By Michael Hudson and cross-posted from Counterpunch.org
Our economy has increasingly been financialized, and the result is a sluggish economy and stagnant wages. We need to decide whether to stop the cycle and save the economy at large, or to stay in thrall to our banks and bondholders by leaving the debt hangover from 2008 intact. Without a debt writedown the economy will continue to languish in debt deflation, and continue to polarize between creditors and debtors. This debt dynamic is in fact themajor explanation for why the U.S. and European economies are polarizing, not converging.
As a statistical measure, financialization is the degree to which debt accounts for a rising proportion of income or the value of an asset, such as a company or piece of property. The ratio tends to rise until defaults lead to a crisis that wipes out the debt, converts it into equity, or transfers assets from defaulting debtors to creditors.
As an economic process, financialization makes money through debt leverage — taking on debt to pay for things that will increase income or the value of assets — such as taking out a loan for education or a mortgage on a property to open a store. But instead of using credit to finance tangible industrial investment that expands production, banks have been lending to those who want to buy property already in place — mainly real estate, stocks and bonds already issued — and to corporate raiders –those who buy companies with high-interest bonds, raising debt/equity ratios. The effect often is to leave a bankrupt shell, or at least enabling the raider to threaten employees that bankruptcy would wipe out their pension funds or Employee Stock Ownership Plans if they do not agree to replace defined benefit pensions with defined contribution schemes that are much more risky.
The dynamic is more extractive than productive. Corporate financial managers, for example, can raise their company’s stock price simply by buying back shares from investors — financing the move by borrowing money. But in addition to raising debt-to-equity ratios, these short-term tactics “bleed” companies, forcing them to cut back on research, development and projects that require long lead times to complete. Corporate managers are paid by how much they can raise their companies’ stock prices in the short run. When earnings are diverted to pay dividends or buy back shares, growth slows. But by that time, today’s managers will have taken their money and bonuses and run…