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Costas Lapavitsas speaks to an audience at The Real News about how finance controls the global economy -   October 27, 2014

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The Financialization of Life (1/6)

Costas Lapavitsas is a professor in economics at the University of London School of Oriental and African Studies. He teaches the political economy of finance, and he's a regular columnist for The Guardian.


The Financialization of Life (1/6)PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Baltimore.

This is our first town hall. We just opened up the studio a few days ago, and we're going to do our first town hall about how finance exploits all of us. It's a very important topic for us at The Real News, because one of the main reasons we came to Baltimore was to take up one critical question, which is, more or less: what would you do if you ran Baltimore in the interests of the majority of its people? Of course, there's sort of a built-in assumption there that it's not currently the case. But that's what we think. I think the facts would lead one there. But if in fact you had a mayor, a city counselor, if you had a governor, a state assembly, and their only interest was the majority of the people's well-being, what with that public policy actually look like? It's easy to critique the existing system. It's perhaps not so easy to say what you would really do. And over the next year, two, or three years, we want to do investigative journalism. We're going to do town hall discussions and debates and talks and film screenings and all manner of formats, but all directed at the same basic objective: what would public policy look like if it was only in the interests of ordinary people?

So we're going to kick it off tonight and talk about how finance exploits all of us with our guest, Costas Lapavitzas. The topic is very important, and it's a very good topic particularly for Baltimore, because Baltimore is the home of the subprime mortgage. Most people that follow this know that the 2008 financial crisis was triggered by a banking crisis that to a large extent was triggered by subprime mortgages, people that were lent money, banks knowing they could never repay the mortgages, and not really caring if the mortgages were ever repaid, because they would package hundreds and even thousands of these mortgages, sell them on the derivatives markets to pension funds and other banks, and the whole thing was a house of cards. And I guess they had either an underlying belief that American real estate could never collapse or they didn't care, 'cause they were making such fees on the whole thing they really didn't care if the whole thing came down, because most of the people playing this game cashed out very well and they make money before the crash and they make money after the crash.
And Baltimore was the target of all this, not in the 2000s, but in the 1990s. This is where the whole subprime experiment began, and it was all targeted at African Americans, deliberately so. And it's come out in court documents since a lawsuit that the City of Baltimore launched against Wells Fargo Bank. It came out that it was specifically targeted to African Americans. They would higher African American loan officers to sell this stuff. They would not care at all whether people could pay. They would promise low interest rates to start, and then later, of course, it would balloon up and people would lose their houses. In the year 2000, subprime mortgages was the number one cause of foreclosures in Baltimore long before it became a national phenomenon.

So this is sort of an example of how we want to tie systemic issues like big banks, predatory lending, and how this appears locally and how it screws up people's lives, and over time start talking about what an alternative financial system--and not just financial but other ways of my managing a city and a state and, someday, a country--might look like.

So without further ado, I'd like to introduce our guest tonight, and he is Costas Lapavitsas. And he's a professor of economics at the School of Oriental and African Studies at the University of London. He's a member of Research on Money Finance (RMF) and the lead author of the new RMF report "Breaking Up? A Route Out of the Euro Zone Crisis". His previous publications include Crisis in the Eurozone; Social Foundations of Markets, Money, and Credit; and Political Economy of Money and Finance. And Costas is going to speak for 15, 20 minutes or so, and then we'll have a Q&A. And I look forward to hearing it all.

So go ahead, Costas.

COSTAS LAPAVITSAS, ECONOMICS PROFESSOR, UNIV. OF LONDON: I will present to you some ideas that I have dealt with in my new book, Profiting without Producing, which has just come out, which discuss finance and the rise of finance. I can't tell you very much about Baltimore because I don't know about it, but I will tell you quite a few things about what I call the financialization of capitalism, which impacts on Baltimore and on many other places.

So, getting on with it, and very quickly because time is short, I think it's fair to say and all of us would agree that finance has an extraordinary presence in contemporary mature economies. It's very clear in the case of the U.S., but equally clear in the case of the United Kingdom, where I live, Japan, about which I know quite a bit, Germany, and so on. There's no question at all about it. Finance is a sector of the economy in mature countries which has grown enormously in terms of size relative to the rest of the economy, in terms of penetration into everyday lives of ordinary people, but also small and medium businesses and just about everybody. And in terms of policy influence, finance clearly influences economic policy on a national level in country after country. The interests of finance are paramount in forming economic policy. So that is clear. Finance has become extraordinarily powerful. And that, in a sense, is the first immediate way in which we can understand financialization. Something has happened there, and modern mature capitalism appears to have financialized.

Now, what is this financialization? The best I can do right now is to give you the gist of this argument of mine in my book. And I will come clean immediately and tell you that I think financialization is basically a profound historical transformation of modern capitalism. This is the way I understand it. It's a profound historical transformation that really began in the 1970s, and it's now been running for about four decades.

How to understand, then, the profound historical transformation, how to go about it, what concepts do we need? I think we need first of all to look at some economic processes, some economic change that is taking place, fundamental economic change, and then we need to look at some changes in politics and institutions and combine the two in order to grasp the historical change.
So let me start with economic changes, the economic foundations of this transformation. I think there are three key root changes here.

The first, funnily enough, doesn't relate to finance itself, but it relates to industry and commerce. In other words, it relates to nonfinancial economic activity. One must start there to understand the historical transformation. So what has happened to big business in particular? Well, what's happened to big business is very interesting. Two things have happened to it. First, big business has become increasingly capable of financing investment out of retained earnings. It retains its profits, and on a net basis it finances investment pretty much out of that. Of course, it still uses banks, but it doesn't rely on banks on a net basis to finance investment. That gives it independence, a certain degree of independence from banks. In addition to that, big business has made so much in retained profits--currently U.S. big business is sitting on piles of cash. It has made so much in retained profits that it can use those funds to play financial games, to engage in financial transactions and financial activities on its own account. So big business has financialized. The key element that we've got to understand first is the financialization of big business. Large enterprises have acquired some of the character of financial institutions, have become bank-like, and they engage in these transactions, and they change the structure of their own organization as they do that. So that's the first thing.

Second economic change, and very, very important, too, relates to banks. If big businesses is doing that, banks must do something else to make profit. Banks are profit-making institutions. So if big business becomes increasingly independent of banks, banks must do something else. What have banks done? It's very clear what they've done. They lend less to businesses for investment and so on, and they play more games in the financial markets. They become transactors in financial assets, and they make profits increasingly not from lending but from fees, commissions, and trading. They become traders in financial assets.

At the same time, banks have also turn households. Households have become a very profitable activity of banks, a new activity. This is a new phenomenon in the development of capitalism. So that much about banks.

The third change has to do with households, workers, ordinary people. And what we see there in the last three to four decades is that ordinary people have been qdrawn into the former financial system like never before. Households have become financialized. Finance has become a fundamental part of household life--like I say, like never before. Why is that? Partly because wages have been stagnant. And therefore--I mean, nowhere more stagnant than in this country. I mean, real wages have been absolutely flat in this country for decades. So partly because of that, people have turned to debt. But also people have got assets, financial assets.

So the financialization of everyday life, of households, is a bit of a complex story. What is actually happening there, I think, is not simply that you borrow in order to consume. That also happens. It's a more complex story than that. What is actually happening is people need access to health, education, housing, and a variety of other needs. Every country has systems of provision for these things. Each country differs from the next country, but pretty much there are similarities. These modes of provision have historically, traditionally, incorporated public provision, some methods of public provision, for everything--for housing, for health, for education, and so on. What we've witnessed the last three to four decades is a retreat of public provision. Public provision has retreated. Private provision has taken its place. As this is happened, finance has emerged as the facilitator of that. So we turn to private provision to solve our housing needs, our health needs, our education needs, and finance makes profits out of that, basically, without having any skills in doing these things. So this to me is the financialization of households, the third major trend.

So non-financials have financialized, banks have changed, and households have been drawn into the financial system. These changes together have basically transformed the economy, transformed the foundations of the economy. This is a new type of capitalism. At the same time, we've had changes in institutions and in ideology. These you would have heard about and you would be familiar with. The changes in institutions are very clear. We've had wave after wave of deregulation. Labor market has become more deregulated, and financial markets have become more deregulated. And in addition to deregulation what we've had is the rise of the ideology of neoliberalism. Deregulation goes hand in hand with neoliberalism, the idea that the market is good, the state is bad. In this country, this is a very powerfully held idea, more powerfully here than anywhere else. Actually, it's extraordinary how powerful this perception is and how a lot of social issues are understood in this way.

The point I want to make you is that neoliberalism is very, very powerful and sustains financialization, but neoliberalism is not really about asserting the merits of the market over the state. Actually, it's more complex than that and it's more crafty than that, because neoliberals are not the enemies of the state. Neoliberals want to take over the state. The actual content of neoliberal ideology is to take over the state and to use the state to protect the market, to make the market bigger, to effect market-favoring, market-conducive changes. So this has also been going on the last three to four decades. And that to me is the core of financialization.

So what have we got after four decades of this? These changes, seen very clearly in the United States, have created, firstly, a deeply unequal country, a deeply unequal society. Financialization is fundamentally about inequality. We see this inequality in terms of income, where the top 10 percent and the top 1 percent draw an extraordinary proportion of income annually. But we see it in terms of the functional distribution, the distribution of income between capital and labor, where labor has lost--and lost dramatically--during the last three to four decades in this country and in just about every other mature capitalist country that has financialized.

So this is a deeply unequal system. It generates inequality. Finance has acted as a key lever in increasing it inequality. Finance is a vital mechanism in increasing inequality. You can see it in terms of the profits it creates. Financial profit has become a huge part of total profit through these activities that I've just discussed by markets, households, and so on--a huge part of total profit. And the rich in this country and elsewhere typically become rich through financial methods; the way in which you acquire great wealth and you cream off the surplus is basically through financial methods, through access to financial assets, privileged ways of trading financial assets, and privileged position in of the financial system that allows you to extract vast returns, which appear as salaries and wages, in other words, remuneration for labor. Come on. What kind of remuneration for labor is this allows someone to draw tens of millions of dollars annually? For what kind of labor? This isn't labor. This is a kind of rent, this is a kind of surplus accruing because of power and position in the financial system or access to finance. And that is typical of financialization in this country and elsewhere.

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