The Financialization Project

The financialization of the economy is a series of changes that have occurred in our savings, power, wealth and society over the past 35 years. This project aims to create a standard definition of these changes with the goals of better understanding their impact on rising US inequality and developing an effective policy response.  While here, you can learn more about the definition, check out our latest research, and read about our team members. We’ll have much more to come in the future, so please continue to check us out.

ANNOUNCING DISGORGE THE CASH BY JW MASON 

In this white paper, Roosevelt Institute Fellow J.W. Mason provides evidence that the relationship between corporate cash flow and borrowing to productive corporate investment has disappeared in the last 30 years and has been replaced with corporate funds and shareholder payouts. Whereas firms once borrowed to invest and improve their long-term performance, they now borrow to enrich their investors in the short-run. This is the result of legal, managerial, and structural changes that resulted from the shareholder revolution of the 1980s. Under the older, managerial, model, more money coming into a firm – from sales or from borrowing – typically meant more money spent on fixed investment. In the new rentier-dominated model, more money coming in means more money flowing out to shareholders in the form of dividends and stock buybacks.


These results have important implications for macroeconomic policy. The shareholder revolution – and its implications for corporate financing decisions – may help explain why higher corporate profits in recent business cycles have generally failed to lead to high levels of investment. And under this new system, cheaper money from lower interest rates will fail to stimulate investment, growth, and wages because, as we show here, additional funds are funneled to shareholders through buybacks and dividends.

Visit RooseveltInstitute.org to download the full report.

Announcing Frenzied Financialization

In the Washington Monthly, Mike Konczal explores the savings and power aspects of financialization, explaining how the growth of the financial sector has left us all poorer.

The 2008 global financial crisis left many people in a state of panic and confusion. Who caused it? What can we do to stop it from happening again? We will explore the causes behind the meltdown, and suggest some solutions for preventing future crises.

What is Frenzied Financialization?

Financialization is the process of building up a business around its financial returns rather than its underlying products and services. For example, instead of selling cars or other goods to customers, companies might use their profits to pour more money into share buybacks (which boost stock prices) and massive dividends (shares paid out by a company).

By 2007, the U.S. finance industry was generating nearly 40% of total corporate profits – that’s more than four times what it had been in 1980! More and more capital has shifted away from tangible assets like factories and equipment toward intangible ones such as complex derivatives contracts which are often based on risky mortgages. During this period, banks didn’t just make money off the interest; they also earned fees and commissions for arranging and selling loans.

The Financialization of Housing

In the past, housing was a stable investment that people purchased to live in rather than flip or trade like stocks on Wall Street. It used to be something average Americans could afford with their hard-earned income, but by 2008 it had become so expensive that many families were forced into taking out risky mortgages just so they could get enough capital together to purchase a home. These high-risk loans became known as subprime mortgages because investors didn’t believe they would ever pay off – this lack of trust is what fed the collapse across global markets when these bad debts started going belly up! Nowadays, buyers can no longer depend on steady incomes from traditional jobs in order to qualify for a mortgage. It has become so hard to get an average home loan that many people are forced into renting rather than buying their own homes.

The Financialization of Corporate America

As financial institutions found more and more ways of making money by trading assets, they started shifting away from taking on real risks with tangible products like cars or houses toward using complex derivatives contracts (like credit default swaps) which had little connection to the underlying asset but still allowed them to earn huge profits if the market went up! By 2012, corporate debt was triple what it had been in 2002; yet most companies were not investing this extra cashback into research & development for new technologies or building factories – instead, these funds were used to buyback company shares and boost stock prices.

This shortsightedness is what caused the 2008 crisis, and it’s still having a negative effect on businesses today. Investors are no longer interested in investing their money into companies that can’t produce consistent profits each quarter; this has led to massive layoffs as well as declining spending on research & development for products that will benefit society long-term rather than just boost investors’ portfolios over the next few months! Instead of being productive members of society, many people have become obsessed with finding ways to make quick money by “playing” the market instead of working hard at jobs they actually care about or using their skills for something meaningful.

Financialization has turned modern capitalism into an endless cycle where everyone tries frantically to get ahead before someone else swoops in and snatches their financial opportunity away!