Financialization is a consequence of free market neo-liberalism. Social inequality and stagnant real income lowers investment in production of goods and services which shifts to the financial sector. Finance capital begins to take over the real economy. The erratically fluctuating market values of financial assets begin to determine business cycle patterns previously determined by real output and effective consumer demand.

Financial profits as a portion of the GDP went from averaging about 15% between 1959 and 1980 to nearly 40% today. In 1970, about 90% of all futures trade by contract consisted of agricultural products with the remainder being precious metals. Currently, about 70% of futures trading is financial instruments with another 25% being energy and currencies. The rapid growth of annual foreign exchange transactions from just under $5.5 trillion in 1980 to about $61 trillion in 2001. GDP as a percentage of annual financial turnover lept from nearly 80% in 1956 to well under 2% currently. By these, and many other measures, financialization is clearly definitive of the present epoch of late capitalism.


The problem is that late capitalism becomes chronically stagnant with fewer and fewer sufficiently profitable outlets for ever larger sums of surplus monopoly capital. A chronic capital glut leads initially to increased spending on advertizing and on the military as in the early decades after WWII. Polish economist Michel Kalecki argued that greater and greater proportions of military spending would be required to sustain even modest levels of economic growth from year to year. In 1966, a burst of military spending as the Vietnam War began to escalate led to dynamic GDP growth making the entire decade of the 1960s the single fastest growing since WWII at an average annual 4.2% real growth rate. This was clearly unsustainable not only for reasons of political feasibility but because the military became an ever smaller share of the growing US economy and thus was doomed to have an overall declining real impact. In the early 1950s, US post WWII military spending peaked at about 14% of GDP. Current unprecedentedly high nominal levels of military spending account for a mere 5% of US GDP. Clearly, something else would be needed to sustain the rate of profit and drive late capitalism in an epoch of chronic stagnation especially since US military spending no longer gave sufficient stimulus to the once labor intensive capital goods sector that it did in the first thirty five years after WWII.

Financialization gradually became the means to sustain late capitalism and resolve the profitability crisis. The problem became, as Hyman Minsky and other post-Keynesians frequently pointed out, that large financial sectors are inherently unstable. They are prone to creating bubbles, regardless of central bank policy, and of causing even wider fluctuations in the business cycles than did the real economy of goods and services production which prevailed years ago. In times of bubbles liquidity preference evaporates and risk aversion declines as the financial sector takes on huge investment. This is especially true as asset price bubbles and the borrowing it generates is the only way to sustain a chronically stagnant late capitalist system which otherwise lacks sufficient effective consumer demand to clear goods markets and sustain profit levels. When the bubble inevitably bursts, losses are catastrophic and the economy suddenly declines threatening a deep depression. These are the contradictions and dangers of financialization.

Financialization arose for reasons not directly related to financialization itself but rather due to a deep and historic transformation in the capitalist system as a whole. Resolving the current crisis will require a shift to a new economic system that values full employment and human needs more than private profit.

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On October 5, 1906, the NY Times published comments made by FDR warning that corporations, when given free reign over their financial activities with no effective supervision, will endanger our entire system of government as well as our entire civilization. It's not that no one saw this coming. It was clear in 1906, for crying out loud. It's that "average" Americans don't have the resources to fight it and the political representatives of those Americans don't have the guts to stand up against the people who line their pockets. When times were good, no one complained when the gap between the upper class and everyone else widened. No one was paying attention. Now the candidates are proposing national health care, re-energizing social security, and re-structuring an educational system to make our kids more competitive in the world. Those are all very distinguished goals, but what about eliminating the greed that got us here?

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1. The Fed is privately owned.

Its shareholders are private banks. In fact, 100% of its shareholders are private banks. None of its stock is owned by the government.

2. The fact that the Fed does not get “appropriations” from Congress basically means that it gets its money from Congress without congressional approval, by engaging in “open market operations.”

Here is how it works: When the government is short of funds, the Treasury issues bonds and delivers them to bond dealers, which auction them off. When the Fed wants to “expand the money supply” (create money), it steps in and buys bonds from these dealers with newly-issued dollars acquired by the Fed for the cost of writing them into an account on a computer screen. These maneuvers are called “open market operations” because the Fed buys the bonds on the “open market” from the bond dealers. The bonds then become the “reserves” that the banking establishment uses to back its loans. In another bit of sleight of hand known as “fractional reserve” lending, the same reserves are lent many times over, further expanding the money supply, generating interest for the banks with each loan. It was this money-creating process that prompted Wright Patman, Chairman of the House Banking and Currency Committee in the 1960s, to call the Federal Reserve “a total money-making machine.” He wrote:

“When the Federal Reserve writes a check for a government bond it does exactly what any bank does, it creates money, it created money purely and simply by writing a check.”

3. The Fed generates profits for its shareholders.

The interest on bonds acquired with its newly-issued Federal Reserve Notes pays the Fed’s operating expenses plus a guaranteed 6% return to its banker shareholders. A mere 6% a year may not be considered a profit in the world of Wall Street high finance, but most businesses that manage to cover all their expenses and give their shareholders a guaranteed 6% return are considered “for profit” corporations.

In addition to this guaranteed 6%, the banks will now be getting interest from the taxpayers on their “reserves.” The basic reserve requirement set by the Federal Reserve is 10%. The website of the Federal Reserve Bank of New York explains that as money is redeposited and relent throughout the banking system, this 10% held in “reserve” can be fanned into ten times that sum in loans; that is, $10,000 in reserves becomes $100,000 in loans. Federal Reserve Statistical Release H.8 puts the total “loans and leases in bank credit” as of September 24, 2008 at $7,049 billion. Ten percent of that is $700 billion. That means we the taxpayers will be paying interest to the banks on at least $700 billion annually – this so that the banks can retain the reserves to accumulate interest on ten times that sum in loans.

The banks earn these returns from the taxpayers for the privilege of having the banks’ interests protected by an all-powerful independent private central bank, even when those interests may be opposed to the taxpayers’ -- for example, when the banks use their special status as private money creators to fund speculative derivative schemes that threaten to collapse the U.S. economy. Among other special benefits, banks and other financial institutions (but not other corporations) can borrow at the low Fed funds rate of about 2%. They can then turn around and put this money into 30-year Treasury bonds at 4.5%, earning an immediate 2.5% from the taxpayers, just by virtue of their position as favored banks. A long list of banks (but not other corporations) is also now protected from the short selling that can crash the price of other stocks.

THE FED NOW OWNS THE WORLD’S
LARGEST INSURANCE COMPANY --

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The so-called bail out of Wall Street recently passed by Congress is like trying to bail out the sinking Titanic. The problem is too big and too top-heavy. It won't work. A REAL bail out for the short term should be geared to those in financial need, not to those who have far more than they need and who have created the current problem.

Here's a formula for the kind of bail-out that would really help in the short term: Have the government give $1 million dollars to every U.S. registered voter whose income is less than $100,000 per year. No strings attached. It would help those who need it most. They would spend much of that, which would give the economy a needed boost. Most of it would be spent in this country rather than overseas. (Details of eligibility and amount are negotiable - within reason.)

Of course, it would not solve the long term problem. That would require legislation imposing stringent regulation of Wall Street and the whole banking, financial and corporate-industrial system. It would also require legislation to bring about a greater financial equality of the population, including higer taxes on wealthy corporations and individuals, leveling of the inequalities of compensation, limits on corporate bonuses and retirement packages, and surcharges on incomes (individual and corporate) of over, say $1 or $2 million per year. Finally, we need to call a halt to our country's politcal and military adventurism and attempts to impose a pax Americana on the rest of the world, and to implement a national, universal, comprehensive, single-payer healthcare system in the U.S.

Those steps would give us a START at reducing the national debt and assisting those among our population who NEED help. Unfortunately, the addiction of the American population to long outdated ideological positions and notions regarding economic and political issues make those goals ALMOST as difficult as bailing out the Titanic. They would, however, offer a HOPE of success in which our present efforts are totally lacking.

Bryce Babcock
Cottonwood, AZ 86326
bbandz@gmail.com

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After this economic calamity in the financials industry, will the auto industry, construction industry, retail industry come calling for assistance from Uncle Sam? Of course they will!!!

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