertaken by the state.
I know it isn’t obvious, so let me explain why it’s so important. The state drove interest rates down to zero through the central bank – by using public resources. The rate of interest that was driven down to zero is that charged by the central bank, a public rate of interest. By driving it down to zero what the state did was to create profits for the commercial banks. The reason is that commercial banks borrowed at next to nothing – at zero-rate – from the central bank, and then they on-lend to private borrowers and could make a secure profit. In this way, the state subsidised the banks and ensured that the banks could make secure profits. This was the biggest intervention by the state, a massive public subsidy to banks through the rate of interest.
The second thing that the state did was to give to the banks vast public funds. Particularly in the United States, an enormous system of public funding for the banks was instituted and banks were effectively buttressed with tax income. Tax income was mobilised and passed onto banks to make sure they didn’t go under.
The third thing that the state did was to create liquidity for banks. Not to give them public funds (or tax money) but fresh money created by the central bank that was lent to the banks. And this allowed banks to continue their normal business and not to go under, because in a crisis banks are typically short of liquid funds. So the state created the necessary liquid funds for the banks.
In these three key ways public intervention rescued the banks and saw to it that the worst of the crisis was confronted. Public resources, public credit-worthiness, public liquidity were mobilised to rescue the private banking system that had created the crisis in the first place.
The fourth part of dealing with the crisis of course related to working people. For working people, however, the conditions that prevailed were the opposite of those for banks. To working people were given austerity, fiscal retrenchment, and cuts in welfare expenditure. What the state was giving with one hand – the largesse towards the financial system to rescue it – was actually taken back by cutting, restraining and restricting welfare spending – austerity in other words – and at the same time wage restraint. That was a clear demonstration of the class character of the modern state, of where its priorities lie.
If we sum up the aims of public policy in dealing with the crisis what we have are the following priorities: first, rescue the banks and restore financial profitability; second, pass the costs onto working people through austerity and wage restraint; and third – just as important, although it wasn’t immediately obvious in 2008/2009 and only became clear in 2010/2011 – avoid any major institutional change in finance. Once profitability had been restored and the costs passed onto working people, it became clear that the underlying concern of the state was to avoid serious institutional transformation of finance.
Figure 1 shows financial profit in the United States, the country for which we have the best data – unfortunately this calculation is impossible to make with similar accuracy for any other mature capitalist country. It shows financial profit, by which is meant the profit of financial institutions and is actually a very narrow part of financial profit, because there is also financial profit that is not financial institution profit, not bank profit. What is shown in Fig. 1 is essentially the profit of banks from 1945 to 2011, and shows financial profit as a proportion of total profit. That is, the curve shows the proportion of the total profit of the US capitalist class that is actually attached to finance, and particularly to the financial institutions, mainly the banks.
There are basically three periods in this. The first runs from 1945 to about 1970 when the proportion rises steadily. The second is when the proportion goes flat, from about 1970 to about 1990. And then third is after 1990 when it shoots right up. For a roughly decade and a half financial profit as a proportion of total profit increased very fast. When you look at 2003 it is clear the financial profit as a proportion of total profit is phenomenal: roughly 40 per cent. The figure depends on how you calculate it and what I am showing you is quite a conservative calculation, but it still is very high: 40 per cent of total profit came out of banks.
This proportion began to decline in 2003 and for about four, five or six years. These were the years of the bubble. As profit began to decline, the banks went mad. They tried to make returns out of paper dealing and mortgage lending to the poorest sections of the US working class. Then the crisis came and financial profit collapsed. At which point the intervention by the state took place. And what did the intervention by the state do? It made financial profit bounce right back. This was the objective of state intervention. Financial profit has not reached the level of 2003, but it is quite healthy even as we speak. The state in the United States and elsewhere saw to it that financial profit recovered quickly. That was a key focus of public intervention in dealing with the crisis.
Is this a crisis of over-accumulation? In a general sense it is. In the sense that profitability and production and accumulation have not recovered the vigour that they had in the 1960s and the first part of the 1970s, there is no question at all about it. However, bearing in mind what I have presented to you, I think we need to be more precise and factor in all the changes that I’ve outlined.
To me the crisis that broke out in 2007 is a crisis of financialisation. It should be seen as a crisis of financialisation, of the structural, historic transformation that has taken place in mature capitalism during the last three to four decades. Financialisation is best understood as an epochal transformation of capitalism and I’ll now discuss how it has worked.
First, financialisation is an epochal, historic transformation in the simple sense that during the last three to four decades the sphere of circulation, including finance, has grown enormously and much faster than the sphere of production. There has been asymmetric growth of circulation relative to production, which is characteristic of financialisation.
Second, financialisation is an epochal, historical transformation in that it represents the second bout of the rise of finance in advanced industrial capitalism. The first bout was the period of imperialism that Hilferding, Lenin and others wrote about at the end of the 19th century and beginning of the 20th century. Financialisation represents the second bout of the rise of finance; it is similar, but also different to the first bout.
As a concept, financialisation originates in Marxist political economy. The first reference to it that I can find is associated with Monthly Review and with Paul Sweezy. For Sweezy, modern capitalism is characterised by the ceaseless growth of ‘surplus’ which cannot be easily absorbed productively and tends to be used unproductively. A crisis emerges when the ‘surplus’ is so great that the economy becomes inundated with it and tries to find other ways of dealing with its excess.
Sweezy thought that finance could be one of these ways in which the surplus could find some kind of profitable use. When the crisis of 1973-74 broke out and the long post-war boom finished, Sweezy was the first to argue that from now on we are likely to see a period of steady growth of finance because that is where the surplus will end up. So the Monthly Review tradition is where the first intimations and first analysis of financialisation can be found, and it continues to produce valuable work on this issue.
Important to the theory of financialisation are also the ideas of Giovanni Arrighi, who was connected to world systems analysis and to Braudel’s view of the historical evolution of capitalism. Arrighi wrote in the early 1990s on this issue and saw financialisation differently from the Monthly Review current. For Arrighi financialisation was a historical development. Arrighi wanted to understand the historical evolution of capitalism and, as it were, the cyclical motion of hegemony in the world market.
Arrighi thought the world market must have one hegemonic power, which was Genoa in the old days, then Britain, and then United States – a succession of hegemonic powers. Financialisation for Arrighi was the period of decline of the hegemonic power. The hegemon emerges and dominates production and trade. When the hegemon begins to move into finance and into lending, then the hegemonic power declines and a new hegemon begins to emerge. That’s how Arrighi conceptualised financialisation, ‘the autumn of capitalist power’ in the world market. You can see the connection that Arrighi wanted to draw with the United States. If the United States financialises, it means that the United States is actually declining in the world market. Again, there is a Marxist aspect to this view in terms of its broad analysis and approach.
Then we have people associated with the French Regulation School, Aglietta, Boyer and the others who also discussed financialisation later in the 1990s. For them financialisation ought to be approached differently. The Regulationists understand capitalism as operating through a regime of accumulation and a mode of regulation, which is essentially the institutional framework through which capitalism works. For the first post-war decades that regime was, as is well known, described as ‘Fordism’, and it was the system through which capitalism did so well in the 1950s and 1960s. Namely, mass production, mass consumption and real wages rising systematically and in line with productivity. When ‘Fordism’ came to an end in the 1970s, capitalism began to look for a new way of regulating its affairs and it is in this context that financialisation emerged, as far as the Regulation School is concerned. Aglietta and others who have developed this approach began to argue that contemporary capitalism is regulated through finance, regulated through the stock market. The financial system has become the new mode of regulation for contemporary capitalism. Again, there is a Marxist aspect to this approach to financialisation, not a traditional one, but Marxist nonetheless.
In addition to the Marxists, or to those who come from Marxist currents, we also have post-Keynesians who have been developing the concept of financialisation. Post-Keynesians economists are basically radical Keynesians who are able to converse with Marxism in terms of its analytical ideas and concepts. For post-Keynesians, financialisation is a characteristic feature of contemporary capitalism. They are the theorists who invented the term ‘finance-led capitalism’. What is characteristic of post-Keynesians is that they think of financialisation as a type of capitalism in which the rentier has reappeared. In this regard they take their cue from Keynes but also, to a certain extent, from Marx.
The rentier is a type of capitalist who holds a lot of money, but doesn’t want to invest directly in production and makes the money available for loan. ΑAs you probably know, Lenin talks about rentiers, as does Marx occasionally. Post-Keynesians argue that contemporary capitalism is rentier capitalism and that’s what drives financialisation. To be specific, financialisation is determined by government policy and policy is determined by the rentier interest. I will come back to this point later in my talk.
The last bit of theory on financialisation that I want to mention is that by economic sociology, economic anthropology, and economic geography. They have analysed financialisation in very interesting and informative ways. There’s a lot of work from these perspectives, but it lacks the common disciplinary core of the other approaches that I have mentioned.
To wrap up, the concept of ‘financialisation’ has Marxist origins, although non-Marxists also use it extensively. The approach that I am proposing to it, however, is based on classical Marxism, and in particular on Hilferding and Lenin. And it is on this basis that I want to argue that financialisation represents a historic, epochal change. Also, we have just come out – or still living through the tail end of – a vast structural crisis, a crisis that has been associated with the financial system and certainly reflects the extraordinary growth of finance. Our analysis of financialisation must be related to that.
My argument is that we should analyse financialisation in the same way that Hilferding and Lenin went about characterising their own period. We should use their approach and method, but we should keep our eyes open to see how their conclusions and arguments fit with the current period. And we should be ready to adapt our explanation.
The first point to stress is that, if financialisation is characterised as an historic transformation, its roots should be associated with the behaviour of productive capital, the behaviour of banks and the behaviour of workers and households. Think of how Hilferding and Lenin defined the rise of finance in their own time. What was that characterised the period of imperialism? Finance capital. This is the term that captured that period, the period of imperialism. And what is finance capital? It is a new form of capital that emerges because big productive capital – big business – is increasingly dependent on big banks for loans to finance investment. The more that big business depends on big banks, the more dominant that big banks become over it. As banks become more dominant, big banks and big business become intertwined with each other, and become one. They become finance capital. This is the form of capital that basically drives imperialism, the highest stage of capitalism as Lenin called it.
This is how they went about it and I suggest we follow the same approach and see how financialisation can be thought of as rooted in the process of accumulation itself. In this connection we can say immediately that the post-Keynesians are not right: the financial system is not run by rentiers and financialisation is not simply a result of government policies to promote finance. It is much more deeply rooted in the structures of contemporary capitalism, as I will show you.
Let me start then with productive capital, or more specifically, industrial and commercial capital. Let’s see how big business behaves today in relation to financialisation. I’ve got two observations to make on the large corporates, the big business of today.
The first observation is that, unlike the period of finance capital, unlike the period of Hilferding and Lenin, we do not see a growing fusion between industrial capital and banking capital. What we find is that there is space opening out between large corporates and large banks. To put it differently, there’s significant independence between large banks and big business, not increasing dependence between them, although there are significant variations among countries. Still, the tendency toward greater independence of big business from big banks can be observed in all mature capitalist countries.
The second observation is that large industrial and commercial businesses tend to financialise, even though they are more independent of banks. In other words, big businesses take part in financial transactions on their own account, and make financial profits by playing financial games independently. They actually have established sections that look like banks and which operate within the confines of large corporates.
We have a complex motion between industrial and banking capital, not an increasing fusion of the two. There is no finance capital today in the historical sense, and actually some space has opened up between large commercial industrial enterprises and large banks. However, there is also increasing financialisation of industrial and commercial enterprises, and an increasing generation of profit through financial activities rather than through production, by playing games in the stock market, or in the derivates markets, or in other financial markets generally.
Let me show you a little bit of evidence from my book. Figure 2 shows, again, the USA, the country for which we have the best data, although on this issue we have good data from other countries too. What I have done here is to show how industrial and commercial capital – taken as a whole – finances its investment on a net basis. Financing investment is obviously the main reason that businesses seek access to credit.
What you will see for the United States, obviously with variations, since this is from 1945 to 2010, the entire post-war period, is that the funding of investment occurred largely with retained funds. During the years of financialisation, in fact, the funding of investment was pretty much 100 per cent through retained profits. It is worth stressing the point: Big business relies on retained profits to finance investments on a net basis, not on banks. Of course, big business also uses banks, but on a net basis its investment is financed through its own funds.
Not only this but when you look at the 2000s you see that retained profits actually shoot right up as a proportion of investment. In other words, big business in the last 10 to 15 years has been sitting on enormous amounts of cash far exceeding its investment needs. Large US corporates do not depend on banks; on the contrary, they’ve got a lot of money and they play games in the stock market with it, or they play games in financial markets with it. They have financialised.
Let me show you Britain: Figure 3. It is the same pattern, except shown from 1985 to 2010 – roughly the years of financialisation. What you see is again fluctuations around the 100 per cent line, that is, British big business similarly finances its investment through retained profits. And again similarly to the United States, what happens in the 2000s is that British big business has been sitting on enormous amounts of cash. The line shows that retained profits rise to 150 per cent of investment needs on a net basis, funds which are not used for investment but in various ways often associated with the financial system.
To sum up, large industrial and commercial enterprises are not increasingly dependent on banks, certainly not on this evidence. They’ve got enormous amounts of cash from retained profits and that’s how they finance their investments but also financialise. In other words, they’ve developed independent capacity to play financial games and to make profits out of their own presence in the financial markets. Financialisation, then, is a historical tendency based on this transformation of the productive sector that I have just outlined.
What about banks? Well, put two and two together. If banks are doing less business with large industrial and commercial capital, then banks have to reinvent themselves. Banks have to begin to make profits some other way. Which other ways? Well, lending to other banks, or playing games with other banks, transacting with other banks and making profits out of financial transactions, rather than lending. Profits made in financial markets out of transactions do not necessarily involve lending. They can be profits from financial buying and selling, from fees, commissions and spread trading. Banks have moved towards making profits out of these transactions with other banks and other financial players.
But banks have also moved towards lending to households and individual workers. If you can’t make a profit out of lending to big business, start looking for profit out of lending to households and to working people. And that is one of the most characteristic features of contemporary financialisation – the shift of banks towards households and individuals, to which I will come back in a minute.
Let me show you a little bit of evidence for banks too from the United States. Figure 4 runs from 1951 to 2009, and the purple line shows bank lending for commercial and industrial purposes. You will see it rising up to 1977 and then declining. At present US banks don’t lend particularly for commercial and industrial purposes; they do lend for this purposes, of course, but proportionately less. Who do they lend more to? Look at household mortgages: there is a vast jump. Look also at commercial mortgages, which have also increased. This shift in the activities of US banks is very clear.
If you look at Britain you will see similar things, although, I repeat, no two countries are exactly the same. I could have shown you Japan and Germany too, but I don’t want to tire you with numbers and figures. The tendencies also hold for those countries, with variations. If you look at Britain in Figure 5 [PP15] you will see that lending by banks to private corporations declines. British financial institutions do not lend to productive, private corporations as much as they used to. Indeed they lend more to other financial institutions, to banks.
With variations, then, British banks are behaving similarly to US banks and not that dissimilarly to German banks or to Japanese banks. Banks have in a sense financialised. I know it sounds ludicrous to use the term financialisation in this context because banks are finance in and of themselves. But banks have transformed themselves in this way
Let me come now to ‘households’. I would have liked to speak about ‘workers’, of course, but Flow of Funds data doesn’t give ‘workers’ as a category, so I cannot do that. I can only use ‘households’, which is the category that the data gives me, which isn’t the same as ‘workers’, but it is a reasonable proxy for ‘waged people’. Though, I must stress that even that, once you begin to look close to the figures, includes various people who work for investment banks who get remunerated in the form of wages but what they receive is not wages – it is profits accruing as salaries.
In any case, let’s use households in the way in which the data gives it to us and see what can be said about financialisation. What do we see? A couple of key things, actually. First, we see that household borrowing has increased tremendously and that is the most staggering feature about financialisation. This rising indebtedness, I have to stress, because people on the left often get this wrong, is not unsecured borrowing. It’s not mostly borrowing to live, or to consume. Often people on the left make an easy connection: ‘wages are not high enough, therefore people borrow to make up the shortfall, therefore, they end up more indebted.’ This also happens but it’s a small part of aggregate household indebtedness.
Households borrow mostly for mortgages, not to consume on a daily basis. Before I examine this fact more closely, though, I wish to stress another point about household financialisation. It is not just indebtedness that has increased for households, but also the holdings of financial assets. These are very important because they are basically pensions, insurance and all the various other things that working people need today to survive. They are the counterpart to debt. Financialisation also applies to assets not just for debt. It’s very important to remember this. Banks can make a profit out of lending money to you but also out of handling your pension funds. Financialisation works on both sides for the household.
Why, then, has the financialisation of the household increased? It is not simply because wages are not rising. Wages have not risen, to be sure, and in the USA real wages have been flat for decades. That’s important, but that’s not the only reason of financialisation, or not even the main reason. Indeed, the main reason why financialisation of the household has become so prominent in the last three to four decades is more complex and has to do with public provision. What we observe in the last three to four decades is the retreat of public provision: in housing, in education, in health, in a whole range of areas that are fundamental to working life. As public provision has retreated, private provision has taken its place. And who mediates private provision? Private finance. The private financial system has emerged as the mediator of private provision. Banks have emerged as key agents in solving the housing problem, the health problem, the education problem, whatever other problem households might have. Without any notable skills in confronting this task, or any reason to believe that banks know how to deal with it. But that’s how things have unfolded.
Financialisation of the household is actually a complex result of these processes. Banks make profits out of lending to households but also out of handling household assets too. Let me show you a little bit of evidence again. This is the United States, Figure 6 [PP 17] and it shows household debts as a proportion of GDP from 1945 to 2009. It’s the household debt mountain basically. Household debt as a proportion of GDP in the United States just went through the roof, particularly from about 1980 onwards – the period of financialisation. What’s the biggest part of that debt? It’s the blue line, that is, mortgages. Other debt also increases, including consumer credit, but it is not at all the dominant part. I know that a certain part of mortgages is consumer credit masquerading as mortgage debt, and it is impossible to tell what proportion that is, but, nonetheless, the biggest part of US household debt is mortgage debt.
If you look at Britain it’s not that different. Figure 7 shows British households from 1987 to 2009. The British people became more indebted as a proportion of GDP, and certainly from the middle of the 1990s the ratio went right up. The bulk of the debt is of course mortgage debt. Unsecured consumer borrowing is also there but it isn’t the biggest part. British households have thus become financialised in this way, and for the reasons that I have explained to you.
Let me now bring these analytical strands together and state that financialisation of mature capitalist countries is an epochal change in which finance has penetrated the most fundamental areas of capitalist accumulation. Finance has found new fields of profit in household income and in transactions in open financial markets. In this way finance has become an incredible source of profit for the capitalist class as a whole. These transformations have contributed to the gigantic crisis that we have been going through. They have led to the crisis in a structural way, not because policy making has been captured by the financial interest and is shaped by it, although the latter cannot be denied.
I want to finish by saying a few words on what to do about financialisation. The first thing to stress is that if it is a historical transformation, which I think it is, if it is a historical period of capitalism, then it has deep roots and foundations, which I have discussed. It follows that confronting it, changing it, cannot be simply a matter of government policy. Policy is certainly necessary, but those who think that by changing government, introducing a raft of laws and bringing in a new institutional framework of finance they would be able to deal with financialised capitalism are simply over-optimistic. Such an approach does not quite appreciate the depth of financialisation and its structural aspects. This is not so much an issue in the UK, but in the United States where there are many people who think that if they introduce regulation and change government policy, they would deal with financialisation. But I doubt it.
Financialisation is a historical transformation that has deep roots and requires a systemic and deep confrontation to be dealt with. Let’s think about it for a minute. Socialists typically say capitalism develops the forces of production, revolutionises material and social life, but it does so in a problematic, exploitative, oppressive and crisis-ridden way. Therefore, what we need to do is retain what is progressive, retain the technical and other advances and do away with the social relations of capitalism that create the social problems, the conflicts and so on.
Can we think of financialisation in this way? The answer is no. Financialisation doesn’t represent a significant social benefit to humanity. What exactly is the gain from the expansion and the explosive growth of finance, from financial markets being able to set financial prices across the globe in a fraction of a second? So what? Let’s take a few seconds more. Let’s take hours. Let’s take days. Why should we be mobilising incredible resources, highly trained physics graduates to deal with computers that deploy advanced programmes to allow people to trade derivatives across the globe constantly? Why? Let’s never do it.
The net benefit to humanity from financialisation, seen generally, appears to be negligible. The first thing that has to be said about financialisation, then, is that it has to be reversed. The growth of finance has to be reversed. Humanity gains very little from this incredible explosion of financial capabilities, institutions, mechanisms and markets. Reversal of financialisation is the order of the day, not take financialisation as given and trying to do something with it. There’s nothing, or very little that we can do with it. It’s in this context that we should be thinking of policies to confront financialisation, and then the meaning will become clear.
How, then, do we reverse a historical transformation that is so deeply rooted? It isn’t simply a matter of regulation, nor simply a matter of policy. First, we have to start with the industrial and commercial enterprises and stop their involvement in finance in the first place. Stop them from financialising. How to do that? Well, one way is to adopt a strategy of public investment, together with policies that limit the financial activities of enterprises and changes, including the way in which they organise their internal affairs. That’s where we have to start, if we are going to confront financialisation in a structural way.
Then what? Well, then we need to do something about banks. Private banks operate in the way which I have explained and create crises; they have basically failed and have relied on the state to rescue them. So how do you we deal with them? We need public ownership and public control over banks. To me it is obvious. Not only nationalisation, because nationalisation by itself doesn’t mean anything very much. The capitalist state can nationalise banks; RBS is nationalised after a fashion. We need public ownership and public control over banks. We need a new spirit of public service and new mechanisms to run these institutions in a public way detaching them from what they have doing the last few decades.
And what about households? There I think that things become even more complex. If we are going to remove financialisation from the sphere of households, then we need to reintroduce public provision in housing, in health, in education. For that we need to insist that public are better than private methods. And under no circumstances should private finance be mediating provision to households, because private finance is not equipped to do so. When it is put in those terms, it is clear that confronting financialisation required innovative, communal and associational policies of household provision to come into play.
These policies to confront and reverse financialisation would obviously reject austerity and wage restraint, which is the way in which the state has dealt with the current crisis. And they would be accompanied by measures of profound income and wealth redistribution. It is clear, then, that reversing financialisation requires steps that are inherently anti-capitalist and open up fresh avenues towards socialism. This is the kind of socialism that we need for the 21st century, the kind of socialism that meets the needs of the current era, and begins to speak to people in the here and now about what the world ought to be like. I think that this is the task we have in front of us and the sooner we begin to develop these ideas, the better for all of us. n