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.”
The Shanghai Free Trade Zone was incorporated on September 29, 2013, with the aim of testing some liberalization measures, including financial liberalization. Although the zone is currently moving at a glacially slow pace in terms of liberalizing interest rates and financial flows, there are plans to allow funds to be transferred offshore. If and when this occurs, some financial flows moving offshore may be legitimate—going to real investment in countries like the United States, Japan, and Australia—while others may move truly offshore to known tax havens.
China has already been in the news recently, due to an exposé on offshore accounts held by members of the Chinese leadership. About 22,000 mainland Chinese and Hong Kong citizens were revealed to have accounts in tax havens in the Caribbean and South Pacific. The money is associated with hidden wealth. Some of this is suspected to stem from transactions that may not have been entirely above board. A current anticorruption campaign is attempting to eliminate some of the worst abuses.
Over the last six months, many developing emerging market economies had witnessed large, unforeseen, and unpredictable swings in their exchange rates. With rumors, and counter-rumors of likely tapering of the U.S. Federal Reserve’s Quantitative Easing (QE) programme, such swings resulted in abrupt depreciations by 16.7% in Indonesia, 7.3% in Thailand, 10.4% in Turkey, 9.3% in Brazil, 13.4% in India, and 8.8% in South Africa…
A recent policy brief by the Peterson Institute for International Economics provided Estimates of Fundamental Equilibrium Exchange Rates and revealed that many of these depreciations were, in fact, overshooting the fundamental equilibrium exchange rates that are consistent with the current account balances of these economies. Now it is found that Indonesia needs its currency to appreciate by 3.9%; Thailand, by 2.4%; the Philippines, by 3.8%; Malaysia, by 4.3%. Meanwhile, Turkey has to let its currency depreciate by 18.1%; South Africa, by 6.8%; Poland, by 4%; Brazil, by 3.4%. Table 1 below summarizes the relevant data.
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.
Doug Orr, Guest Blogger
Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John Maynard Keynes (1936)
Every night on the evening news we hear something like this: “In economic news, the Dow is up by 1.5%, the S&P is up by 1.2% and the NASDAQ is down by 0.3%, based on ….” Reporting these numbers so prominently and giving a supposed link to the events of the day gives the impression that the stock market plays a central role in moving the economy forward and that everyone has a stake in these daily changes. In fact, the movement of these stock indices on a day-to-day basis has almost nothing to do with the actual economy and, except in times of economic crisis, the stock market has almost no impact on the lives of most Americans. Fewer than half of American families own a single share of stock, and only about a third own shares totaling more than $5000. The stock market is the realm of the elite, and for the past several decades has had a negative impact on the real economy.
One of the Commodity Futures Trading Commission’s (CFTC) most colorful commissioners, Bart Chilton, announced last week that he is stepping down soon. Chilton, one of the few commissioners at the CFTC with agricultural experience, has been a rock-n-roll hero of position limits during his term, frequently referring to rock music in explaining his views on commodity derivatives regulation. For example, he referred to position limits—a ceiling on the number of futures contracts a single non-commercial trader is allowed to hold—as “suggested speed limits on a dark desert highway” (a reference to the 1977 Eagles song “Hotel California”).
Chilton’s parting speech noted that the CFTC was “taking it to the limits one more time” (a reference to another Eagles song). This was in direct reference to the CFTC’s announcement that same day of new, rewritten regulations to establish position limits on speculative commodity futures trading. The proposed rules mark an important milestone for the CFTC in its attempts to rein in excessive speculation that can disrupt commodity markets. But in the longer history of the issue, how best to regulate these markets is likely to remain contested.
From the editors: This piece by Triple Crisis blogger Martin Khor appeared last week at Third World Network.
This week marks five-year anniversary of the collapse of Lehman Brothers that was the immediate trigger for the United States and global financial crisis.
Lehman was the tip of the iceberg. Below the surface were many contributory elements.
They include financial deregulation, the conversion of finance from serving the real economy to a beast that thrived on speculation, creaming layers off the productive sectors and unsuspecting consumers through new manipulative instruments.
The U.S. subprime housing mortgage crisis was the boil that burst—where massive loans were given to homeowners who could not pay, the loans were securitised and sold to unsuspecting investors, the derivatives magnified the proportions of the crisis, while the bankers made billions selling very risky “financial products” as very credit-worthy investments.
Many collapsed or collapsing banks in the U.S. and Europe had to be rescued in bailouts totaling trillions of dollars.
The crisis also exposed the deep deficiencies of the global financial system. Globalisation of finance meant a crisis in one part could be quickly transmitted to other parts of the system.
Rumor has it that China is set to accelerate the de-regulation of its financial system.
China is “too big to fail.” Nobody in the world can afford for financial liberalization to fail there.
For years, China has restricted the ability of its residents and foreign investors to pull and push their money in and out of the country.
While that may be illiberal, there was a sound reason for this restriction: Every emerging market that has scrapped these regulations has had a major financial crisis and subsequent trouble with growth.