Changes in Economic Policy and Regulation
In two earlier posts, “What is financialization and why does it matter? – part 1” and “What is financialization and why does it matter? – Part 2” we defined financialization and discussed the changes in the financial sector of the economy as well as the changes in the behavior of corporations under financialization.
These could not have occurred without changes in the regime of laws and regulations that control the economy. The rich and corporations changed laws and regulations to facilitate changes in the financial sector and the financialization of corporations in the real economy. The financial sector is outsized in the control of government policy by capitalist enterprises and the rich. They spend $billions each year lobbying in Washington and leveraging their position to affect the regulations that enforce laws.
This is crudely yet robustly illustrated by the parade of finance chieftains who have occupied leading roles in the Federal government through many administrations of both parties. For example, just from Goldman Sachs: Henry Paulson, Secretary of the Treasury; Robert Rubin, Secretary of the Treasury; Stephen Friedman, Director Of the National Economic Council; Gary Cohn, Director of the National Economic Council; and William Dudley, President of the Federal Reserve Bank of New York.
Examples of laws and regulations that have driven financialization since 1980 –
- Securities and Exchange Commission(SEC) Rule 10b-18 in 1982 made stock buybacks1 by corporations legal. This opened the door for a tsunami of stock buybacks, which have become a regular use of corporate profits instead of investments. Before this change, stock buybacks were considered stock price manipulation (which, of course, they are).
- Antitrust policy: In the 1980s, the Chicago School of Economics influenced antitrust enforcement. This shift focuses much more on the effect of market concentration on consumer prices and less on concerns over other effects of monopolization in the economy.
- Financial Services Modernization Act(1999) (aka Gramm-Leach-Bliley Act (1999): this law repealed the Glass-Steagal Act of the Great Depression era. It lifted the barriers between commercial banking, investment banking, and insurance companies.
- The Commodity Futures Modernization Act(2000) exempted many derivatives, commodities, hybrid financial instruments, and other financial instruments from regulation by the Commodity Futures Trading Commission.
- Sarbanes-Oxley Act(2002) increased stricter accounting and reporting requirements for public companies following the Enron and Worldcom scandals of the 1990s.
- Dodd-Frank Wall Street Reform and Consumer Protection Act (2010) – established new regulations and oversight for banks and other financial institutions and created the Consumer Financial Protection Bureau (CFPB). It has been under attack from day one.
- The Jumpstart Our Business Startups (JOBS) Act (2012) facilitates capital formation for small businesses and startups. It relaxes certain securities regulations, allowing for crowdfunding, eases IPO requirements, and provides exemptions for certain securities offerings.
- Biden administration signals new interest in returning to more vigorous enforcement of anti-trust laws. Results to date are thin.
Of these, the most significant changes by far are:
- Rule 10b-18allowing stock buybacks
- The decline in anti-trust enforcement beginning in the 1980s
- Repeal of the Glass-Steagall Act in 1999, ending the separation between commercial and investment banks
- Commodity Futures Modernization Act(2000) opened the floodgates to speculation in various financial instruments – derivatives, etc.
- Significant weakening of protection for labor unions from corporate harassment
Summary of Financialization
The financial sector has almost doubled in size to over 8% of the economy over the past 50 years. Its share of corporate profits has ballooned to 25%. Much of the activity of this sector is simply speculation. Gambling. This has introduced a powerful element of instability in the economy. This was demonstrated by the near collapse of the global banking system during the 2008 Great Recession. The financialization of corporations in the real economy has transformed their behavior. Now, top management, driven by huge personal payouts for immediate financial results, focuses its attention on extracting the most money in the shortest time rather than on products and services, customers, employees, and the long-term success of the firm.
Combined with the monopolization of virtually every sector of the economy, the export of jobs to low-wage countries through globalization, the decline in unionization, financialization is a key driver of the explosion of income and wealth inequality in the US.
