Can We Avoid Another Cataclysmic Meltdown Of The Global Financial System?

What’s Changed? Increased Financialization

The U.S. is still considered the most market oriented country in the world and although we are considered to be the bastion of capitalism, Ms. Foroohar notes that there has been a widespread change in US public sentiment and a loss of faith in our brand of capitalism. She claims that the most disaffected cohort of the US population are the millenials with only 19% of those between the ages of 18 to 29 considering themselves as “capitalists”, followed by  older Americans, at 26%.

Ms. Foroohar then points to a number of changes that have taken place over the past few decades that have caused our capitalist system to be further questioned. She notes that our financial institutions were initially designed to provide financing to businesses and consumers.

But due to increased “financialization”, these financial institutions have shifted away from  financing the real economy  and are increasingly using  “financialization” as their primary way for  creating wealth.  She explains that they have found ways to increase their earnings and inflate the value of their shares  through activities such  as bundling and resale of securitized debt, underwriting and a wide variety of trading activities involving securities, derivatives and  commodities. She claims that these practices have been so lucrative as to  deprived businesses that operate in the real economy that actually make things,  of the funding they need to recover and to grow.

Likewise, she also claims that increased “financialization” has undercut availability of affordable home mortgages and encouraged corporate speculators in the housing market and a return to a secondary market for bundled sub-prime mortgages.

She then concedes that financialization has really worked extremely well for US financial institutions, citing data that indicates that a) the US financial sector as a share the US economy has increased from ~4%  in 1980 to ~7% in 2016; and b) the financial sector has been able to increase their profits to 25%  of all corporate profits while increasing job growth by just 4%. Observation: this appears to be an obvious impediment to those that want to fix the system.

What’s Has Shifted and What to Fix

The first ten chapters of  “Makers and Takers” contain a series of stories about companies and people who Ms. Foroohar explains were “at the heart of financialization over the past hundred years”. She uses these stories to describe the “tectonic shift that has taken place in financialization” in order to help the reader better understand what has taken place and how we got to where we are today.

Chapter 11 contains Ms. Foroohars’s suggestions as to how to fix the finance sector to make it better serve business and society. In this short chapter she  offers a number of broad policy solutions,  while conceding that turning back the tide of financialization will be hard to achieve.

Can We Avoid Another Cataclysmic Meltdown Of The Global  Financial System

This is the fundamental question Ms. Foroohar raised in her Time Magazine article. Included in this section are my thoughts on this matter, after reading her article and book and having preparing this synopsis. I have used my take-aways to reach some preliminary conclusions in order to make those who share my concerns, more aware of dangers we  face.

A Synopsis of “Movers and Takers”

“Movers and Takers” presents four major findings.

1) The capital markets and the banking  sector in particular, are providing less funding for new investments  as most of the money in the system is being used in lending against existing assets. And the financial industry’s focus has changed from lending to speculation.

2) Financial institutions are increasingly behaving less like banks and more like casinos. These institutions are using a variety financialization schemes to boost their share prices through investing  and trading securities for their own account in order to run up the value of their stocks through stock buy-backs.

3) Financial institutions have also used these financialization strategies to create wealth for their CEOs and other officers thought offering stock options as bonuses, then buying back these awarded shares at inflated values.

4) Many American corporations other than the financial institutions, have embraced comprehensive financialization strategies. Some of them have decided not to re-invest in growing their core businesses, but to divert their sources of financing away from  business growth activities and market expansions to serve consumers in the real economy. Instead they have been using  their investment capital to acquire and trade assets in order to inflate asset values and increase their stockholders’ share value.