The Death Spiral of Financialization

The primary driver of our economy–financialization–is in a death spiral. Financialization substitutes expansion of interest, leverage and speculation for real-world expansion of goods, services and wages.

Financial “wealth” created by leveraging more debt on a base of real-world collateral that doesn’t actually produce more goods and services flows to the top of the wealth-power pyramid, driving the soaring wealth-income inequality we see everywhere in the global economy.

As this phantom wealth pours into assets such as stocks, bonds and real estate, it has pushed the value of these assets into the stratosphere, out of reach of the bottom 95% whose incomes have stagnated for the past 16 years.

The core problem with financialization is that it requires ever more extreme policies to keep it going. These policies are mutually reinforcing, meaning that the total impact becomes geometric rather than linear. Put another way, the fragility and instability generated by each new policy extreme reinforces the negative consequences of previous policies.

These extremes don’t just pile up like bricks–they fuel a parabolic rise in systemic leverage, debt, speculation, fragility, distortion and instability.

This accretive, mutually reinforcing, geometric rise in systemic fragility that is the unavoidable output of financialization is poorly understood, not just by laypeople but by the financial punditry and professional economists.

Gordon Long and I cover the policy extremes which have locked our financial system into a death spiral in a new 50-minute presentation, The Road to FinancializationEach “fix” that boosts leverage and debt fuels a speculative boom that then fizzles when the distortions introduced by financialization destabilize the real economy’s credit-business cycle.

Each new policy destroys another level of prudent fiscal/financial discipline.

The discipline of sound money? Gone.

The discipline of limited leverage? Gone.

The discipline of prudent lending? Gone.

The discipline of mark-to-market discovery of the price of collateral? Gone.

The discipline of separating investment and commercial banking, i.e. Glass-Steagall? Gone.

The discipline of open-market interest rates? Gone.

The discipline of losses being absorbed by those who generated the loans? Gone.

And so on: every structural source of discipline has been eradicated, weakened or hollowed out. Financialization has consumed the nation’s seed corn, and the harvest of instability is ripening in the fields of finance and the real economy alike.

 

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  • diogenes

    “Financialization” proliferates legalized counterfeiting of paper entitlements to extract tolls from the 99% for NOTHING. It is theft enforced by laws enacted by fraud and enforced by corruption — fraud from top to bottom and poisonous to society from bottom to top.

  • Zartan

    Yes … Money is worthless, but what is more worthless, the money, or the people who think it has value?

  • Jed Grover

    I reflect back on two interesting reads “Pawns in the Game by William Carr and Lords of Creation by Lewis”. History and all the connected dots.

  • Zartan

    Why complain about the banks?

    Why complain about the Corporate Thieves?

    The people have the power to Discipline “all” and get “anything” they want. The people in all of their utter foolishness have a Constitution that they still do not comprehend that allows them to Bear Arms, Assemble, Protest and even make Citizens Arrests with Force!

    Any group that puts itself ( in numbers, +500,000) in front of the NYSE and sets Siege will not only Totally Control the Markets, but will Totally Control “Governments” Shorting the Lobbies and taking them completely out of the picture! The leadership of such a movement will be instantly wealthy off the short alone! Why, if they are really smart, RUSSIA, or ANY other nation would pay MILLIONS to secure such a movement. The Founders made deals with Other Nations to Beat England. SO, why not, America? Are you Lame? Do you not know that You have all been made Slaves? Sad.

    This prison camp called America is getting old and it is nothing but a wet paper bag in reality.

    Wake up and Smell the Coffee!