The Emergence, Part 2: Debt-Driven Growth, Financial Colonization, and Speculation/Debt Reciprocity

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Louis Scuderi
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The Emergence, Part 2: Debt-Driven Growth, Financial Colonization, and Speculation/Debt Reciprocity

(This is the second post in a series on the rise of finance capital in the United States, for Part 1, click here.)

 

One of the key moments in Ronald Reagan’s push towards a neoliberal state apparatus occurred in the summer of 1981, when he officially declared war on labor with the dismantling of the Air Traffic Controller’s Union.  This is also the time when the so-called “financial explosion” began. Policies intended to restore profitability by combatting inflation and restoring business investment (and, by extension, job creation), ended up only succeeding in halting inflation. The overdetermination of inflation (versus unemployment) is still highly emphasized by United States policymakers and the Federal Reserve today, which happens to considerably bolster profits made via financial investing and speculation.

 

As profitability continued to stagnate and real wages steadily fell, a certain array of financial instruments gradually became a necessity to citizens across social classes. I call this phenomenon “financial colonization.” It is a process where policies intended to grow the economy via “trickle down” effects - by empowering the most wealthy “prime-movers” (job creators) of the economy - a grid of investment methods and opportunities are created that engross the entire United States population, with transnational effects. The results of financial colonization will be explored much more in further posts: they are the political, cultural, and social consequences of economic growth driven by debt and so-called “risk management.”

 

But, as it turns out, “financial innovation” began at the first sign of the profitability crisis: in 1970 with the introduction of mortgage backed securities. MBS’s sparked a wave of optimism towards advancing credit instruments: how could you go wrong investing in something that was backed by an American cultural fetish-object?

 

Innovation continued. Currency futures markets were introduced in 1972, along with options and equity (stock) futures in 1973. Futures markets continued to proliferate and expand throughout the 70’s, culminating in 1979 with the emergence of over-the-counter and unregulated trading: the so-called “shadow banking” system. In 1985, after the continued enlargement of options and futures market, the computerization of markets and trading was introduced. The rise of information technology was an extremely important stimulus in the hegemonic rise of finance, just as automobile technology and its extensions (highways and other productive government projects) were crucial pre-1970s.

 

So financial colonization began with the standard neoliberal agenda of open global capital flows, but gradually created a massive and dynamistic market for complicated credit instruments. Coinciding and synergizing this with this was the steady increase in household debt, a result of consumers being forced to incur debt and continue their consumerist habits despite declining wages and sluggish income growth. Bankers and financiers were turned into salespeople - promising unheard of rates of return using new tools the “household investor” (and, it turns out, the financiers) couldn’t comprehend.

 

It should be noted that debt was not only incurred by households. The total debt of the United States also rose considerably, which consists of household, government, non-financial institutional, and financial institution debt. According to John Bellamy Foster and Fred Magdoff, financial institution debt rose from 22 to over 100 percent of GDP from 1981-2005, along with rises of similar magnitude in household debt. According to Businessweek: "in this game every player wins, except for the cash strapped homeowner." Another phenomenon that will be explored further in this blog was also noted by Foster and Magdoff: the reciprocal relation between increases in financial speculation and debt.[1]

 

In 1986 Margaret Thatcher, in an effort to recapture London’s spot at the top of global financial hierarchy (it had been surpassed by New York), suddenly deregulated UK financial markets. This moment - known as the “Big Bang” - skyrocketed market activity in London, most notably because of the replacement of open-outcry trading with electronic techniques. The Big Bang also unified global stock, options, and currency trading markets. This moment catalyzed even more innovation, with the introduction of Collateralized Debt Obligations (CDOs), Collateralized Bond Obligations (CBOs), and Collateralized Mortgage Obligations (CMOs) occurring over the next two years.  


 As the real economy continued to struggle and stagnate, financial profits surged. Innovation continued. Credit default swaps were introduced in 1990, and “off-balance sheet” investment vehicles were introduced a year later. Trading volume increased substantially from 1990 on, culminating in the dot-com bubble from 1995-2000 and the housing bubble, which peaked in 2006. Capital continues to tend to avoid real investment opportunities as we face the consequences of financialization and debt-fueled growth.

Footnotes:

[1] Foster, John and Bernie Magdoff. The Great Financial Crisis: Causes and Consequences. New York: Monthly Review Press, 2009. Print.