Stolen: How to Save the World from Financialisation

INTRODUCTION

Before 2007 the last time there was a run on a British bank the Austro-Hungarian Empire was preparing for war with the Prussians, and the thirty-seven states of the USA had just agreed to free the country’s slaves. In 1866, Overend, Gurney and Company — the banker’s bank — found itself in serious financial difficulties.¹ Caught up in the euphoria of the industrial revolution, the bank had lent too much to the UK railway industry, fuelling a speculative boom that spread the length and breadth of the country. But when the bubble burst, the bank found itself with a stack of unpayable debts. Overend appealed to the Bank of England for financial assistance, but its pleas fell on deaf ears. Queues started forming outside the bank’s headquarters at 65 Lombard Street, and within a week the Panic of 1866 had taken hold of the country.

141 years later, the panic of 2007 was just beginning as Northern Rock, the largest mortgage lender in the UK, found itself unable to access funding.² Northern Rock’s business model was based on the securitisation of mortgage loans — turning mortgages into financial securities that could be traded on capital markets. It borrowed from other financial institutions over short-time horizons — often on an overnight basis — and lent long, issuing mortgages that wouldn’t mature for decades. When financial markets started to seize up in 2007, banks stopped lending to one another, and the Rock found itself unable to access international capital markets, meaning it couldn’t pay its debts. On 13 September 2007, the news broke that Northern Rock was seeking emergency support from the Bank of England: the first UK bank run since Overend.

Both bank runs resulted from an asset bubble — one in railways, the other in housing. Both Northern Rock and Overend relied on borrowing from financial markets to finance their day-to-day liabilities. Both were eventually forced to appeal to the Bank of England for help. But there were also some critical differences between the two institutions. Overend lent money to companies that were building the UK’s railway networks: the same railway networks that we use to this day. They may have done so on unwise terms, but they had invested in the expansion of the productive capacity of the economy — in our ability to produce things, both then and in the future. Northern Rock was doing no such thing. A former building society, Northern Rock lent consumers money to buy already-existing homes. It had been criticised for approving mortgages with incredibly high loan-to-value ratios; on occasion the bank granted mortgages worth 125% of the property’s value.³ Rather than creating assets, Northern Rock was creating debt. And it was doing so on an unsustainable scale.

The contrast is puzzling. If it was so unproductive, then why was Northern Rock bailed out when Overend, Gurney and Company was allowed to fail? It is true that by 2007 the Bank of England had become the UK’s official lender of last resort, with a responsibility to support ailing banks if their demise might threaten the stability of the financial system. But this raises more questions. How had a small former building society become so important that its demise could have brought the booming British finance sector to its knees? When did the UK’s finance sector became so large, and so powerful, that a single bank could extract billions from the taxpayer under the threat of economic meltdown? In other words, when did finance become such a dominant and dangerous force in our society?

This book argues that, since the 1980s, the UK has entered a new phase of its economic history. Once the workshop of the world, today our main connection to the global economy comes from the City of London, a global centre for financial speculation. This transformation has not been slow and steady — it has occurred in fits and starts, as the economy has lurched from one crisis to the next, adapting under the influence of the powerful at each stage. Our current economic model — finance-led growth — can be traced back to the 1980s, when a new system emerged out of the ashes of the post-war social-democratic order. Since then, British politics and economics, as in the US and a string of other advanced economies, has become financialised, with results that were not apparent until the crisis of 2008.

The best-known definition of financialisation is that it involves the increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of the domestic and international economies.⁴ In other words, financialisation means more and bigger financial institutions — from banks, to hedge funds, to pension funds — wielding a much greater influence over other economic actors — from consumers, to businesses, to the state.⁵ The growth of finance has led to the emergence of a new economic model — financialisation represents a deep, structural change in how the economy works.⁶

When economists talk about financialisation, they usually point to the United States, which, in absolute terms, is home to the largest finance sector on the planet.⁷ Whilst this book focuses on the history of finance-led growth from a British perspective, most of its lessons can also be applied to the world’s current superpower. In the run up to the crisis, each and every one of these issues — the financialisation of corporations, households and the state — afflicted the American economy too, though in subtly different ways. In fact, we can speak of a peculiarly Anglo-American growth model, marked by a growing finance sector, a falling wage share of national income, growing household and corporate debt, and a yawning current account deficit.⁸ Other economies that pursued this model before 2007 include Iceland and Spain, and today Australia and Canada are perhaps its most enthusiastic adopters.

The most obvious indicator of financialisation is the dramatic increase in the size of the finance sector itself. Between 1970 and 2007, the UK’s finance sector grew 1.5% faster than the economy as a whole each year.⁹ The profits of financial corporations show an even starker trend: between 1948 and 1989, financial intermediation accounted for around 1.5% of total economy profits. This figure had risen to 15% by 2007.¹⁰ The share of finance in economic output was, however, dwarfed by the growth in the assets held by the UK banking system: banks’ assets grew fivefold between 1990 and 2007, reaching almost 500% of GDP by 2007.¹¹ The UK also boasted one of the biggest shadow banking systems relative to its GDP before the crisis — a trend that has continued to this day.¹² Meanwhile, cottage industries of financial lawyers, consultants, and assorted advisors grew up in the glistening towers in the City of London and Canary Wharf. Between 1997 and 2010, the increase in the share of financial and insurance services in UK value-added was greater than the increase in the share of any other broad sector bar the government sector — itself supported by the tax revenues provided by finance.¹³ Overall, by 2007, the UK had one of the largest finance sectors in the world relative to the real economy.

But financialisation can’t be reduced to the increasing importance of big banks in the functioning of the economy.¹⁴ It’s not as though capitalism has been taken over by finance. Instead, every aspect of economic activity has been subtly, and sometimes dramatically, transformed by the rising importance of finance in the economy as a whole. Whereas economic life for the individual was once centred around wages and wage bargaining, now the management of debt has gained importance. Businesses once focused primarily on producing the goods and services for which they had a competitive advantage, but today they are likely to place just as much if not more focus on their share price, their dividends regime, their borrowing and the bets they’ve made on exchange rates and interest rates. There was a time when state borrowing was constrained by restrictive monetary policy; today states are not only able to borrow far in excess of what they earn, they are also able to have private corporations undertake their spending on their behalf.

Historically, its advocates have argued that capitalism makes everyone better off by creating wealth for everyone. Businesses make profits, and they invest these profits in future production. This creates jobs, which raise living standards for the majority of the population. Such a system might lead to rising inequality in the short term but, as entrepreneurs reinvest their profits, eventually this wealth will trickle down to everyone else. Whilst this has always been an optimistic reading of the way capitalism works, during the post-war period it often appeared to reflect reality (at least in the global North). But finance-led growth upsets the channels through which wealth is supposed to trickle down from rich to poor, and it does so in obvious ways. Investment slows, wages fall, and profits — especially financial profits — boom. ¹⁵

Whilst all capitalist systems are premised upon the monopolisation of the gains of growth by the people who own the assets, under finance-led growth these dynamics become more extreme. Rising private debt might conceal this fact during the upswing of the economic cycle, but when the downturn hits it becomes clear that finance-led growth is based on trickle-up economics, in which the gains of the wealthy come directly at the expense of ordinary people. This is because financialisation involves the extraction of economic rents from the production process — income derived from the ownership of existing assets that doesn’t create anything new. When, for example, a landlord increases a tenant’s rent without having made any changes to the property, this is a simple transfer of wealth from a non-owner to an owner. The landowner cannot use the increase in price to ‘create’ new land that would benefit everyone – he will simply pocket the money for himself. The same can be said for interest payments on debt, which transfer money from people who don’t own capital to people who do. Rising household debt, booming property prices, the enforcement of shareholder value and the financialisation of the state all transfer money from those who don’t own assets to those who do, without creating anything new in the process.

Financialised capitalism may be a uniquely extractive way of organising the economy, but this is not to say that it represents the perversion of an otherwise sound model. Rather, it is a process that has been driven by the logic of capitalism itself. As their economic model has developed, the owners of capital have sought out ever more ingenious ways to maximise returns, with financial extractivism the latest fix. In many ways finance-led growth represents capitalism’s most perfect incarnation — a system in which profits seem to appear out of thin air, even as these gains really represent value extracted from workers, now and in the future.

The Interregnum

The financial crisis was the beginning of the end for finance-led growth. Since 2007, the UK has experienced the longest period of wage stagnation since the Napoleonic wars, whilst American workers have the same purchasing power as they did forty years ago.¹⁶ Employment may be high, but work has also become more insecure, and levels of in-work poverty have risen. High levels of employment have also coincided with a stagnation in productivity — the amount of output produced for every hour worked — which has flatlined in these states since the financial crisis. The rate of investment — by both the public and private sectors in the US and the UK — has fallen since 2008 and remains below its pre-crisis peak.¹⁷ In the UK, falling business confidence, volatility in financial markets, and the levelling off in house prices suggest that a recession is just around the corner. In the US, meanwhile, corporate debt is higher as a percentage of GDP than it has ever been. There seems to be a new corporate scandal every week, with overindebted, extractive, monopolistic companies controlling an increasing share of economic output whilst public services crumble. Interest rates around the world were until recently at record lows and most states are only now – a decade on from the crash – starting to wind up quantitative easing. The extra weight placed on monetary policy means that when the next crisis hits there will be little room for manoeuvre.

Economists are at a loss to explain this ongoing malaise. Some have argued that we are living through an era of secular stagnation (where secular means long-term). Technological and demographic change mean that the Western world must accustom itself to much lower rates of growth than in the past.¹⁸ Others claim that this economic stagnation results from rising government debt, which is a drain on productive economic activity and is scaring off foreign investment.¹⁹ Still others argue that this is all down to economic populism — governments implementing ill-advised economic policies to please the masses rather than listening to the timeless, objective wisdom of professional economists.²⁰ The lost decade since the financial crisis is living up to that old adage that when you get ten economists in a room, you’ll get eleven opinions. The old guard is unable to explain to people just what on Earth is going on.

The central argument of this book is that, having gorged themselves before the crash, today’s capitalists are running out of things to take. We are currently living through the death throes of finance-led growth. Just like the post-war consensus of the 1970s, the old model is crumbling before our eyes, leaving chaos and destruction in its wake. And just like the post-war consensus, the death of finance-led growth was inevitable and predictable. Marx showed that every kind of capitalist system is subject to its own contradictions: strains that arise from the normal functioning of the economic model — from businesses trying to make money, politicians trying to get votes, and people trying to survive.²¹ These dynamics have characterised the development of capitalism for centuries. Each and every capitalist model must end in crisis, and moments of crisis are moments of adaption — moments when, out of the ashes of the old, the new economy can be born.

They are also, as the Italian theorist Antonio Gramsci pointed out, very dangerous moments indeed. Each crisis of capitalism doesn’t simply threaten to bring down the dominant economic model, but the institutions that govern politics and society too. When people no longer expect to be made better off by the status quo, they withdraw their support for it. The guardians of our governing institutions double down as a result, defending their model even as it fails to deliver gains for the majority of the population. Both sides dig in, leading to battles that can be drawn along surprising lines — with those at the bottom the most likely to lose out.

British society has clearly entered such a phase since the financial crisis. The UK’s 2016 referendum vote to leave the European Union was the biggest upset to British politics in a generation. Voters across the country used the referendum to express their discontent with a status quo that has seen them excluded from the proceeds of economic growth. The 2017 general election that followed the vote delivered a government unable to rule without the conditional support of one of the most regressive parties in British politics — the Democratic Unionist Party (DUP) — and unable to undertake the one task appointed to it — delivering a Brexit deal. In the absence of a growing finance sector, and with rising debt and asset price inflation, inequality has risen, living standards have fallen, and the old neoliberal institutions have struggled to contain, let alone channel, the anger of the majority of the population. A pervasive sense of crisis hangs in the air of British politics. The old paradigm can offer only more of the same, and ongoing austerity and weak growth will only exacerbate the UK’s political and economic problems.

In the US, the election of Donald Trump signals a similar grassroots backlash, even as Trump’s economic policy has served to increase inequality and provide windfalls for finance capital. Socialists within the Democratic Party seem to be profiting from Trump’s failure to address the concerns of the constituency that helped to elect him. In Europe, a new wave of xenophobia is sweeping across the continent, countered only by the steady rise in support for popular, socialist alternatives. Crisis after crisis has afflicted the economies that were once represented as the great success stories of liberal, capitalist development — Brazil, South Africa, Russia, Argentina, Turkey, and so many others are all experiencing political and economic turmoil. The poorest states continue to be left behind. Countries like Mozambique and Ghana, along with many low-income countries, are in deep debt distress.

Meanwhile, the environment is collapsing around us. Climate change is accelerating at rates that will render many parts of the planet uninhabitable in just a few short years. The past four years have been the warmest since records began, and the warmest twenty years have all occurred within the last twenty-two. As our forests are destroyed and our oceans acidified, it will not be long before we reach a series of tipping points when the effects of climate change will accelerate suddenly and unpredictably, rapidly creating the kind of hothouse Earth currently only seen in science fiction. And it is not just climate change we have to worry about. We are living through a mass extinction: the last fifty years has seen a 60% fall in vertebrate populations. Insects, particularly those critical for pollinating many plant species, are in terminal decline, and our soils are being eroded faster than they can be replenished. In other words, we are on the verge of ecological Armageddon.

But this moment of extended crisis could also represent a moment of opportunity. Many capitalist economies around the world are not only failing to deliver rising living standards for their most powerful constituencies, the capitalist mode of production is accelerating the breakdown of all our most important environmental systems. Finance-led growth contributes to these dynamics by creating huge, unsustainable booms, followed by equally massive, wasteful busts. We cannot afford to organise our economies according to the logic of finance-led growth anymore. But our aim should not be to replace it with a new, equally contradictory model. Instead, we must use this moment of crisis as an opportunity to move beyond capitalism entirely. But that means answering a question that, ordinarily, we are not allowed to ask: What comes next?

What is the Alternative?

For a long time, it has been easier to imagine the end of the world than the end of capitalism — by which we mean an economic system based on private ownership of the means of production (the main factors used in the production process) with the aim of profit maximisation, the enforcement of private property rights by the state, and the allocation of resources through the market mechanism. The system may create inequality, unemployment, frequent crises, and environmental degradation but, we have been told, the alternative is far worse. Socialism — a system under which the means of production are owned collectively — has only ever lead to death and destruction. Capitalism is the worst way of organising the economy, except for all the others.

Socialism’s opponents seem to believe that the basic conditions for organising a society and an economy have been the same at every moment throughout history. Capitalism emerged naturally because it is the natural way of doing things; socialism has failed because it is not. But, as surprising as it may seem, capitalism has not always existed. For most of human history, societies have been governed based on non-capitalist economic and political institutions. Feudalism only gave way to capitalism because states became powerful enough to disrupt rural power relationships and create a landless working class that could be used in the production process.²² This kind of power was premised upon the existence of complex societies, and the availability of certain technologies, without which experiments at capitalism would have foundered.

In the same way, the technological, economic, and political pre-conditions for the establishment of socialist societies exist today in ways that they never have in history. Large sections of the global economy are governed by rational planning rather than the market — that is, all of the economic activity that takes place within private corporations.²³ Huge, international monopolies, many times the size of modern nation states in revenue terms, organise themselves based on a regime of top-down planning, generally using the latest technologies to do so. Neoclassical economists treat the firm as a black box and do not see relations within these firms as particularly relevant to economic outcomes. Instead, some might say conveniently, they restrict their analysis to those areas of economic activity governed by market relations. But the management of most firms today makes it quite clear that rational planning is perfectly possible, provided you have the means, and you are working towards the right ends.

When it comes to the means, we are living in a phase of human history associated with unparalleled technological development.²⁴ Each of us holds in our pockets a computing device more powerful than the technology that sent the first man into space. We produce endless amounts of data about our habits, behaviours, and preferences that can be agglomerated and used by firms like Amazon to determine how much they should be producing, and of what. But the revolutionary power of these technologies is limited because they are concentrated in the hands of a tiny elite, which is using them to maximise their profits.

This brings us to the second issue, ends. Some say that it doesn’t matter what goes on inside firms as long as they are organised according to the logic of profit maximisation. This ensures that they remain efficient, and therefore provides for an optimal allocation of society’s limited resources. Except it doesn’t. Not only do many firms operate far from maximum efficiency (and pay expensive consultants to tell them how they can improve), they produce a host of other social and environmental ills — from inequality to climate change. There is no way that an organisational structure based on incentivising those at the top to extract as much as possible is the most rational — or indeed moral — way to organise production today. And top-down planning with the aim of achieving other ends is just as likely to lead to information and coordination problems.

Complex systems — whether these be firms or entire economies — rely on feedback. They are neither centrally directed, nor perfectly decentralised — they operate on the boundary between chaos and order — the realm of complexity. Such systems are dynamic — they are constantly moving. It is never possible to achieve a static equilibrium because conditions are always in flux. Instead, feedback from different parts of the network helps people to self-organise with the aim of achieving a collectively-determined goal, with some coordination and direction provided from the centre.

Capitalism, on the other hand, operates at the two poles of order and chaos. Within the firm — which neoclassical economists don’t study, but which Marxists do — production is organised through command-and-control, enforced by the threat of the sack and supported by various other technologies of control and exploitation. Outside of the firm, the state determines the rules of the game, backed up by the threat of force. These two institutions — firms and states — work together to produce an economic system based on domination, which also provides the appearance of freedom. Because within the market — its boundaries having already been determined by the powerful — economic activity seems almost anarchic. There are booms and busts, firms rise and fall, individuals are encouraged to place themselves in constant competition with one another just to survive. And