Financialsation & Crisis

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Financialisation and CrisisHistorical Materialism Conference,

New Delhi, April 2013

Sushil KhannaIndian Institute of Management Calcutta


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Finance & Global Economy:

Some Issues

What has fueled the expansion of financial

sector in the Western World ?

What are the key characteristics of the

contemporary financial sector? What is the mode of surplus appropriation?

How does this financialisation of economy

change our understanding of contemporarycapitalism?

What does it mean for developing economies?


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Finance and Capitalist Crisis

During the last century all crisis have begun

from the financial sector

The crisis of 1930s, often attributed to

excesses of speculative finance?

When the capital development of a country

becomes a byproduct of the activities of acasino, the job is likely to be ill-done -Keynes


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Regulation of Finance & Revival of

Capitalist Accumulation

The excesses and the crisis ( 1930s) itcaused, led to a regime that constrained the

role of finance in the economy

Glass-Steagall Act that prohibited banks fromundertaking investment banking activities; later

also insurance (1956).

Interest rate regulation

Control on financial conglomerates Fixed exchange rates

Post War Golden Age of Capitalism


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Crisis and Rise of Neo-Liberalism

Capitalism faced its first post-war crisis in

1973; caused by :

Rising trade deficit of USA and accumulation of

dollar reserves Increase in oil/energy prices

Revelation of limits to US power (Vietnam

debacle)

Followed a decade of volatility in exchange

rates and crisis of accumulation and expansion


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Rise of Neo-Liberalism

Characterized by:

Deregulation of business & privatisation of

State Enterprises

Expansion of market into new corners (water

supply, municipal services)

Dismantling of social programmes &

weakening of trade unions

Unrestrained global competition


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Making of a New Regime of

Accumulation

End of fixed exchange rates and expansionof trading / speculation in foreign exchangemarkets

Globalization of finance (initially limited toTRIAD and later to few developing countries)

Erosion of Glass Steagall restrictions andrise of self-regulation

Mergers & rise of financial conglomerates

Universal banking


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The New Regime of Accumulation

Monetarist policies that used interest rates tocontrol inflation destroyed funding ability of

banks and thrift industry

Key role ofSecu r i t isat ion (financial papersuitable for global structure- Minsky)

Enhanced the funding capability of financial

market -- as opposed to banks

Conformity of Institutions across nations-

ability of creditors to capture assets that

underlie securities(L. American Debt Crisis)


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The New Regime of Accumulation

This was accompanied by capital account

liberalisation and globalisation of production

and trade

Western oligopolies increasingly underpressure from Third World producers

Financial sector begins to grow at rates twice

as fast as real economy sometimesunconnected to real economy


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Increasing share of financial profits


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Rising share of FIRE in USA GDP


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Changing share of corporate profits-US


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Finance Today -- Speculative ?

We now know that Financial System no longerserves need of production /real economy

Only 3 per cent of the UKs 6 trillion (= 200 bn)financial sectors assets constitute lending to

business (manufacturing, retail, transport etc) Consumer loans & mortgages = 1000 bn

Rest ( 82 per cent) are all financial assets

How do we understand the financial entitieslending to each other? What does it mean for theeconomy? Or for capitalist accumulation?


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Mode of Surplus Generation &

Appropriation

How can the financial sector capture bulk of

the profits of the economy?

What then is the power of multinational

monopolies and corporate barons behindevery productmarket?

Can there be surplus generation and

appropriation without workers? If so, what is the mechanism of surplus

extraction by the financial sector?


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Shift in power to Financial Oligarchy

while .. these entities( boardrooms of giant

multinationals) (control) allocation of

resources. the occupants of these

boardrooms are themselves to an increasingextent constrained and controlled by finance

capital (Paul Sweezy, 1994)


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Mechanism of Surplus Extraction

Surplus still generated only in real economy

Corporate restructuring driven by financial

entities; operations of M&A; private equity &

hedge funds which rely on high dividends andstripping of assets and assumption of debt

before being sold off -- transfer surplus to the

financial sector Pressure to cut costs to be competitive forces

down wages and rise in household debt


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Third World in the Web of Global

Finance Capital

The rise of Asia (now Africa) often celebrated

as `Empire striking back or spread of

capitalism to hitherto pre-capitalism societies

But sweat shops of Asia actually transfersurplus from their underpaid workers to

boardrooms of giant multinationals and finally

to financial oligarchy Western MNCs still manage to capture bulk

of consumer spending, (on account of IP,

brands, marketing etc.)


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Is this adequate explanation?

Only partially, -- since though surplus from

real sectors is transferred to financial

oligarchs, it is not adequate to explain the

large share Profits also arise from `mark to market of

esoteric financial securities, and financial

assets can exchanged for real economyassets.


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Financial Liberalisation in India

Capital account convertibility to prop-up a

growing financial sector held back by

Narasimham I 1997-98

Narasimham 2 2006

Still India has incipient financial liberalisation and

entry of private equity and hedge funds with risingconflict with promoters.


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In Conclusion

How do we understand capitalism today with

its large financial structure?

How is this financialisation linked to

weakening of the working class movement?

How will capital resurrect itself for a new

regime of accumulation?

Can developing countries play a role inredefining the role of finance?

State owned banks and financial entities?

Financialsation & Crisis

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