This is the third 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 considers financialization in relation, first, with industrial and commercial enterprise and, second, with the household. It then turns to the main consequences of financialization, in terms of economic stability, development, and inequality. (See the earlier parts of the interview here and here.)

Costas Lapavitsas, Guest Blogger

Part 3

Dollars & Sense: A striking aspect of your analysis of industrial and commercial enterprises is that, rather than simply becoming more reliant on bank finance, they have taken their own retained profits and begun to behave like financial companies. Rather than plow profits back into investment in their core businesses, they are instead placing bets on lots of different kinds of businesses. What accounts for that change in corporate behavior?

CL: In some ways, again, this is the deepest and most difficult issue with regard to financialization. Let me make one point clear: to capture financialization and to define it, we don’t really have to go into what determines the behavior of firms in this way. Financialization is middle-range theory. If I recognize the changed behavior of the corporation, that’s enough for understanding financialization. It’s good enough for middle-range theory. Now obviously you’re justifiedto ask this question: why are corporations changing their behavior in this way? And, there, I would go back at some point to technologies, labor, and so on—the forces and relations of production.

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Gerald Epstein

When President Obama’s fortunes were tanking in the winter of 2010, he needed a way to come out punching at the bankers again in order to gain some more momentum on financial reform—and with the voters. So he turned to an unlikely “populist” symbol—Paul Volcker, former head of the Federal Reserve System from the 1980s, who had been widely reviled, especially on the left, for his anti-inflationary crusade and high interest rate policy at that time. Volcker’s policy raised unemployment to dizzying heights, resulted in thousands of bankruptcies, and ushered in the Third World debt crisis that left much of South America in economic ruin for a decade or more. But as a sign of how crazy U.S. politics had become and how far economic discourse had shifted to the right in the ensuing 30 years, Paul Volcker had become a voice of relative sanity in the fight over financial reform in the wake of the Great Financial Crisis of 2007-2008. Obama called a press conference with Volcker at the front and Timothy Geithner, Obama’s Treasury Secretary who had been very unenthusiastic about significant financial reform, slightly behind and with a scowl on his face. The conference announced Obama’s support for “the Volcker Rule,” which was to be included in the Dodd-Frank Financial Reform bill that was under development and the subject of furious debate in Washington—and that ultimately became law in the summer of 2010.

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Gerald Epstein

Sharmini Peries of the Real News Network interviews Triple Crisis blogger Gerald Epstein about new U.S. federal government regulations raising the required capital banks must hold. Epstein explains why the regulations will be more stringent, allowing fewer loopholes, than previously, why they will reduce systemic risk somewhat in the banking system, but why they’re “probably not enough.”

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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

Part 2

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.

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Timothy A. Wise

Timothy A. Wise, the Director of the Research and Policy Program at the Global Development and Environment Institute (GDAE) and a regular Triple Crisis contributor, announces GDAE’s annual Leontief Prize for Advancing the Frontiers of Economic Thought.

Today my institute will award its annual Leontief Prize for Advancing the Frontiers of Economic Thought to economists Angus Deaton and James K. Galbraith for their work on poverty, inequality, and well-being. Angus Deaton’s most recent book, The Great Escape: Health, Wealth, and the Origins of Inequality, is a must-read on the issue. James K. Galbraith’s Inequality and Instability: A Study of the World Economy Just Before the Great Crisis locates inequality in the context of the recent financial crisis.

As Global Development and Environment Institute co-director Neva Goodwin said in awarding the prizes, “Angus Deaton has demonstrated that inequality is about much more than income differences, focusing on how inequality affects the health and well-being of societies. James Galbraith has shown that inequality isn’t an outcome driven by factors outside of our control, but instead is often a direct result of the policy choices we make.”

You can read more about the Leontief Prize and its illustrious laureates, and about about this year’s prize. You can also watch the ceremony live, including lectures from Deaton and Galbraith on the theme “Health, Inequality, and Public Policy.” The stream below will run from 12:30-2:00 EDT on April 4, 2014.

Triple Crisis welcomes your comments. Please share your thoughts below.

Gerald Epstein

Anton Woronczuk of the Real News Network interviews Triple Crisis blogger Gerald Epstein about the borrowing advantages enjoyed by “Too Big to Fail” banks, due to creditors’ confidence that the banks will be bailed out if they are in danger of failing. Little has changed, Epstein, warns–in terms of the big banks’ advantages or their risk taking–due to the financial crisis or subsequent regulation.

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Philip Arestis and Malcolm Sawyer

The announcement by the European Central Bank (ECB) of its Outright Monetary Transactions (OMT) programme in July 2012, along with the prior statement by the ECB’s president that the bank would do “whatever it takes” to save the euro, restored the confidence of the markets. The interest rates on Italian and Spanish sovereign debt, for example, fell to more tolerable levels.

Further details of the OMT programme have emerged since September 2012, when it was announced that relevant candidate countries would receive help and be allowed access to OMT if they only had complete market access—that is, the ability to get credit from private sources. (The ECB, instead of publishing OMT’s legal documentation “soon” after September 2012, shifted its stance to “only publish when a country applies.”) The ECB shifted to the stricter condition of complete market access from the one of July 2012, under which the programme might help those countries that were simply regaining market access.

The German central bank, the Bundesbank, though, opposes OMT on the grounds that it is close to the monetary financing of budget deficits. In other words, OMT implies clear and direct borrowing by governments from their own central banks, which, it is stressed, is banned by the Maastricht Treaty. It is clear, though, that the treaty permits the ECB to buy public debt in the secondary markets.

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This is the final installment of a four-part series excerpted from the Political Economy Research Institute (University of Massachusetts-Amherst) working paper “The Endogenous Finance of Global Dollar-Based Financial Fragility in the 2000s: A Minskian Approach,” by Junji Tokunaga and Gerald Epstein. Tokunaga is an Associate Professor in the Department of Economics and Management, Wako University, Tokyo. Gerald Epstein is a Professor in the Department of Economics, University of Massachusetts-Amherst, and Co-Director of the Political Economy Research Institute (PERI). See Part 1, Part 2, Part 3, and the full paper.

Junji Tokunaga and Gerald Epstein

The Nature of the Global Financial Crisis

The Endogenously Dynamic Process of Balance Sheet Expansion at LCFSs

In this section, we show how our approach is much better for understanding the nature of the global financial crisis than the arguments of the global imbalance view that many mainstream economists, policymakers, and even heterodox economists advocate.

Firstly, we argue that the global financial crisis was inherently caused by the dynamic process of balance sheet expansion at large complex financial institutions (LCFIs), driven by the elastic growth of global dollar in the global shadow banking system. … The global imbalances view attributes the emergence of global financial crisis to an excess of saving over investment in emerging market countries. According to that view, the financial crisis was triggered by an external and exogenous shock that resulted from excess saving in emerging market countries, not the shadow banking system in advanced countries which were the epicenter of the financial crisis.[43] In this view, LCFIs have a negligible role in the global financial crisis in the 2000s.

Recall our discussion of the endogenously dynamic process of balance sheet expansion, which, driven by the endogenously elastic finance of global dollar supplies in the global shadow banking system, contributed to the buildup of global financial fragility that led to the global financial crisis. Accordingly, it is clear that the global financial crisis is strongly affected by the endogenous dynamics of balance sheet in the global shadow banking system, rather than the emergence of excess savings in emerging market countries, as the global imbalances view stresses.

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Gerald Epstein

Jaisal Noor of the Real News Network interviews Triple Crisis blogger Gerald Epstein about the U.S. Federal Reserve “taper” and its global impact. See a related interview with Epstein, by the Real News Network’s Paul Jay, here.

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This is the third in a four-part series excerpted from the Political Economy Research Institute (University of Massachusetts-Amherst) working paper “The Endogenous Finance of Global Dollar-Based Financial Fragility in the 2000s: A Minskian Approach,” by Junji Tokunaga and Gerald Epstein. Tokunaga is an Associate Professor in the Department of Economics and Management, Wako University, Tokyo. Gerald Epstein is a Professor in the Department of Economics, University of Massachusetts-Amherst, and Co-Director of the Political Economy Research Institute (PERI). See Part 1, Part 2, and the full paper.

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