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"...public opinion deserves to be respected as well as despised" G.W.F. Hegel, 'Philosophy of Right'

What is the role of finance in a good and just society? « Previous | |Next »
September 5, 2010

In his review of several finance books at National Interest Daniel W. Drezner asks a dam good question: "What is the role of finance in a good and just society?"

It's a good question given the hegemony of market fundamentalism or faith in the power of markets to correct themselves, the history of asset bubbles and financial crises and the shift to minimal regulation of finance capitalism. He doesn't directly answer it. it needs to be answered given the current conflict between Wall St and Main St in the US arising from the bursting of the housing/ financial bubble.

Drezner says that:

The trouble is that finance now permeates not only the economic but also the political and social fabric of our world. No one can talk about Big Finance without talking about the power of capital in politics. At the same time, Goldman Sachs now possesses all the cultural cachet of a tobacco company. And no matter how Washington attempts to curb the excesses of an industry whose core purpose is the making and reallocation of money, the future of global financial regulation remains unclear.

The financial sector has been entirely transformed since the mid-1970s. The changes are evident: rapid growth, deregulation, widespread introduction of new technology, profound institutional transformation. The weight of the financial sector has grown markedly in developed capitalist countries in terms of employment, profits, size of institutions and markets. Finance now penetrates every aspect of society in the developed world, and has also grown rapidly in the developing world.

The thesis of financialization depicts the shift in the center of gravity of the capitalist economy, from production to finance. In response to the bursting of the financial bubble, the main strategy of the advanced capitalist states has evolved from an immediate financial bailout, involving tens of trillions of dollars, to a much more concerted attempt, for which there are no real historical analogies, to reinstate financialization as the motor force of the capitalist system.

The growth of international capital markets limits the power of states to regulate them, forcing them to give way to financial market forces.Hence, although new regulations may be put in place, they will not, in the end, constitute effective restraints on financial institutions and markets.

In Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism Kevin Philips says that:

My summation is that American financial capitalism, at a pivotal period in the nation's history, cavalierly ventured a multiple gamble: first, financializing a hitherto more diversified U.S. economy; second, using massive quantities of debt and leverage to do so; third, following up a stock market bubble with an even larger housing and mortgage credit bubble; fourth, roughly quadrupling U.S credit-market debt between 1987 and 2007, a scale of excess that historically unwinds; and fifth, consummating these events with a mixed fireworks of dishonesty, incompetence, and quantitative negligence.

Phillips compares the 21st century United States with the late stages of three great imperial powers before it -- the Spanish, Dutch and British empires to argue that the once mighty U.S. is no longer master of its own manifest destiny.

| Posted by Gary Sauer-Thompson at 7:51 PM | | Comments (7)


Forget for a minute the pros and cons of shifting the centre capitalist economy from production to finance.

The problems really get out of hand when SPECULATION becomes the main driving force... not actual returns or forecasts. The game is rigged in favour of the big stake holders. The fabled "mom and pop" investors are out of their depth.


One of the great mantras of the modern economics profession is that markets know best, and that the collective "wisdom" of investors is generally correct.

I've never really believed that, having spent years writing about business and finance. In fact, my interviews with market strategists, Wall Street economists and portfolio managers have convinced me that it's the rare investor or analyst who has done much serious reading of history, political science or even economics and finance for that matter. Sure, some people can be very good at analyzing the worth and the potential of a specific company, but when it comes to macroeconomic trends, most of the explanations you get are very narrowly focussed and ignorant, showing little concern for or understanding of the great drivers of history, economics or politics.

That said, I'm still left scratching my head at today's roughly 3% jump in the US equities market, which the investment analyst community is attributing to a report by the relatively obscure Institute for Supply Management, which announced that its index of manufacturing activity in the US had risen a bit to 56.3, instead of dipping slightly, as had been predicted by analysts.

Word that manufacturing was improving (and it was an improvement of just 0.8% at that), led to a stampede into equities by investors...


The recently deceased world-systems historian of capitalism, Giovanni Arrighi, was fond of saying that in the long, rise and fall cycles of capitalist empires, the financialization phase signalled that an empire was in its autumn.

Giovanni Arrighi’s account in The Long Twentieth Century (1994) is a history of hegemony shifting from the city states of Genoa and Venice in the sixteenth century to Amsterdam and the Low Countries in the seventeenth before concentrating in Britain from the late eighteenth century until the United States eventually took control after 1945. Each shift, Arrighi notes, occurred in the wake of a strong phase of financialization (he cites with approval Braudel’s maxim that financialization announces the autumn of some hegemonic configuration).

Today there is a tectonic shift away from United States dominance and hegemony that has been under way for some time is becoming much clearer. Larry Elliot says that according to Arrighi's thesis:

the concentration of economic power on Wall Street, the stagnation of incomes for all but the rich, the structural trade deficit, the military overreach, the switch from being the world’s biggest creditor nation to its biggest debtor add up to a simple conclusion: we are in the twilight years of the long American century.

But hegemonic shifts, Arrighi argues, are not determined in advance. They depend upon the emergence of some power economically able and politically and militarily willing to take on the role of global hegemon (with its costs as well as its advantages).

David Harvey says that:

While the historical geography of a shifting hegemony as Arrighi describes it has a clear pattern and while it is also clear from the historical record that periods of financialization precede such shifts, Arrighi does not provide any deep analysis of the processes that produce such shifts in the first place.

I'm not competent to address that explanatory issue.I do accept Arrighi’s view that we are experiencing a transition from one regime to a new, as-yet undetermined one.

Kevin Philips in his "Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism," argues that the "financialization" of the American economy has malign consequences.

According to this review in sometime in the mid-'90s, he writes, financial services overtook manufacturing as the biggest chunk of the U.S. gross domestic product. If you believe, as Phillips does, that all the furious activity on Wall Street masterminded by the likes of Citigroup and Goldman-Sachs and Merrill Lynch is just a bunch of speculation and froth that doesn't actually result in the creation of anything real, then there has never been a better time for triumphantly pointing out the disasters that ensue when the rest of the world also realizes that Wall Street is wearing no clothes.

Wall Street now owns Washington, lock, stock and barrel. As recent events so clearly demonstrate--the bailout of WAll Street-- maintaining the health of financial markets is the first order of priority for Congress and the White House; even though financial markets are just a giant Ponzi scheme.

According to this account of Arrigh's last book, Adam Smith in Beijing, Arrighi argues that it is now late autumn for the U.S.-centered regime of accumulation, and the era of American hegemony is over. Bush's attempt to stave off decline and prolong America’s power ended in failure.

With the bursting of the housing bubble, what we are observing now is, quite clearly, the terminal crisis of US financial centrality and hegemony.

The other argument is that ” China’s economic emergence should be viewed from the perspective of the longue durée;----the entire East Asian system of interstate relations has been characterized by a long-term dynamic, or the East Asian development path

"...when the rest of the world also realizes that Wall Street is wearing no clothes..."

hahaha... and THAT'S where it gets really cute!

I reminds me of the approach taken by my daughters when they were much younger...

For quite some time they suspected (with good reason) that there was no Santa Claus. You could just tell by some of the things they said. And I could see that suspicion grow from year to year.

As with most kids, my girls would get a present from us and a nice gift from Santa every Christmas. And... it seems to me they reached a stage when they were fairly certain that there was no Santa... but as long as they didn't openly state the fact... they knew that the traditional bonus presents would keep on coming.

So... as long as we all keep quiet about the "magic" of Wall Street...

Oh... and about that question... "What is the role of finance in a good and just society?"

To paraphrase the infamous Baroness Thatcher, we no longer part of a society. Rather we live in an economy. And it will give us all when need... if only we'd work just a bit harder!!!