Finance and Wealth Part Two

*Note: This is a second part of a presentation for my Economic Sociology class over a chapter of Miguel Centeno and Joseph Cohen’s book “Global Capitalism” on finance and wealth. Part two is slightly adapted to include some bits of related information (graph!) and light editing for coherence. The first part is here.

More or Less Accountability

The question of where we are today leaves us with wondering whether such a liberated financial system is more or less accountable than the interventionist state policies that preceded it. Proponents of market liberalization long criticized centralized economic control as being prone to manipulation for short-term political gains. Financial liberalization was thought to have freed markets in such a way that substantial and beneficial growth could be broadly shared while maintaining stability through market discipline.

Yet a “key question here is whether, after liberalization, the gravity of control over the financial economy resides with actors that have a greater obligation or constraint to operate in ways that benefit society, and do not use their position of power for self-interest at the expense of the commons.” The events of 2008, and previous smaller crisis, have cast serious doubts whether such an obligation* or constraint exists. Because market discipline rests on the fear of economic failure, the existence of moral hazard creates a situation where a privately managed financial system has incentives to manipulate the economy for short-term monetary gains that can be detrimental to national and global economic welfare. As the authors put it, “‘Private corporations’ chief responsibility is to make profit for shareholders, not take care of society as a whole.”

The Specters of Exploitation and Exacerbated Inequality

Centano and Cohen write that “one of the principle benefits of financial market liberalization is that it encourages investment in enterprises with weaker credit, which typically are poorer and/or prone to financial problems.” Unfortunately what has happened is that such avenues of access to credit (where it exists, that is) for poorer segments in society have nevertheless resulted in stagnant wage growth, and at least for the immediate term a bleak economic outlook for future increases in the ability to save and participate in the credit market.

The authors also note that one of the effects of market liberalization has been to put great financial pressures on governments, who provide key services to the economically disenfranchised, to reduce essential goods and public sector jobs. You can see this directly in the decline of total public jobs since the Great Recession began (obviously, the spike was temporary hiring for the census):

Again the authors ask “whether any gains to poorer people’s wages must be spent on things that might have been provided to them without direct cost under alternative economic systems.”

Dangerous Money

The chapter concludes with the idea that the financial sector has effectively become an independent, influential force in the real economy. Just as financial growth can result in real economic growth, the events of 2008 proved that “financial problems can destroy real economic activity.” It isn’t so much a question of whether financial liberalizationcan create economic opportunities in reallocating financial resources, but whether such opportunities are with the cost when those markets become too powerful and the rest of the world suffers the consequences of the markets’ own excesses.

*Obviously Centano and Cohen shortly thereafter admit that there’s no “obligation” per se for private financial intermediaries to operate in a way that is beneficial to society. This, I think, is a “have your cake and eat it too” problem for neoliberal prescriptions. That is, they would argue that the private allocation of resources is “naturally” beneficial to society in the absence of a formalized obligation – yet even if that was not entirely or universally true “market discipline” would constrict private economic actors in such a way as to produce such a natural beneficence.

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