This is the second part of a four-part interview with Costas Lapavitsas, author of Financialised Capitalism: Expansion and Crisis (Maia Ediciones, 2009) and Profiting Without Producing: How Finance Exploits Us All (Verso, 2014). This part turns toward international aspects, including the contrasts between financialization in high-income and developing countries and the relationships between financialization and both neoliberalism and globalization. (See the first part here.)
Costas Lapavitsas, Guest Blogger
Dollars & Sense: You’ve anticipated our question about whether financialization is exclusive to high-income capitalist countries or is also happening in developing countries. How is it different in developing countries?
CL: Financialization in developing countries is a recent phenomenon, which has begun to emerge in the last 15 years in full earnest. We see a number of middle-income countries that are financializing, and we have to look at it carefully to understand it. One thing that is immediately obvious is that, in mature countries, financialization has been accompanied by weak or indifferent performance of the real economy. Rates of growth have been weak, crises have been frequent, unemployment has been above historical trends. We see a problematic state of real accumulation in mature countries. But when we look at developing countries, it is possible to see countries with phenomenal financialization, where growth has been reasonably strong. Brazil has been financializing during the last ten years, and yet its growth rate has been significant. Turkey has been financializing and yet its growth rate has been significant, and so on. So financialization in developing countries is not the same as in mature countries, because typically in the last ten years, it’s been accompanied by significant rates of growth.
This is the first part of a four-part interview with Costas Lapavitsas focusing on the Era of Financialization and the transformations at the “molecular” level of capitalism that are driving changes in economic performance and policy in both high-income and developing countries. Lapavitsas is a professor of economics at SOAS, University of London, and the author of Financialised Capitalism: Expansion and Crisis (Maia Ediciones, 2009) and Profiting Without Producing: How Finance Exploits Us All (Verso, 2014).
Costas Lapavitsas, Guest Blogger
Dollars & Sense: Over the past few years we’ve heard more and more about the phenomenon of “financialization” in capitalist economies. This concept appears prominently in your writings. How would you define “financialization”?
Costas Lapavitsas: Well, it’s very easy to see the extraordinary growth of the financial sector, the growth of finance generally, and its penetration into so many areas of economic, social, and even political life. But that, to me, is not sufficient. That is not really an adequate definition. In my view—and this is basically what I argue in my recent book and other work that I’ve done previously—financialization has to be understood more deeply, as a systemic transformation of capitalism, as a historical period, basically. I understand it as a term that captures the transformation of capitalism in the last four decades. To me, this seems like a better term to capture what has actually happened to capitalism during the last four decades than, say, “globalization.”
Recently, I gave a private talk on the risks of shadow banking and included the following table in a handout. I include a somewhat abbreviated version on this blog post for readers to use as well. I rate and provide and brief explanation for the level of liquidity, solvency, and market risk contained in these shadow banking sectors. This is elaborated on to some extent in my recent blog post here.
A vague panic has overcome many analysts when discussing China’s shadow banking sector. The sector has even been referred to as a “ticking time bomb” by some. Other analysts say there is nothing to fear in the shadow banking sector. So which is it? Is the risk so high that a shock in this sector might result in a financial crisis? Or is the risk so low that growth will be entirely unaffected?
Looking at the sector from several angles, we try to rate the level of risk in various shadow banking sectors to determine whether this fear is justified. We look at liquidity risk, or whether shadow banking institutions have sufficient cash to repay asset holders in the short run; solvency risk, whether shadow banking institutions can muster up repayments in the long run; and market risk, whether shadow banking institutions are exposed to an overall decline in asset prices
Portes as the poster child for the failure of econometrics and neoclassical dogma
Richard Portes is the economist that the U.K.’s neoclassical economists chose to be their representative. They consider him to represent the greatest strengths of neoclassical economists in general and econometricians in particular. “Econometricians” is a fancy term for economists whose specialty is statistics. Economics is unique in that one can receive exceptional honors from fellow-neoclassical economists for proving catastrophically wrong – repeatedly and causing immense human suffering. Wesley Marshall and I are doing a book that illustrates this point by focusing on Nobel Laureates in economics, and explains the underlying pathology that has so twisted the field. Portes has not been made a Laureate, but he is a global leader among neoclassical economists. Portes’ pronouncements on Iceland have proven so wrong, so often, that they serve a similar purpose in illustrating these crippling pathologies.
His infamous November 2007 ode to the soundness of the big three Icelandic banks was commissioned by Iceland’s Chamber of Commerce and it went on at length about Portes’ accomplishments. Here is a brief excerpt to give the reader a feel for tone.
“Professor Portes is a Fellow of the Econometric Society, a Fellow of the British Academy, a Fellow of the European Economic Association, and Secretary-General of the Royal Economic Society. He is Co-Chairman of the Board of Economic Policy. He is a member of the Group of Economic Policy Advisors for the President of the European Commission; of the Steering Committee of the Euro-50 Group; of the Bellagio Group on the International Economy; and Chair of the Collegio di Probiviri (Wise Men Committee) of MTS.”
Yes, they were so sexist that they had a “Wise Men Committee” in 2007, and Portes used that phrase to describe the group. The Committee, of course, proved to be an oxymoron composed of regular morons. The Queen named him a Commander of the British Empire (CBE) in 2003 then famously asked British economists why they had missed the developing crisis.
The global financial crisis that began in 2008 in the United States had roots in offshore banking, some of which have been revealed: the Bear Stearns’ 2007 Cayman Island hedge fund bankruptcy, in which the company attempted to file offshore to protect U.S. assets, Goldman Sachs’ off balance sheet Cayman deals in shaky asset-backed securities (ABSs), and Citigroup’s creation of structured investment vehicles in London to hide the sales of ABSs. These offshore banking centers, which include locations such as Luxembourg, the Netherlands, and Bermuda, were safe havens for large American banks that wished to move collateralized debt obligations (CDOs) and other asset backed securities off their balance sheets, and away from the scrutiny of auditors and shareholders.
Many of the large financial corporations were engaged in these dealings and created structured investment vehicles, many of which were held offshore. While we may never know about all of these dealings, some rough calculations performed using the SEC’s Edgar database and offshore classification from the Tax Justice Network reveals interesting statistics on offshore entities held by major financial corporations.
I’m obsessed about this idea that I call the “speculative spread.” A bit more about it and some precisions.
This idea, which I referred to in a previous blog post (and a working paper, and an article), says that if the shadow banking system (non-traditional financing) rises far above the level of financial deepening (measured by M3), financial instability will arise. For the US and Europe, I believe that if the shadow banking system is greater than M3 the financial system is in peril—for the United States, this was the case until 2012, while for Europe, this was not really a problem except, tellingly, in the pre-global crisis period. For China and other less developed countries, I believe that if the size of the financial system (measured in China’s case by total social financing, or bank loans plus non-traditional financing) is greater than M3, instability will arise.
As China’s economy rapidly changes, we ask: Will the trust companies that currently operate in the shadows undergo the dramatic restructuring that the country’s Trust and Investment Companies (TICs) have experienced in the past twenty years—will they get ‘TIC’ed?
China’s trust companies are wily institutions. They currently hold over nine trillion renminbi (RMB) in assets under management, and they are quite apt at skirting regulation. Before 2010, trusts gladly removed risky bank loans from bank balance sheets and repackaged them as securities for banks to sell to customers. When this practice was banned, trusts continued to extend loans themselves or through third parties and sell them to banks to bundle as wealth management products. Many borrowers are companies that are too risky to qualify for a bank loan—not a good sign.