The financial sector employs about 6% of all workers but ‘produced’ 40% of all companies' profits. Making money without actually making something turned out to be the largest growth sector of economy from the early 1980s until the current crisis.

This seems to imply that as manufacturing and other parts of the “real” economy have become less lucrative, the trading of paper assets has become Wall Street’s new profit-center, the Golden Goose.

What impact has the “financialization” of the economy had on the rest of us?

First, it was the neoliberal “revolution” begun in the 1970s that did immense harm to working people.

For example, unionization rates began to fall dramatically in the 1980s, as Reagan began his “magic of the marketplace” assault on the working class.

Real wages (the purchasing power of our paychecks) began to stagnate in the 1970s and are not much higher today than then.

Relatively high-wage public employment began to endure a long period of privatization, which also damaged working class living standards.

The move toward “free trade” did workers here no good, as manufacturing began to flee our shores for low-wage havens abroad. None of these things had to do with financialization per se.

Second, however, once the neoliberal attack on working class living standards took hold and incomes began to flow upward, those with a great deal more money began to look for ways to put this money to work.

The corporations that they owned also had higher profits, and they did the same. The United States has always had a robust financial sector, though in the past, it was not the tail that wagged the dog as far as our system of production and distribution was concerned.

Neoliberalism brought with it a deregulation of international movements of money and goods and services.

These, in turn, required a certain amount of financial innovation, to reduce, for example, the risks of fluctuations in currency exchange rates and sharp changes in political conditions that could threaten investments.

From these innovations came still more, until finance began to take on a life of its own. And while neoliberalism and direct corporate actions inside workplaces did reduce costs and raise profits, they did not create nearly enough capital spending opportunities (investment) to absorb the growing individual savings and business profits.

Finance of one kind or another then began to be seen as a place to dispose of surplus and make still more money.

Leveraged buyouts, stock market speculations, real estate “investments,” all took off from the 1980s on, absorbing money that could not find enough opportunities in the real economy of production.

As these things happened, financial “innovation” exploded, with all of the alphabet soup of financial instruments we describe in our book.

This explosion of finance proved detrimental to working people in a number of ways. Leveraged buyouts inevitably resulted in the hollowing out of what were often perfectly viable businesses.

Companies were saddled with debt, assets were stripped and sold, and workers were furloughed by the tens of thousands. The inflation of asset values gave rise to the notion that it was the job of managers to increase the share price of their businesses—in any way possible.

Businesses came to be thought of as mere collections of assets rather than entities that produced things. Asset inflation gave rise to asset speculation and the development of ever more complex financial instruments, all leading sooner or later to financial bubbles and the inevitable bursting of the bubbles.

As we have seen, the bursting of financial bubbles has had tremendously negative impacts on working people: shuttered workplaces and unemployment to name but the primary ones.

The last bubble, in real estate markets, was harmful to workers not only after it burst but also as it was developing.

In the aftermath of the dot.com bubble, Alan Greenspan, former Chairman of the Fed Board of Governors, directed Fed policy to pressure interest rates down to very low levels.

This helped to push loose money into real estate. As house prices began to rise, banks and brokers started to encourage working people to do two things: borrow money against the appreciated value of their homes and buy homes, either as first-time buyers or as purchasers of more expensive homes (after selling old ones).

Working people were eager to do both because they saw houses as sources of cash to compensate for stagnating household incomes and as a form of wealth that could help secure them against the hazards of ill health, lost pensions, or college-age children needing money for school.

Working class households began to take on large amounts of debt, making themselves more vulnerable, even as they thought they were making wise financial decisions.

Ironically, those who saw their incomes rise so high because of neoliberalism were now, in effect, loaning money to those who didn’t fare so well.

As banks accumulated mortgages, farsighted Wall Street swindlers saw golden opportunities to develop a slew of new financial instruments based upon the packaging and repackaging of mortgages into new and exotic instruments.

Greenspan played their shill, arguing that they had uncovered the secret of hedging infallibly against risk.

From here it was but a short step to the criminal schemes of Countrywide and a host of other financial institutions.

The billions of dollars made were used not only to finance a new gilded age of revoltingly lavish consumption but to corral the most tractable politicians money could buy.

Financialization of the economy created the possibilities for people to take on more and more debt—credit cards, new cars, 2nd mortgages, etc. It was the selling of a lifestyle way beyond people’s ability to pay for it plus the easy access of loans that created the bind that many people find themselves in today.

In essence, it allowed people to live beyond their means. They were encouraged to take on debt as their house values seemed headed up forever, and the great rise in foreclosures and bankruptcies is the unfortunate result of the financialization of the economy.

Also, those people who had retirement money in individual accounts or with pension systems and thought that they had become very wealthy, now found themselves with much less to rely upon.

In the last couple of decades, consumer debt has skyrocketed, doubling from 1975 to 2005, to 127 percent of disposable income.

No entity—not a person, a family, a business, even a government— can take on rising levels of debt (relative to income) indefinitely. Sooner or later, the piper has to be paid.

Working-class consumers took on large amounts of debt, to compensate in part for stagnating wages and incomes, and, it is important to note, to pay for health problems and other household traumas.

This meant that the burden of the debt rose, since income wasn’t rising as fast as the debt, and also because the interest rates charged on credit cards and subprime mortgages were so high.

Many on the radical left have been decrying the rise of consumer debt for many years, and that the debt chickens would come home to roost sooner of later.

But most sceptical economists were surprised that debt could be broadened and deepened for so long.

The ingenuity of creditors in extending loan periods and devising so many new forms of debt has to be admired for its audacity.

Then, the ways in which these debts were packaged and sold so that more debt could be extended was truly breathtaking. Unfortunately, consumers ultimately couldn’t pay and all hell broke loose.

Now, with so much unemployment, workers are truly strapped. They will not be borrowing so much or spending so much anytime soon.

So the question arises: what spending will fuel a sustained recovery? It won’t likely be consumer spending. Capital spending was stagnating to begin with and was the root cause of the crisis.

There are no new “epoch-making” innovations on the horizon that would generate the amounts of investment that were brought forth by the automobile. U.S. exports seem a very unlikely demand support.

That leaves the government. In a capitalist economy, especially one like the United States with its lack of a history of generally accepted public spending, it seems very unlikely that public spending will make up for shortfalls in aggregate demand.

Already, there are widespread entreaties (and not just from the far right) urging the federal government to wind down in spending programs—well before, I might add, the economy has recovered.

The US is in for a long period of stagnation, a “down cycle” as you put it.

The economy is in a process that economists call “deleveraging,” which is just another way of referring to somehow getting rid of debt.

Some are able to pay off what they owe, a few are able to renegotiate down some of their debt, many are losing their homes, and some are going bankrupt.

Until this works its way out, and a lot of debt is shed one way or another, there will be a drag on the “consumer” portion of the purchases.

This is particularly significant to the U.S. economy because it is so dependent on consumer purchases—in 2007, these absorbed approximately 70% of the goods and services produced.

tags: neoliberalism  financial sector  capitalism  wall street  consumer debt