Financialization and the Enterprise session at 12th International Conference

1. Neoliberalism, financialization and globalization: an
intrinsically instable institutional arrangement?
Lessons f rom Minsky's analyses of f inancial cr ises and capitalism
history.
Christ ine Sinapi
As sociate Profes sor, Burgundy School of Bus ines s (Di jon, France)
12TH INTERNATIONAL POST KEYNESIAN CONFERENCE,
KANSAS CITY, SEPT 25-27, 2014.
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2. Context: financialization and the
economists…
Financialization
◦ Rooted in financial liberalization & neoliberalism, but an inversion of its initial postulate, also debated
within the mainstream
=> Debates on financial liberalization needs a step further => financialization
◦ Start of the process in the 1980's, but :
In the literature :
◦ Debated since the 1990's in political science, sociology, geography, anthropology
◦ … while economics almost blind to the phenomenon
◦ Really a matter of interest after 2009 (2000-2007 : 10 papers /y, 2012 & 213 : 50 papers/ y)
◦ An exception : Heterodox economists
◦ of special interest : HP Minsky (1990, 1992) "Money Manager Capitalism"
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3. Minsky : some insights
Minsky's mainly referred to regarding the "Financial Instability Hypothesis" (FIH)
More recently quoted in Post Keynesian perspectives on financialization (Wray, 2009, 2012,
Zalewski and Whalen, 2010, Palley, 2013, Whalen, 2013)
Yet interrelation between those 2 components rarely debated
Proposal :
◦ Institutional foundations to Minsky's HIF as a key to 'bridge the gap'
◦ Replaced in the context of globalization, neoliberalism (and financialization)
◦ Help addressing some of the limitations inherent to the FIH and renewing the analysis
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4. Financialization in the P-K perspective
Generic definition
"the increasing importance of financial markets, financial motives and financial institutions in
the operation of the domestic and international economies" (Epstein, 2005, p 3).
Post-Keynesian insights
"financialization is a particular form of neoliberalism", characterized by the "domination of the
macro economy and economic policy by the financial sector interest" (Palley, 2013)
"Financialization involves the replacement of industrial or production capitalism by a more
predatory form of financial capitalism" […] "new form of capitalism which has not only
transformed the way markets work, but carries with it important political, cultural and economic
consequences" (Rochon, 2012)
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5. Financialization : some key features
1/ Rising share of financial profit and decreasing wage share
2/ Financialization of the non-financial sector
3/ Securitization & Shadow Banking
4/ Macroeconomic impacts, including increase in inequalities and poverty
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6. Financialization : some key features
1/ Rising share of financial profit and decreasing wage share
The "rentier share" of the national income : financial institutions' profits compared to non-financial
corporations' profits increased in countries like the United States and France and, more
generally, among OECD countries (Epstein, 2005).
in the US: in recent years, the financial sector has contributed to 20% of the GDP, but obtained
40 % of corporate profits (Nersisyan and Wray 2010)
Significantly correlated to the fall in the labor share (OECD countries, long run) Hein (2013) ;
Shift in the sectorial composition of the economy, claims on management wages and rentier's
share are more significant factors
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7. Labor income shares as % of GDP in
selected OECD Countries (1960 - 2012)
Source: (Hein 2013)
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8. Labor income shares as % of GDP in
selected OECD Countries (1960 - 2012)
Source: (Hein 2013)
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9. Labor income shares as % of GDP in
selected OECD Countries (1960 - 2012)
Source: (Hein 2013)
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10. Financialization : some key features
2/ Financialization of the non-financial sector
Source: (Nersisyan and Wray 2010)
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11. Source : Sinapi (2012)
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12. Source : Sinapi (2012)
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13. Financialization : some key features
3/ Securitization & Shadow Banking
Hidden, invisible, complex, unregulated
Notional in US largest banks as a % of assets : 0 in 1990's, 2000% to 6000% in 2007 (Wray, 2010)
Incorporates "debt" by construction => potentially infinite leverage, as already pointed by
Minsky in 1987
"Securitization implies that there is no limit to bank initiative in creating credits for there is no
recourse to bank capital" (Minsky 1987), p 3).
4/ Macroeconomic impacts : depressive effects on productive investment , negative impact on
consumption and demand, inequality widening
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14. Minsky's FIH and financialization
What can we still learn from Minsky's FIH (financial instability hypothesis)?
Instability is endogenous to capitalist economies
◦ 1st theorem : fragility criteria (hedge, speculative, Ponzi finance)
◦ 2nd theorem : fragility rises in the business cycle (prosperity is destabilizing) (liability and assets )
◦ End of the cycle is endogenous
◦ Spill-over effects
Addressing some of the FIH limitations, by re-reading Minsky and considering its institutionalist
foundations
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15. Speculative & Ponzi : cash flows, not debt
1st theorem (typology of balance sheet):
◦ Wrongly limited to over-Indebtness
◦ Minsky's definition focuses on cash flow incured both from the financial structure and the investment
(Minsky, 1986, 1992a)
◦ => ex post & ex ante speculative finance (Arestis & Glickman, 1996)
◦ "quality of assets" => productive investment
Within the financialization process :
◦ Household Debt and subprime : un unsufficient explanation
◦ Infinite leverage in derivatives, CDO's, CDS' … squared, remic's
◦ Unproductive assets via financialization of non-financial corporations, reinforced by international
accounting standards
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16. Endogeneity of the FIH?
Endogeneity of the reversal (Nasica, 1997)
Endogeneity of financial fragility rise (2nd theorem)?
=> incorporating institutional mechanisms
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17. Minsky's FIH and financialization
What can we still learn from Minsky's FIH (financial instability hypothesis)?
Instability is endogenous to capitalist economies
◦ 1st theorem : fragility criteria (hedge, speculative, Ponzi finance)
◦ 2nd theorem : fragility rises in the business cycle (prosperity is destabilizing)
◦ End of the cycle is endogenous
◦ Spill-over effects
2007-2009 : a case study?
- hidden financial fragility in derivatives' hidden leverage, OTC trading, shadow banking
- Spill-over effects : but worldwide via new institutional arrangements of financial globalization
- Productive investment deterioration : financialization of non financial sector
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18. Minsky's stages of capitalism
- A late development in Minsky's work, largely unpublished or remaining as WP, but key to
understand the FIH
- Rooted in Commons and in historical institutionalism (Sinapi, 2012)
"Minsky found the most effective way to obtain this 'deeper look' was to focus on long-term
capitalist development rather than business cycles" "In this period [1994}, Minsky thought it was
essential to combat the dominant trend with an analysis grounded in history and institutional
reality." (Whalen 1999)
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19. Minsky's stages of capitalism
2 key mechanisms : "The hypothesis holds that business cycles of history are compounded out of
(i) the internal dynamics of capitalist economies, and (ii) the system of interventions and
regulations that are designed to keep the economy operating within reasonable bounds".
(Minsky, 1992 p 9)
1/ five stages in the development of capitalism: merchant capitalism (1607-1813), industrial
capitalism (1813-1890), banker capitalism (1890-1933), managerial capitalism (1933-1982), and
money manager capitalism (1982 - …)
2/ Business cycle – led institutional mechanisms :
◦ procyclicity of risk taking
◦ Institutional "fragility" arising from majors shifts in forms of capitalism (stages)
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20. Minsky's stages of capitalism
=> Current period to be considered as a 6th stage of capitalism : globalized, financialized, and
neoliberal-driven institutional context => the "global financialized capitalism"
=> its emergence = institutional fragility => financial fragility => self-cumulated crisis
Which perspectives ?
1/ Following Minsky's predictions : in the absence of adequate intervention =>"a continuation of
current economic miasmas"?, self cumulative crisis via debt deflation (?)
2/ the unsuitability of the system of interventions and regulations consists in the failure of the
intentional mechanisms. The formal regulatory institutions have become inoperative under the
effect of the evolution of the financial system and of financial innovation.
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21. Minsky's stages of capitalism
Which perspectives ?
2/ Need for Big Bank and Big Government redefined in the age of globalization and
financialization
◦ BB : also prudential regulation on OTC, non banks, non financial involved in financialization, BG : socialization of investment to
restart the economy, employer of last resort
◦ + Cf forms of institutions (Commons) : authority = dominant paradigm
◦ => in the context of financialization :
◦ dominant neoliberalism views at decision making level (press, business, political decision makers)
◦ ex IFRS – financial assets valuation (hedge/specu) insufficient and inapplicable => pushing financialization in non financial assets
(ex PSA : 5 Billion loss 2012, of which 4.7 B depreciation of Aulnay and other factories ; 2.3 Billion 2013, of which 1.1
depreciation)
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22. Leaving the conclusion to Minsky
"[In] real world economies the simplistic propositions of laissez-faire no longer hold. Economies
with the financial system of modern capitalism can implode, as happened between 1929-33.
[…]There is need for rethinking the system of intervention into capitalist economies that has
evolved out of the New Deal structure which was mainly put in place before World War II."
(Minsky and Whalen 1996)
A prescient economist, worth revisiting today …
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