Financialization

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Share in GDP of US financial sector since 1860 NYUGDPFinancialShare.jpg
Share in GDP of US financial sector since 1860

Financialization (or Financialisation in countries that spell with British spelling) is a term sometimes used to describe the development of financial capitalism during the period from 1980 until 2010, in which debt-to-equity ratios increased and financial services accounted for an increasing share of national income relative to other sectors.

American and British English spelling differences Comparison between US and UK English spelling

Many of the differences between American and British English date back to a time when spelling standards had not yet developed. For instance, some spellings seen as "American" today were once commonly used in Britain and some spellings seen as "British" were once commonly used in the United States. A "British standard" began to emerge following the 1755 publication of Samuel Johnson's A Dictionary of the English Language, and an "American standard" started following the work of Noah Webster and in particular his An American Dictionary of the English Language, first published in 1828.

Contents

Financialization describes an economic process by which exchange is facilitated through the intermediation of financial instruments. Financialization may permit real goods, services, and risks to be readily exchangeable for currency, and thus make it easier for people to rationalize their assets and income flows.

Financial instrument monetary contract between parties

Financial instruments are monetary contracts between parties. They can be created, traded, modified and settled. They can be cash (currency), evidence of an ownership interest in an entity (share), or a contractual right to receive or deliver cash (bond).

A currency, in the most specific sense is money in any form when in use or circulation as a medium of exchange, especially circulating banknotes and coins. A more general definition is that a currency is a system of money in common use, especially for people in a nation. Under this definition, US dollars (US$), pounds sterling (£), Australian dollars (A$), European euros (€), Russian rubles (₽) and Indian Rupees (₹) are examples of currencies. These various currencies are recognized as stores of value and are traded between nations in foreign exchange markets, which determine the relative values of the different currencies. Currencies in this sense are defined by governments, and each type has limited boundaries of acceptance.

Specific academic approaches

Various definitions, focusing on specific aspects and interpretations, have been used:

University of Michigan Public research university in Ann Arbor, Michigan, United States

The University of Michigan, often simply referred to as Michigan, is a public research university in Ann Arbor, Michigan. The university is Michigan's oldest; it was founded in 1817 in Detroit, as the Catholepistemiad, or University of Michigania, 20 years before the territory became a state. The school was moved to Ann Arbor in 1837 onto 40 acres (16 ha) of what is now known as Central Campus. Since its establishment in Ann Arbor, the university campus has expanded to include more than 584 major buildings with a combined area of more than 34 million gross square feet spread out over a Central Campus and North Campus, two regional campuses in Flint and Dearborn, and a Center in Detroit. The university is a founding member of the Association of American Universities.

Capital accumulation is the dynamic that motivates the pursuit of profit, involving the investment of money or any financial asset with the goal of increasing the initial monetary value of said asset as a financial return whether in the form of profit, rent, interest, royalties or capital gains. The process of capital accumulation forms the basis of capitalism, and is one of the defining characteristics of a capitalist economic system.

Profit, in accounting, is an income distributed to the owner in a profitable market production process (business). Profit is a measure of profitability which is the owner’s major interest in income formation process of market production. There are several profit measures in common use.

Michael Hudson (economist) American economist

Michael Hudson is an American economist, Professor of Economics at the University of Missouri–Kansas City and a researcher at the Levy Economics Institute at Bard College, former Wall Street analyst, political consultant, commentator and journalist. He is a contributor to The Hudson Report, a weekly economic and financial news podcast produced by Left Out. Paul Craig Roberts argues that he is the best contemporary economist.

Usury Concept of loans with unfairly high interest rate

Usury is the practice of making unethical or immoral monetary loans that unfairly enrich the lender. The term may be used in a moral sense—condemning, taking advantage of others' misfortunes, or in a legal sense, where an interest rate is charged in excess of the maximum rate that is allowed by law. A loan may be considered usurious because of excessive or abusive interest rates or other factors defined by a nation's laws. Someone who practices usury can be called a usurer, but in contemporary English may be called a loan shark.

Feudalism combination of legal and military customs in medieval Europe

Feudalism was a combination of legal and military customs in medieval Europe that flourished between the 9th and 15th centuries. Broadly defined, it was a way of structuring society around relationships derived from the holding of land in exchange for service or labour. Although derived from the Latin word feodum or feudum (fief), then in use, the term feudalism and the system it describes were not conceived of as a formal political system by the people living in the Middle Ages. In its classic definition, by François-Louis Ganshof (1944), feudalism describes a set of reciprocal legal and military obligations among the warrior nobility revolving around the three key concepts of lords, vassals and fiefs.

"only debts grew exponentially, year after year, and they do so inexorably, even when—indeed, especially when—the economy slows down and its companies and people fall below break-even levels. As their debts grow, they siphon off the economic surplus for debt service (...) The problem is that the financial sector's receipts are not turned into fixed capital formation to increase output. They build up increasingly on the opposite side of the balance sheet, as new loans, that is, debts and new claims on society’s output and income.

Debt deferred payment, or series of payments, that is owed in the future

Debt is when something, usually money, is owed by one party, the borrower or debtor, to a second party, the lender or creditor. Debt is a deferred payment, or series of payments, that is owed in the future, which is what differentiates it from an immediate purchase. The debt may be owed by sovereign state or country, local government, company, or an individual. Commercial debt is generally subject to contractual terms regarding the amount and timing of repayments of principal and interest. Loans, bonds, notes, and mortgages are all types of debt. The term can also be used metaphorically to cover moral obligations and other interactions not based on economic value. For example, in Western cultures, a person who has been helped by a second person is sometimes said to owe a "debt of gratitude" to the second person.

[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.

Credit card Card enabling payments from a line of credit

A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder's promise to the card issuer to pay them for the amounts plus the other agreed charges. The card issuer creates a revolving account and grants a line of credit to the cardholder, from which the cardholder can borrow money for payment to a merchant or as a cash advance.

Mortgage loan loan secured using real estate

A mortgage loan or, simply, mortgage is used either by purchasers of real property to raise funds to buy real estate, or alternatively by existing property owners to raise funds for any purpose, while putting a lien on the property being mortgaged. The loan is "secured" on the borrower's property through a process known as mortgage origination. This means that a legal mechanism is put into place which allows the lender to take possession and sell the secured property to pay off the loan in the event the borrower defaults on the loan or otherwise fails to abide by its terms. The word mortgage is derived from a Law French term used in Britain in the Middle Ages meaning "death pledge" and refers to the pledge ending (dying) when either the obligation is fulfilled or the property is taken through foreclosure. A mortgage can also be described as "a borrower giving consideration in the form of a collateral for a benefit (loan)".

Student loan loans given to students for education-related expenses

A student loan is a type of loan designed to help students pay for post-secondary education and the associated fees, such as tuition, books and supplies, and living expenses. It may differ from other types of loans in the fact that the interest rate may be substantially lower and the repayment schedule may be deferred while the student is still in school. It also differs in many countries in the strict laws regulating renegotiating and bankruptcy. This article highlights the differences of the student loan system in several major countries.

... 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."

Jean Cushen explores how the workplace outcomes associated with financialization render employees insecure and angry. [5]

Roots

In the American experience, increased financialization occurred concomitant with the rise of neoliberalism and the free-market doctrines of Milton Friedman and the Chicago School of Economics in the late Twentieth Century. Various academic economists of that period worked out ideological and theoretical rationalizations and analytical approaches to facilitate the increased deregulation of financial systems and banking.

In a 1998 article, Michael Hudson discussed previous economists who saw the problems that result from financialization. [6] Problems were identified by John A. Hobson (financialization enabled Britain's imperialism), Thorstein Veblen (it acts in opposition to rational engineers), Herbert Somerton Foxwell (Britain was not using finance for industry as well as Europe), and Rudolf Hilferding (Germany was surpassing Britain and the United States in banking that supports industry).

At the same 1998 conference in Oslo, Erik S. Reinert and Arno Mong Daastøl in "Production Capitalism vs. Financial Capitalism" provided an extensive bibliography on past writings, and prophetically asked [7]

In the United States, probably more money has been made through the appreciation of real estate than in any other way. What are the long-term consequences if an increasing percentage of savings and wealth, as it now seems, is used to inflate the prices of already existing assets - real estate and stocks - instead of to create new production and innovation?

Financial turnover compared to gross domestic product

Other financial markets exhibited similarly explosive growth. Trading in US equity (stock) markets grew from $136.0 billion (or 13.1% of US GDP) in 1970 to $1.671 trillion (or 28.8% of U.S. GDP) in 1990. In 2000, trading in US equity markets was $14.222 trillion (144.9% 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, and the like—had reached a level of $1,200 trillion, or $1.2 quadrillion, a year. By comparison, US GDP in 2006 was $12.456 trillion.

Futures markets

Futures Trading Composition 2019 SVG.svg

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 the 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 the 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 and then the US Federal Reserve in the late 1970s, futures contracts based on various bonds and 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 in research by the American Council of Life Insurers (ACLI) 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 of 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 that 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 January 3, 1995, the CME boasted that its total volume for 1994 had jumped by 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.)

Futures contracts are a "contract to buy or sell a very common homogenous item at a future date for a specific price". The nominal value of a futures contract is wildly different from the risk involved in engaging in that contract. Consider two parties who engage in a contract to exchange 5,000 bushels of wheat at $8.89 per bushel on December 17, 2012. The nominal value of the contract would be $44,450 (5,000 bushels x $8.89). But what is the risk? For the buyer. the risk is that the seller will not be able to deliver the wheat on the stated date. This means the buyer must purchase the wheat from someone else; this is known as the "spot market". Assume that the spot price for wheat on December 17, 2012, is $10 per bushel. This means the cost of purchasing the wheat is $50,000 (5,000 bushels x $10). So the buyer would have lost $5,550 ($50,000 less $44,450), or the difference in the cost between the contract price and the spot price. Furthermore, futures are traded via exchanges, which guarantee that if one party reneges on its end of the bargain, (1) that party is blacklisted from entering into such contracts in the future and (2) the injured party is insured against the loss by the exchange. If the loss is so large that the exchange cannot cover it, then the members of the exchange make up the loss. Another mitigating factor to consider is that a commonly traded liquid asset, such as gold, wheat, or the S&P 500 stock index, is extremely unlikely to have a future value of $0; thus the counter-party risk is limited to something substantially less than the nominal value.

Accelerated growth of the finance sector

The financial sector is a key industry in developed economies, in which it represents a sizeable share of the GDP and an important source of employment. Financial services (banking, insurance, investment, etc.) have been for a long time a powerful sector of the economy in many economically developed countries. Those activities have also played a key role in facilitating economic globalization.

Early 20th Century History in the United States

As early as the beginning of the 20th Century, a small number of financial sector firms have controlled the lion's share of wealth and power of the financial sector. The notion of an American "financial oligarchy" was discussed as early as 1913. In an article entitled "Our Financial Oligarchy," Louis Brandeis, who in 1913 was appointed to the United States Supreme Court, wrote that "We believe that no methods of regulation ever have been or can be devised to remove the menace inherent in private monopoly and overwhelming commercial power" that is vested in U.S. finance sector firms. [8] There were early investigations of the concentration of the economic power of the U.S. finance sector, such as the Pujo Committee of the U.S. House of Representatives, which in 1912 found that control of credit in America was concentrated in the hands of a small group of Wall Street firms that were using their positions to accumulate vast economic power. [9] When in 1911 Standard Oil was broken up as an illegal monopoly by the U.S. government, the concentration of power in the U.S. financial sector was unaltered. [10]

Key players of financial sector firms also had a seat at the table in devising the central bank of the United States. In November 1910 the five heads of the country's most powerful finance sector firms gathered for a secret meeting on Jekyll Island with U.S. Senator Nelson W. Aldrich and Assistant Secretary of the U.S. Treasury Department A. Piatt Andrew and laid the plans for the U.S. Federal Reserve System. [11]

Deregulation and Accelerated Growth

In the 1970s, the financial sector comprised slightly more than 3% of total Gross Domestic Product (GDP] of the U.S. economy, [12] while total financial assets of all investment banks (that is, securities broker-dealers) made up less than 2% of U.S. GDP. [13] The period from the New Deal through the 1970s has been referred to as the era of "boring banking" because banks that took deposits and made loans to individuals were prohibited from engaging in investments involving creative financial engineering and investment banking. [14]

U.S. federal deregulation in the 1980s of many types of banking practices paved the way for the rapid growth in the size, profitability and political power of the financial sector. Such financial sector practices included the creation of private mortgage-backed securities, [15] and more speculative approaches to the creation and trading of derivatives based on new quantitative models of risk and value, [16] . Wall Street ramped up pressure on the United States Congress for more deregulation, including for the repeal of Glass-Steagall, a New Deal law that, among other things, prohibits a bank that accepts deposits from functioning as an investment bank since the latter entails greater risks. [17]

As a result of this rapid financialization, the financial sector scaled up vastly in the span of a few decades. In 1978, the financial sector comprised 3.5% of the American economy (that is, it made up 3.5% of U.S. GDP), but by 2007 it had reached 5.9%. Profits in the American financial sector in 2009 were six times higher on average than in 1980, compared with non-financial sector profits, which on average were just over twice what they were in 1980. Financial sector profits grew by 800%, adjusted for inflation, from 1980 to 2005. By way of comparison with the rest of the economy, U.S. nonfinancial sector profits grew by 250% during the same period. By way of historical perspective, financial sector profits from the 1930s until 1980 grew at the same rate as the rest of the American economy. [18]

Assets of sectors of the United States GeldverrmogenUSAengl.PNG
Assets of sectors of the United States

By way of illustration of the increased power of the financial sector over the economy, in 1978 commercial banks held $1.2 trillion (million million) in assets, which is equivalent to 53% of the GDP of the United States. By year's end 2007, commercial banks held $11.8 trillion in assets, which is equivalent to 84% of U.S. GDP. Investment banks (securities broker-dealers) held $33 billion (thousand million) in assets in 1978 (equivalent to 1.3% of U.S. GDP), but held $3.1 trillion in assets (equivalent to 22% U.S. GDP) in 2007. The securities that were so instrumental in triggering the financial crisis of 2007-2008, asset-backed securities, including collateralized debt obligations (CDOs) were practically non-existent in 1978. By 2007, they comprised $4.5 trillion in assets, equivalent to 32% of U.S. GDP. [19]

The development of leverage and financial derivatives

One of the most notable features of financialization has been the development of overleverage (more borrowed capital and less own capital) and, as a related tool, financial derivatives: financial instruments, the price or value of which is derived from the price or value of another, underlying financial instrument. Those instruments, whose initial purpose was hedging and risk management, have become widely traded financial assets in their own right. The most common types of derivatives are futures contracts, swaps, and options. In the early 1990s, a number of central banks around the world began to survey the amount of derivative market activity and report the results to the Bank for International Settlements.

In the past few years, the number and types of financial derivatives have grown enormously. In November 2007, commenting on the financial crisis sparked by the subprime mortgage collapse in the United States, Doug Noland's Credit Bubble Bulletin, on Asia Times Online, noted,

The scale of the Credit "insurance" problem is astounding. According to the Bank of International Settlements, the OTC market for Credit default swaps (CDS) jumped from $4.7 TN at the end of 2004 to $22.6 TN to end 2006. From the International Swaps and Derivatives Association we know that the total notional volume of credit derivatives jumped about 30% during the first half to $45.5 TN. And from the Comptroller of the Currency, total U.S. commercial bank Credit derivative positions ballooned from $492bn to begin 2003 to $11.8 TN as of this past June....

A major unknown regarding derivatives is the actual amount of cash behind a transaction. A derivatives contract with a notional value of millions of dollars may actually only cost a few thousand dollars. For example, an interest rate swap might be based on exchanging the interest payments on $100 million in US Treasury bonds at a fixed interest of 4.5%, for the floating interest rate of $100 million in credit card receivables. This contract would involve at least $4.5 million in interest payments, though the notional value may be reported as $100 million. However, the actual "cost" of the swap contract would be some small fraction of the minimal $4.5 million in interest payments. The difficulty of determining exactly how much this swap contract is worth, when accounted for on a financial institution's books, is typical of the worries of many experts and regulators over the explosive growth of these types of instruments.

Contrary to common belief in the United States, the largest financial center for derivatives (and for foreign exchange) is London. According to MarketWatch on December 7, 2006,

The global foreign exchange market, easily the largest financial market, is dominated by London. More than half of the trades in the derivatives market are handled in London, which straddles the time zones between Asia and the U.S. And the trading rooms in the Square Mile, as the City of London financial district is known, are responsible for almost three-quarters of the trades in the secondary fixed-income markets.


Effects on the economy

In the wake of the 2007-2010 financial crisis, a number of economists and others began to argue that financial services had become too large a sector of the US economy, with no real benefit to society accruing from the activities of increased financialization. [20]

In February 2009, white-collar criminologist and former senior financial regulator William K. Black listed the ways in which the financial sector harms the real economy. Black wrote, "The financial sector functions as the sharp canines that the predator state uses to rend the nation. In addition to siphoning off capital for its own benefit, the finance sector misallocates the remaining capital in ways that harm the real economy in order to reward already-rich financial elites harming the nation." [21]

Emerging countries have also tried to develop their financial sector, as an engine of economic development. A typical aspect is the growth of microfinance or microcredit, as part of financial inclusion. [22]

Bruce Bartlett summarized several studies in a 2013 article indicating that financialization has adversely affected economic growth and contributes to income inequality and wage stagnation for the middle class. [23]

Cause of financial crises

On 15 February 2010, Adair Turner, the head of Britain’s Financial Services Authority, said financialization was correlated with the 2007–2010 financial crisis. In a speech before the Reserve Bank of India, Turner said that the Asian financial crisis of 1997–98 was similar to the 2008–9 crisis in that "both were rooted in, or at least followed after, sustained increases in the relative importance of financial activity relative to real non-financial economic activity, an increasing 'financialisation' of the economy." [24]

Effects on political system

Some, such as former International Monetary Fund chief economist Simon Johnson, have argued that the increased power and influence of the financial services sector had fundamentally transformed the American polity, endangering representative democracy itself through undue influence on the political system and regulatory capture by the financial oligarchy. [25]

In the 1990s vast monetary resources flowing to a few "megabanks," enabled the financial oligarchy to achieve greater political power in the United States. Wall Street firms largely succeeded in getting the American political system and regulators to accept the ideology of financial deregulation and the legalization of more novel financial instruments. [26] Political power was achieved by contributions to political campaigns, by financial industry lobbying, and through a revolving door that positioned financial industry leaders in key politically appointed policy making and regulatory roles and that rewarded sympathetic senior government officials with super high-paying Wall Street jobs after their government service. [27] . The financial sector was the leading contributor to political campaigns since at least the 1990s, contributing more than $150 million in 2006. (This far exceeded the second largest political contributing industry, the healthcare industry, which contributed $100 million in 2006.) From 1990 to 2006, the securities and investment industry increased its political contributions six-fold, from an annual $12 to $72 million. The financial sector contributed $1.7 billion to political campaigns from 1998 to 2006, and spent an additional $3.4 billion on political lobbying, according to one estimate. [28]

Policy makers such as Chairman of the Federal Reserve Alan Greenspan called for self-regulation.

See also

Notes

  1. Thomas Philippon (Finance Department of the New York University Stern of Business at New York University). The future of the financial industry. Stern on Finance, November 6, 2008.
  2. Standard Schaefer. Who Benefited from the Tech Bubble? an Interview with Michael Hudson CounterPunch, August 29, 2003.
  3. Marois, Thomas (2012). States, Banks and Crisis: Emerging Finance Capitalism in Mexico and Turkey. Edward Elgar Publishing.
  4. Gerald Epstein Financialization, Rentier Interests, and Central Bank Policy. December, 2001 (this version, June, 2002 )
  5. Cushen, J. (2013). Financialization in the workplace: Hegemonic narratives, performative interventions and the angry knowledge worker. Accounting, Organizations and Society, Volume 38, Issue 4, May 2013, pp 314–331.
  6. Hudson, Michael (September 1998). Financial Capitalism v. Industrial Capitalism (Contribution to The Other Canon Conference on Production Capitalism vs. Financial Capitalism Oslo, September 3-4, 1998 ) . Retrieved March 12, 2009.
  7. Reinert, Erik S.; Daastøl, Arno Mong (2011). Production Capitalism vs.Financial Capitalism - Symbiosis and Parasitism. An Evolutionary Perspective and Bibliography (PDF). Working Papers in Technology Governance and Economic Dynamics no. 36. The Other Canon Foundation, Norway. Tallinn University of Technology, Tallinn.
  8. Simon Johnson and James Kwak, "13 Bankers: The Wall Street Takeover and the Next Financial Meltdown," (New York: Pantheon Books, 2010), pp. 28-29
  9. Simon Johnson and James Kwak, "13 Bankers: The Wall Street Takeover and the Next Financial Meltdown," (New York: Pantheon Books, 2010), p. 28
  10. Simon Johnson and James Kwak, "13 Bankers: The Wall Street Takeover and the Next Financial Meltdown," (New York: Pantheon Books, 2010), p. 26
  11. Simon Johnson and James Kwak, "13 Bankers: The Wall Street Takeover and the Next Financial Meltdown," (New York: Pantheon Books, 2010), p. 27
  12. Simon Johnson and James Kwak, "13 Bankers: The Wall Street Takeover and the Next Financial Meltdown," (New York: Pantheon Books, 2010), p. 61
  13. Simon Johnson and James Kwak, "13 Bankers: The Wall Street Takeover and the Next Financial Meltdown," (New York: Pantheon Books, 2010), p. 63
  14. Simon Johnson and James Kwak, "13 Bankers: The Wall Street Takeover and the Next Financial Meltdown," (New York: Pantheon Books, 2010), p. 60-63
  15. Simon Johnson and James Kwak, "13 Bankers: The Wall Street Takeover and the Next Financial Meltdown," (New York: Pantheon Books, 2010), p. 76
  16. Simon Johnson and James Kwak, "13 Bankers: The Wall Street Takeover and the Next Financial Meltdown," (New York: Pantheon Books, 2010), pp. 78-81
  17. Simon Johnson and James Kwak, "13 Bankers: The Wall Street Takeover and the Next Financial Meltdown," (New York: Pantheon Books, 2010), pp. 82-83, 95
  18. Simon Johnson and James Kwak, "13 Bankers: The Wall Street Takeover and the Next Financial Meltdown," (New York: Pantheon Books, 2010), p. 60
  19. Simon Johnson and James Kwak, "13 Bankers: The Wall Street Takeover and the Next Financial Meltdown," (New York: Pantheon Books, 2010), p. 59
  20. Megan McCardle. The Quiet Coup. The Atlantic Monthly , May 2009
  21. William K. Black. How the Servant Became a Predator: Finance's Five Fatal Flaws. The Huffington Post , February 19, 2010.
  22. Mader, P. (2016). Microfinance and Financial Inclusion. The Oxford Handbook of the Social Science of Poverty, Ch. 37, pp 843-865.
  23. Bruce Bartlett. Financialization as a Cause of Economic Malaise. NY Times , June 11, 2013.
  24. Reserve Bank of India. "After the Crises: Assessing the Costs and Benefits of Financial Liberalisation". Speech delivered by Lord Adair Turner, Chairman, Financial Services Authority, United Kingdom, at the Fourteenth C. D. Deshmukh Memorial Lecture on February 15, 2010 at Mumbai.
  25. Megan McCardle. The Quiet Coup. The Atlantic Monthly , May 2009
  26. Simon Johnson and James Kwak, "13 Bankers: The Wall Street Takeover and the Next Financial Meltdown," (New York: Pantheon Books, 2010), p. 89
  27. Simon Johnson and James Kwak, "13 Bankers: The Wall Street Takeover and the Next Financial Meltdown," (New York: Pantheon Books, 2010), p. 90
  28. Simon Johnson and James Kwak, "13 Bankers: The Wall Street Takeover and the Next Financial Meltdown," (New York: Pantheon Books, 2010), p. 91

Further reading

John Bogle, founder and retired CEO of The Vanguard Group of mutual funds, discusses how the financial system has overwhelmed the productive system, on Bill Moyers Journal
DRadio Wissen Hörsaal (introduction in German, lecture in English)

Related Research Articles

Derivative (finance) financial instrument whose value is based on one or more underlying assets

In finance, a derivative is a contract that derives its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate, and is often simply called the "underlying". Derivatives can be used for a number of purposes, including insuring against price movements (hedging), increasing exposure to price movements for speculation or getting access to otherwise hard-to-trade assets or markets. Some of the more common derivatives include forwards, futures, options, swaps, and variations of these such as synthetic collateralized debt obligations and credit default swaps. Most derivatives are traded over-the-counter (off-exchange) or on an exchange such as the New York Stock Exchange, while most insurance contracts have developed into a separate industry. In the United States, after the financial crisis of 2007–2009, there has been increased pressure to move derivatives to trade on exchanges. Derivatives are one of the three main categories of financial instruments, the other two being stocks and debt. The oldest example of a derivative in history, attested to by Aristotle, is thought to be a contract transaction of olives, entered into by ancient Greek philosopher Thales, who made a profit in the exchange. Bucket shops, outlawed a century ago, are a more recent historical example.

Financial market generic term for all markets in which trading takes place with capital

A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Securities include stocks and bonds, and precious metals.

Commodity market physical or virtual transactions of buying and selling involving raw or primary commodities

A commodity market is a market that trades in the primary economic sector rather than manufactured products, such as cocoa, fruit and sugar. Hard commodities are mined, such as gold and oil. Investors access about 50 major commodity markets worldwide with purely financial transactions increasingly outnumbering physical trades in which goods are delivered. Futures contracts are the oldest way of investing in commodities. Futures are secured by physical assets. Commodity markets can include physical trading and derivatives trading using spot prices, forwards, futures, and options on futures. Farmers have used a simple form of derivative trading in the commodity market for centuries for price risk management.

Finance capitalism

Finance capitalism or financial capitalism is the subordination of processes of production to the accumulation of money profits in a financial system.

Derivatives market

The derivatives market is the financial market for derivatives, financial instruments like futures contracts or options, which are derived from other forms of assets.

World economy conjunto de economías nacionales de todos los países del mundo

The world economy or global economy is the economy of the humans of the world, considered as the international exchange of goods and services that is expressed in monetary units of account. In some contexts, the two terms are distinct "international" or "global economy" being measured separately and distinguished from national economies while the "world economy" is simply an aggregate of the separate countries' measurements. Beyond the minimum standard concerning value in production, use and exchange the definitions, representations, models and valuations of the world economy vary widely. It is inseparable from the geography and ecology of Earth.

Futures exchange central financial exchange where people can trade standardized futures contracts

A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts; that is, a contract to buy specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future. These types of contracts fall into the category of derivatives. The opposite of the futures market is the spots market, where trades will occur immediately after a transaction agreement has been made, rather than at a predetermined time in the future. Futures instruments are priced according to the movement of the underlying asset. The aforementioned category is named "derivatives" because the value of these instruments are derived from another asset class.

National Stock Exchange of India Stock Exchange located in Mumbai, India

The National Stock Exchange of India Limited (NSE) is the leading stock exchange of India, located in Mumbai. The NSE was established in 1992 as the first demutualized electronic exchange in the country. NSE was the first exchange in the country to provide a modern, fully automated screen-based electronic trading system which offered easy trading facility to the investors spread across the length and breadth of the country. Vikram Limaye is Managing Director & Chief Executive Officer of NSE.

The foreign exchange market is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines the foreign exchange rate. It includes all aspects of buying, selling and exchanging currencies at current or determined prices. In terms of trading volume, it is by far the largest market in the world, followed by the Credit market.

Over-the-counter (finance) trading done directly between two parties

Over-the-counter (OTC) or off-exchange trading is done directly between two parties, without the supervision of an exchange. It is contrasted with exchange trading, which occurs via exchanges. A stock exchange has the benefit of facilitating liquidity, providing transparency, and maintaining the current market price. In an OTC trade, the price is not necessarily published for the public.

Debt levels and flows

Debt levels and flows are a measure of the levels of debt – how much debt is outstanding – and the flows of debt – how much the level of debt changes over time. This is basic macroeconomic data, and varies between countries. Debt is used to finance enterprises and business around the world. Within mainstream economics, levels and flows of public debt are a cause of concern, while levels and flows of private debt are not seen as being of central importance.

The following outline is provided as an overview of and topical guide to finance:

An economy is an area of the production, distribution, or trade, and consumption of goods and services by different agents. Understood in its broadest sense, 'The economy is defined as a social domain that emphasize the practices, discourses, and material expressions associated with the production, use, and management of resources'. Economic agents can be individuals, businesses, organizations, or governments. Economic transactions occur when two parties agree to the value or price of the transacted good or service, commonly expressed in a certain currency. However, monetary transactions only account for a small part of the economic domain.

The United States subprime mortgage crisis was a nationwide financial crisis, occurring between 2007 and 2010, that contributed to the U.S. recession of December 2007 – June 2009. It was triggered by a large decline in home prices after the collapse of a housing bubble, leading to mortgage delinquencies and foreclosures and the devaluation of housing-related securities. Declines in residential investment preceded the recession and were followed by reductions in household spending and then business investment. Spending reductions were more significant in areas with a combination of high household debt and larger housing price declines.

In finance, a stock market index future is a cash-settled futures contract on the value of a particular stock market index, such as the S&P 500. The turnover for the global market in exchange-traded equity index futures is notionally valued, for 2008, by the Bank for International Settlements at USD 130 trillion.

Financial position of the United States

The financial position of the United States includes assets of at least $269.6 trillion and debts of $145.8 trillion to produce a net worth of at least $123.8 trillion as of Q1 2014.

BNP Paribas CIB

BNP Paribas Corporate and Institutional Banking (CIB) is the global investment banking arm of BNP Paribas, the largest banking group in the world. In October 2010, BNP Paribas was ranked by Bloomberg and Forbes as the largest bank and largest company in the world by assets with over US$3.1 trillion. BNP Paribas CIB's main centres are in Paris and London, with large scale operations in New York, Hong Kong, and Singapore, and smaller operations in almost every financial centre in the world. It employs 185,000 people across 56 countries and provides financing, advisory and capital markets services. BNP Paribas CIB is a globally recognised leader in two areas of expertise: trading derivatives on all asset classes, and structured financing. BNP Paribas CIB also has a large corporate advisory network in Europe and Asia. BNP Paribas CIB has 13,000 clients, consisting of companies, financial institutions, governments, investment funds and hedge funds.

Financial crisis of 2007–2008 Global financial crisis

The financial crisis of 2007–2008, also known as the global financial crisis and the 2008 financial crisis, is considered by many economists to have been the most serious financial crisis since the Great Depression of the 1930s.

Sharia and securities trading Muslim view on trading

The Islamic banking and finance movement that developed in the late 20th century as part of the revival of Islamic identity sought to create an alternative to conventional banking that complied with sharia (Islamic) law. Following sharia it banned from its practices riba (usury) – which it defined as any interest paid on all loans of money – and involvement in haram (forbidden) goods or services such as pork or alcohol. It also forbids gambling (maisir) and excessive risk.

As of 2004 financial services in the United States represented 20% of the market capitalization of the S&P 500 in the United States.