While the financial sector of the core capitalist economies is enjoying escalating asset price inflation, the real sector of these economies, especially those of Europe and Japan, is suffering from deflation, that is, stagnation and high unemployment.
And while the simultaneous occurrence of inflation and deflation sounds paradoxical, it is only superficially so. In reality it is simply the logical outcome of neoliberal monetary policies pursued in these countries: as these policies of austerity economics have since the 2008 financial collapse systematically drained the overwhelming majority of citizens of material resources and funneled those resources to the financial sector, the result has been the understandable contraction of the real sector concurrent with the expansion of the financial sector.
In the face of these apparently contradictory developments, economic pundits and financial “experts” at the helm of monetary policy-making apparatus feign bewilderment at how market developments have become increasingly more “complicated,” and how economic fine-tuning has accordingly become more challenging. Such pompous utterances are, however, hollow pretensions designed to obfuscated issues, to mystify economics and to confuse the people. In reality, there is absolutely nothing “complicated” or mysterious about the simultaneous expansion of the financial sector and contraction of the real sector. It is, indeed, altogether axiomatic that if you systematically rob Peter to pay Paul, you are going to impoverish Peter (the 99%) while enriching Paul (the 1%).
The concurrent enrichment of the financial plutocracy and impoverishment of the masses of the people is akin to the growth of a parasite in the body of a living organism at the expense of life-sustaining blood or nourishment of that organism. What is unbeknown to the public is that the parasitic transfer of economic blood from the bottom up is not simply the spontaneous outcome of the operations of the invisible hand of market mechanism, or the blind forces of competition. More importantly, the transfer is the logical outcome of deliberate monetary policies that are crafted by the financial elites and their proxies at the helm of economic policy making of most capitalist countries. As political economist Mike Whitney recently put it:
“As most people now realize, stocks haven’t tripled in the last 5 years because the economy is expanding. Heck, no. The economy is still on all-fours and everyone knows it. The reason stocks have been flying-high is because the Fed added a hefty $4 trillion in red ink to its balance sheet. Naturally, when someone buys $4 trillion in financial assets, the price of financial assets go up” (source).
The purported rationale behind the unremitting bestowing of the nearly interest-free money upon the financial institutions is that as these institutions receive cheap money from the printing presses of the government they would, in turn, extend low-cost credit to manufacturers, thereby prompting investment and job creation in the real sector of the economy.
This traditional/New Deal monetary policy worked fairly well as long as regulatory constraints—especially the Glass-Steagall Act that was in force from 1933 to 1998—strictly stipulated the types and quantities of investments that banks and other financial intermediaries could undertake. As those regulatory requirements prohibited banks from engaging in speculative or risky investments, they had very little choice but to behave or do business mainly as banks, or financial intermediaries, that is, funneling depositors’ savings and/or government-generated money to the real sector of the economy.
With the systematic removal of regulatory constraints, however, banks have been increasingly abandoning or marginalizing their traditional role as financial intermediaries. Instead, they now invest mostly in buying and selling of assets and other speculative activities, as such financial/speculative investments are much more lucrative than simply accepting deposits at certain rates of interest and then lending them at slightly higher rates.
Not only has this change in the behavior or function of the banking system drastically curtailed the flow of capital from the financial to the real sector, it has in fact reversed the flow of capital between these two sectors: there is now an alarming capital flight from the real to the financial sector in pursuit of higher, speculative rates of profit. Evidence shows that (in recent years) real sector corporate managers/CEOs are increasingly diverting their profits, as well the cheap money they borrow from governments (usually through the privately-owned central banks), to speculation instead of production. As I noted in an earlier article on this subject, “they seem to have come to think: why bother with the messy business of production when higher returns can be garnered by simply buying and selling titles.”
This steady transfer of money from the real to the financial sector is the exact opposite of what monetary policy-makers—and indeed the entire neoclassical/mainstream economic theory—claim or portray to happen: flow of money from the financial to the real sector.
One would imagine that these drastic changes in real world markets, which show how gravely mainstream economists have gone awry in holding tight to their abstract and largely obsolete theories, would have somewhat shaken the faith of these economists in their economic orthodoxy and prompted them to revise or adjust their traditional theories of money supply, of credit creation, of finance, and of investment.
Alas, the faith in market mechanism and economic orthodoxy seems to be as strong as the faith in any otherworldly religion. Whether as university professors or as advisors to policy makers, mainstream economists continue to teach the same materials and retell the same theories in the face of heavily financialized economies as they did in times long past, that is, in the era of relatively competitive markets and industrial/manufacturing economic structures of yore.
Under the sway of financial capital, monetary policy has increasingly turned into an instrument of asset price inflation, that is, of accumulation of ever more fictitious capital in the deep pockets of the financial oligarchy. While not openly acknowledged, the rationale behind the endless injection of cheap money into the financial sector—in the manner of pumping hot air into a balloon—is a desperate attempt or a vain hope on the part of economic policy makers that the so-called trickle-down effects of asset price bubbles may lead to economic recovery.
Admittedly, the presumed trickle-down effects on aggregate demand may have had some validity in the earlier (industrial or manufacturing) stages of capitalism where the rise in the wealth of nations also meant expanded (real) production and increased employment. However, in the era of heavily financialized economies, where the dominant form of capitalist wealth comes not so much from real production of goods and services as it does from asset price bubbles, trickle-down theory has lost whatever minimal validity it may have had at earlier phases of capitalism.
Sadly, monetary policy makers, who are often proxies of financial elites at the helm of privately-owned central banks (contrary to the widespread perceptions, the U.S. Federal Reserve Bank is also privately owned, its share-holders are commercial banks) are not deterred by real world economic developments that tend to contradict their religious-like theories. Their loyalty is first and foremost to the interests and agendas of their behind-the-scene bosses and benefactors―those who nurture, promote and place them at the seat of monetary/economic decision-making. Having abandoned traditional fiscal and monetary policies of demand management, asset-price inflation has now become the policy of choice of economic recovery—if not recovery, then of preventing an economic collapse.
Hostage to Banksters
This helps explain why the economies of most of the core capitalist countries have become hostage to banksters, to their insatiable appetite for ever more cheap money. This practice of continued injections of cash into the financial sector is obviously tantamount to ransom payments to the “too big to fail” banksters, out of an exaggerated fear that their failure would lead to “cataclysmic economic collapse.” It also helps explain the multiple renewals or endless extensions of the policy of quantitative easing (QE), as termination of this policy is bound to lead to another financial implosion.
As an indication of this destructive addiction of the financial markets to Uncle Sam’s generous cash injections, let us remember how these markets went into a tail spin in mid-October by the prospect that QE may not be extended beyond October; and how they immediately rebounded on the news that the Fed would indeed continue cash injections beyond October―that is, QE3 would be continued as QE4. This is how Mike Whitney described those turbulent days of the financial markets:
“By mid-day [of October 15, 2014], the Dow was down 460 points before clawing its way back to minus 173 points. It looked like the market was set for another triple-digit flogging on Thursday [October 16] when the Fed stepped in and started talking-up an extension to QE3. That’s all it took to ease investors jitters, stop the meltdown and send equities rocketing back into space. By the end of Friday’s session, all the markets were back in the green with the Dow logging an impressive 263 points on the day” (source).
While the policy of indefinite extension of QE (along with near-zero interest rates) may temporarily keep the financial markets from imploding, the policy simply delays the day of reckoning—more or less like keeping a terminally-ill patient alive on artificial life support. And therein lies the futile and, indeed, tragic aspect of this policy: monetary policy-makers’ obligation to constantly inject cash into the financial system in order to keep the system from collapsing is akin to the logic of the proverbial bicyclist who has to keep riding forward or else he would fall over.
Monetary policy-makers at the head of central banks and treasury departments, representing the powerful interests of big finance, would do everything they can to avoid going off the cliff, or delaying the approach to the cliff. In so doing, however, they drain the overwhelming majority of citizens of economic/financial resources—by transferring those resources (through austerity measures) to the financial oligarchy. Andre Damon (of the World Socialist Web Site) succinctly captures the redistributive effects of this neoliberal monetary policy:
“The richest one percent of the world’s population now controls 48.2 percent of global wealth, up from 46 percent last year, according to the most recent global wealth report issued by Credit Suisse, the Swiss-based financial services company.
“Hypothetically, if the growth of inequality were to proceed at last year’s rate, the richest one percent for all intents and purposes would control all the wealth on the planet within 23 years.
“The report found that the growth of global inequality has accelerated sharply since the 2008 financial crisis, as the values of financial assets have soared while wages have stagnated and declined. . . . Emma Seery, head of Inequality at Oxfam, the British anti-poverty charity, commented, ‘This report shows that those least able to afford it have paid the price of the financial crisis whilst more wealth has flooded into the coffers of the very richest.’
“The study revealed that the richest 8.6 percent of the world’s population—those with a net worth of more than $100,000—control 85 percent of the world’s wealth. Meanwhile, the bottom 70 percent of the world’s population—those with less than $10,000 in net worth—hold a mere 2.9 percent of global wealth.
“The growth in inequality is bound up with a worldwide surge in paper wealth, fueled by the trillions of dollars pumped into the financial system by central banks via zero interest rate and ‘quantitative easing’ policies. . . .
“As the report noted, ‘The overall global economy may remain sluggish, but this has not prevented personal wealth from surging ahead during the past year. Driven by … robust equity prices, total wealth grew by 8.3% worldwide … the first time household wealth has passed the $250 trillion threshold’.” (Source).
What is To be Done?
The solution to the runaway financial sector, according to most liberal–Keynesian critics of financialization, is regulation, or re-regulation. While this would be a welcome improvement over the destabilizing behavior of the unbridled finance capital, it would represent only a tentative short- to medium-term solution, not a definitive long-term one. For, as long as there is no democratic control, regulations would be undermined by the influential financial interests that elect and control both policy-makers and, therefore, policy. The dramatic reversal of the extensive regulations of the 1930s and 1940s, which were put in place in response to the Great Depression, to today’s equally dramatic deregulations serves as a robust validation of this judgment.
Other critics of the out-of-control finance capital call for public banking. These critics argue that, due to their economic and political influence, powerful financial interests easily subvert government regulations, thereby periodically reproducing financial instability and economic turbulence. By contrast, they further argument, public-sector banks can better reassure depositors of the security of their savings, as well as help direct those savings toward productive credit allocation and investment opportunities. Ending the recurring crises of financial markets thus requires placing the destabilizing financial intermediaries under public ownership and democratic control.
While nationalization of commercial banks could mitigate or do away with market turbulences that are due to financial bubbles and bursts, it will not preclude other systemic crises of capitalism. These include profitability crises that result from very high levels of capitalization (or high levels of the “organic composition of capital” a la Marx), from insufficient demand and/or under-consumption, from overcapacity and/or overproduction, or from disproportionality between various sectors of a market economy.
Furthermore, as long as capitalism and, along with it, the lopsided distribution of economic surplus prevails, financial instability cannot be uprooted by bank nationalization. For, while nationalization of traditional/commercial banks may temper financial fragility, other types of financial intermediaries and institutions are bound to arise in order to circumvent regulation and/or nationalization, thereby precipitating financial instability. These include all kinds of shadow banks and speculative enterprises such as private equity firms, derivative markets, hedge funds, and more.
To do away with the systemic crises of capitalism, therefore, requires more than nationalizing and/or regulating the banks; it requires changing the capitalist system itself.
Ismael Hossein-zadeh is Professor Emeritus of Economics (Drake University). He is the author of Beyond Mainstream Explanations of the Financial Crisis (Routledge 2014), The Political Economy of U.S. Militarism (Palgrave–Macmillan 2007), and the Soviet Non-capitalist Development: The Case of Nasser’s Egypt (Praeger Publishers 1989). He is also a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press 2012).