Republican Financialization of Our National Economy

Former Goldman Sachs Executive Director Greg Smith recently resigned from the banking giant, and today, 3-14-2012, in a New York Times op-ed blew the whistle on what he called a "toxic and destructive" environment within the bank. Smith writes, "I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it."

Smith went on to write that banksters at the firm "callously" rip their clients off - and routinely refer to their customers as "muppets." Most shocking, Smith reveals that the most common question he gets from fellow banksters is, "How much money did we make off the client?"

The dangerous part of this is that banksters like Goldman Sachs now make up more than a quarter of our economy when they used to make up less than a tenth. That means one-fourth of all the money in the United States comes from banksters on Wall Street preying on their customers with things like exploding mortgages and fees, jacking up oil and food prices by gambling on them, and making a profit crashing entire nations economies.

Uploaded from: Leonard N. Stern School of Business at New York University. (leads to blog) - Thomas Philippon, The future of the financial industry. The graph is directtly from: http://3.bp.blogspot.com/_v3_kw7R30BI/SPdjzUeM9DI/AAAAAAAAADk/cwSlKhfq9Lw/s1600-h/finshv.jpg

 What is happening is called Financialization.

Financialization is a term sometimes used in discussions of financial capitalism which developed over recent decades, in which financial leverage tended to override capital (equity) and financial markets tended to dominate over the traditional industrial economy and agricultural economics.

Financialization is a term that describes an economic system or process that attempts to reduce all value that is exchanged (whether tangible, intangible, future or present promises, etc.) either into a financial instrument or a derivative of a financial instrument. The original intent of financialization is to be able to reduce any work-product or service to an exchangeable financial instrument, like currency, and thus make it easier for people to trade these financial instruments.

Workers, through a financial instrument such as a mortgage, could trade their promise of future work/wages for a home. Financialization of risk-sharing makes all insurance possible, the financialization of the U.S. Government's promises (bonds) makes all deficit spending possible. Financialization also makes economic rents possible.

• Michael Hudson summarized financialization in a 2003 interview:

Companies are not able to invest in new physical capital equipment or buildings because they are obliged to use their operating revenue to pay their bankers and bondholders, as well as junk-bond holders. This is what I mean when I say that the economy is becoming financialized. Its aim is not to provide tangible capital formation or rising living standards, but to generate interest, financial fees for underwriting mergers and acquisitions, and capital gains that accrue mainly to insiders, headed by upper management and large financial institutions. The upshot is that the traditional business cycle has been overshadowed by a secular increase in debt. Instead of labor earning more, hourly earnings have declined in real terms. There has been a drop in net disposable income after paying taxes and withholding "forced saving" for social Security and medical insurance, pension-fund contributions and–most serious of all–debt service on credit cards, bank loans, mortgage loans, student loans, auto loans, home insurance premiums, life insurance, private medical insurance and other FIRE-sector charges. ... This diverts spending away from goods and services.

• Sociological and political interpretation have also been made. In his 2006 book, American Theocracy: The Peril and Politics of Radical Religion, Oil, and Borrowed Money in the 21st Century, American writer and commentator Kevin Phillips presented financialization as “a process whereby financial services, broadly construed, take over the dominant economic, cultural, and political role in a national economy.” (page 268). Philips considers that the financialization of the U.S. economy follows the same pattern that marked the beginning of the decline of Habsburg Spain in the 16th century, the Dutch trading empire in the 18th century, and the British Empire in the 19th century: (It is also worth pointing out that the true final step in each of these historical economies is; collapse)

... the leading economic powers have followed an evolutionary progression: first, agriculture, fishing, and the like, next commerce and industry, and finally finance. Several historians have elaborated this point. Brooks Adams contended that “as societies consolidate, they pass through a profound intellectual change. Energy ceases to vent through the imagination and takes the form of capital.”

Bain Capital Partners, of which Mitt Romney was a co-founder, president and CEO of, operates entirely by the process of financialization. Hedge funds, large banks, investment brokers, insurance funds, and commodity traders all are operating on this principle and pushing for greater GDP prominence. 

The roots of financialization can be traced to the rise of Neoliberalism and the free-market doctrines of Milton Friedman and the Chicago School of Economics, which provided the ideological and theoretical basis for the increasing deregulation of financial systems and banking beginning in the 1970s. Notre Dame heterodox economist David Ruccio has summarized the politico-economic philosophy of Friedman and the Chicago School as one in which “markets, private property and minimal government will achieve maximum welfare.”

Milton Friedman was an economic adviser to President Ronald Reagan. Under Reagan the traditional model of Keynesian Economics was replaced with the Friedman economic model as defined above. Friedman was first a supporter of the Keynesian model during the FDR administration and acknowledged that it was responsible for the recovery of the economy after the collapse in 1929 and thus the Great Depression. However, later he developed his Chicago School of Economics and an entirely new approach that was more in line with the Conservative ideology of less government as promoted by Sen.Barry Goldwater, R-Arizona and who ran against Lyndon Johnson for President, Johnson won. Milton had to wait until Richard Nixon to start to insert his ideology into economic policy. Under Nixon it was not a huge shift at that time, but by the time Ronald Reagan became president with a Republican Congress, the shift was swift. The only thing that stood in the way of completing this conversion was the repeal Glass-Steagall Act of 1934, which was accomplished by a major lobbying by CitiBank in 1998-1999 of the Republican controlled Congress and unfortunately the repeal was signed by Pres. Bill Clinton under advisement by one his economic advisers who happen to come from CitiBank. Once the repeal was accomplished, the total shift was in place and the financial sector took off with growth to GDP at astronomical level.

 Financial turnover compared to gross domestic product
Other financial markets exhibited similarly explosive growth. Trading in U.S. equity (stock) markets grew from $136.0 billion or 13.1 percent of U.S. GDP in 1970, to $1.671 trillion or 28.8 percent of U.S. GDP in 1990. In 2000, trading in U.S. equity markets was $14.222 trillion, or 144.9 percent of GDP. Most of the growth in stock trading has been directly attributed to the introduction and spread of program trading.
According to the March 2007 Quarterly Report from the Bank for International Settlements (see page 24.):

Trading on the international derivatives exchanges slowed in the fourth quarter of 2006. Combined turnover of interest rate, currency and stock index derivatives fell by 7% to $431 trillion between October and December 2006.

Thus, derivatives trading – mostly futures contracts on interest rates, foreign currencies, Treasury bonds, etc. had reached a level of $1,200 trillion, $1.2 quadrillion, a year. By comparison, U.S. GDP in 2006 was $12.456 trillion.

The data for turnover in the futures markets in 1970, 1980, and 1990, is based on the number of contracts traded, which is reported by the organized exchanges, such as the Chicago Board of Trade, the Chicago Mercantile Exchange and the New York Commodity Exchange, and compiled in data appendices of the Annual Reports of the U.S. Commodity Futures Trading Commission. The pie charts below show the dramatic shift in types of futures contracts traded from 1970 to 2004. For a century after organized futures exchanges were founded in the mid-19th century, all futures trading was solely based on agricultural commodities.
But after the end of dollar gold-backed fixed-exchange rate system in 1971, contracts based on foreign currencies began to be traded. After the deregulation of interest rates by the Bank of England, then the U.S. Federal Reserve, in the late 1970s, futures contracts based on various bonds / interest rates began to be traded. The result was that financial futures contracts - based on such things as interest rates, currencies, or equity indices - came to dominate the futures markets.



The dollar value of turnover in the futures markets is found by multiplying the number of contracts traded by the average value per contract for 1978 to 1980, which was calculated by ACLI Research in 1981. The figures for earlier years were estimated on computer-generated exponential fit of data from 1960 to 1970, with 1960 set at $165 billion, half the 1970 figure, on the basis of a graph accompanying the ACLI data, which showed that the number of futures contracts traded in 1961 and earlier years was about half the number traded in 1970.

According to the ALCI data, the average value for interest rate contracts is around ten times that of agricultural and other commodities, while the average value of currency contracts is twice that of agricultural and other commodities. (Beginning in mid-1993, the Chicago Mercantile Exchange itself began to release figures of the nominal value of contracts traded at the CME each month. In November 1993, the CME boasted it had set a new monthly record of 13.466 million contracts traded, representing a dollar value of $8.8 trillion. By late 1994, this monthly value had doubled. On. Jan. 3, 1995, the CME boasted that its total volume for 1994 had jumped 54%, to 226.3 million contracts traded, worth nearly $200 trillion. Soon thereafter, the CME ceased to provide a figure for the dollar value of contracts traded.)

The bottom line is that the value of work (labor) to create goods and services is becoming less and less, therefore, only those who have the money to play in the financial markets will earn an income with disposable income sufficient to create limited demand for themselves. Thus their will be only a small need for actual labor, especially since automation has replaced most labor need and has reduced the cost of productivity to a level that it is becoming less and less costly to produce a commodity. Massive chronic unemployment will be the norm in this new economy. In the end, America will be a welfare state in as much as that will be the only source of basic needs to sustain the population. There will not be enough employment demand to employ the populace. Welcome to the 21st Century...