Embedded Files
3 January 2019
SPERI research team
The third blog in our new series sets out SPERI’s research agenda on Finance, Debt & Society.
Over the past decade, conventional thinking on the financial sector has been turned on its head. Prior to the 2008 financial crisis, policymakers argued that deregulated financial markets would self-regulate and accurately price risk. But in fact, complex financial products generated significant credit bubbles and destabilising speculation. The state, far from being powerless in an age of mobile capital flows, actively came to the rescue of the global financial system through ‘bail-out’ packages and the embrace of unconventional monetary policy. The crash exposed severe blind-spots in mainstream understandings of the financial system. Yet despite this, the world economy remains deeply immersed with the ebbs and flows of global finance.
These processes have confirmed what those working in the tradition of political economy have long argued. Finance is not simply a ‘neutral’ allocative economic mechanism aligning savers and borrowers; it is a sphere of social activity that profoundly shapes and is shaped by power relations and politics. Grounded in this political economy tradition, SPERI’s Finance, Debt and Society research theme examines the dynamics of financial power at work in our unstable post-crash world.
Finance at the global, national and ‘everyday’ scales
In analysing finance, it is important to recognise that, though it can often appear abstract and ‘disembedded’ from any particular place, it is always mediated by distinctive institutions at the global, regional, national and household scales.
Over recent decades, the world economy has experienced a long wave of financialisation, understood as the increased role of financial motives, markets and actors across domestic and international economies. The post-war Bretton Woods settlement had explicitly sought to place constraints on ‘hot’ money – speculative flows of capital which could destabilise currencies and instigate crises. Finance was partially contained within national borders, through a system of fixed exchange rates and capital controls. From the 1960s onwards, the financial sector sought to escape these constraints, first as the City of London became a space through which dollar-denominated transactions could escape US oversight through the euro-dollar markets, then through deregulatory initiatives such as the abolition of exchange controls and the ‘Big Bang’ of the 1980s. The shift towards international capital mobility empowered and underpinned the development of firms with a global orientation, such as transnational corporations, global investment banks, derivatives traders, and hedge funds. The institutional architecture of this new financial order – tight fiscal discipline, capital account liberalisation and the creation of operationally independent central banks – was underpinned by the US commitment to an ‘open’ financial system, backed-up by international organisations such as the IMF and World Bank.
Financial globalisation has occurred alongside a deepening of global trade, with these two dynamics becoming increasingly intertwined over recent decades. China’s huge trade surpluses have underpinned the purchase of dollar-denominated assets, whilst cheap Chinese imports constrained inflationary pressures in the West and contributed to the low interest rate environment which sustained the pre-2008 global credit bubble. Similar trade and capital account dynamics between the Eurozone’s ‘core’ and ‘periphery’ have intensified geographical imbalances within European capitalism.
Government policies, national legal structures and institutional frameworks played a key role in shaping the rise of global finance. The abolition of capital controls which ‘freed’ financial movement was driven by states grappling with domestic political dilemmas, as well as by the lobbying efforts of financial actors. A distinctive trans-Atlantic deregulatory dynamic subsequently emerged as the US and UK sought to retain the competitiveness of Wall Street and the City of London. As the fall-out from 2008 revealed, national states continue to play a critical role in underpinning the liquidity of the financial sector. Banks across Europe, Asia and America were supported by re-capitalisation funds from their own governments and ‘swap lines’ arranged by the US Federal Reserve.
The rise of global finance did not only take place within corporate headquarters and the meetings of central bank officials. It has also been rooted in the everyday experience of households, families and individual citizens. The liberalisation of global finance occurred alongside an erosion of collective, ‘risk-sharing’ forms of welfare like social housing and pensions. In this context, household debt boomed and risk became increasingly individualised. Public and institutional pensions were replaced with individual portfolios and people were encouraged to meet their future welfare needs through home ownership. The pensions, savings and investments of the moderately well-off became, in the hands of institutional investors, highly mobile stocks of global capital. Financial globalisation did not therefore only reconfigure ‘markets’; it also had profound implications for individuals and for patterns of everyday life.
Finance and inequality
Understanding the role of global finance today must also take into account its relationship to deep distributional shifts within advanced capitalist states. Growing inequality and the rise of finance are closely intertwined. New kinds of asset management firms have taken up a central role in corporate ownership, driving an emphasis on achieving short term ‘shareholder value’. This has driven a wave of corporate concentration, restructurings and ‘rationalisation’ that has increased pressure on firms to minimise costs, in particular through eroding wages and the employment conditions of the workforce. The concentration of wealth at the upper end of the income distribution has led to a glut of funds available for speculative investment.
In states unable to secure a surplus through export markets, private debt and consumer spending have increasingly acted as the key drivers of economic expansion within ‘debt-led’ economies such as the UK, US and the Southern Eurozone. This increased reliance on credit has fallen unevenly across existing racial, class-based and gendered inequalities. Sub-prime loans in the US were aggressively targeted at marginalised groups, such as low-income Latino and black households, who subsequently suffered foreclosure and financial distress. In these ways, finance can reproduce and deepen existing social stratifications, with potentially explosive political consequences.
The 2008 crisis compounded the dysfunctional relationship between finance and inequality. The impacts of austerity programmes, justified as measures to reduce public deficits by cutting public expenditure cuts, have disproportionately fallen on low income households, public sector workers and women. Real wages have fallen but asset prices have been maintained through quantitative easing (QE) and other forms of monetary stimulus. At the same time, attempts by powerful states to resolve domestic crises through loose monetary policy have destabilised the global macroeconomic environment. The unwinding of QE potentially threatens new bouts of global instability. Deep interconnections between states mean that the disruptive and distributional consequences of financial capitalism play out globally.
The politics of financial transformation
Whilst conventional policymaking thinking has extolled the virtues of large financial markets, more critical voices have pointed to the profound dysfunctions which an over-sized financial sector can generate. The idea of a ‘finance curse’ highlights the potential economic damage which ‘too much finance’ can cause through the misallocation of resources or increased exposure to crisis. Much like the analogous ‘resource curse’, that can accompany the discovery of a high-value mineral such as oil, the presence of a major global financial centre within a country is a double-edged sword. The financial sector generates significant employment and exports, but also large rents, which divert high-skilled workers and investable capital away from other sectors of the economy. Inflows of foreign investment can both push up the exchange rate, making export-oriented sectors uncompetitive, and expose a country to greater risks of contagion from international financial crises. How to move financialised economies away from their dependence on unrestrained finance is therefore a pressing question.
Despite the long-term damage which financialisation can cause, it also produces entrenched constituencies of support which can make its reversal difficult. The British Treasury, for example, has become heavily dependent on tax revenues generated by the City of London. Whilst unbridled growth in house prices and tight credit conditions have excluded millions of young prospective homeowners from the property market, locking them into often exploitative rent relations, those with existing housing wealth have an entrenched interest in maintaining the status quo. Any political solution aimed at improving access to housing is likely to generate severe resistance from those who stand to lose out. Mapping these constituencies is a key task for those seeking to build political support for a transformation of the financial sector and its relationship to society.
Finance plays a fundamental role in our economic and social world. It therefore raises deep normative questions. What social function should finance play? How do the distributional dynamics of the financial system, and central bank interventions, relate to broader conceptions of distributive justice? What institutional form might a more sustainable financial system assume? Is it possible for investment to be embedded within a wider conception of the public good? These are difficult questions, but alternative models of finance have existed historically and continue to exist in embryonic forms today. Public investment banks can place financial decision-making under a layer of democratic control that can take account of wider social interests. The return of mutual societies or credit unions has the potential to embed finance within particular places and communities. Whatever form an alternative financial system takes, it is essential that it secures a degree of autonomy from the logics and pressures inherent in the contemporary global financial system. Constraining and embedding finance within democratically accountable local, national and global structures is therefore a necessary condition of designing a more socially oriented system of credit provision.
The sheer scale of global finance has created formidable centres of power. A vision of finance as a domain of market ‘rationality’, as presented by mainstream economics, financial lobbyists and some politicians, entrenches existing power relations. The financial system as a whole remains vulnerable to future breakdowns. Financial capitalism in its current form is riven with internal tensions and imbalances. But these will not be resolved automatically. A new politics of financial reform, underpinned by research and analysis, is necessary if broader socio-economic change is to occur.
This blog series was collectively planned and written by members of the SPERI research team: Andrew Baker, Laura Bennett, Matt Bishop, Martin Craig, Remi Edwards, Desiree Fields, Laura Foley, Katy Fox-Hodess, Andrew Gamble, Jon Kishen Gamu, Ellie Gore, Colin Hay, Andrew Hindmoor, Tom Hunt, Michael Jacobs, Patrick Kaczmarczyk, Scott Lavery, Genevieve LeBaron, Owen Parker, Tony Payne, Ed Pemberton, Kaisa Pietilä, Andreas Rühmkorf, Liam Stanley and Peter Verovšek.
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