DEFINANCIALIZATION AS AN ALTERNATIVE PARADIGM
Faruk ÜLGEN Associate Professor of Economics Director of the Department of International Relations and Conventions Head of the Branch Campus of Valence Grenoble Faculty of Economics – Univ. Grenoble Alpes Centre de Recherche en Economie de Grenoble (CREG)
[email protected]
AFEE @ EEA 2016 Eastern Economic Association - 42nd Annual Conference Marriott Wardman Park, Washington, D.C. Feb. 25-28, 2016 1
Plan I. Financialization: theoretical roots, policy implementation, results II. Logical and systemic inconsistency analysis: fundamental characteristics of monetary capitalism III. Alternative macro-regulatory framework and definancialization 2
I. Financialization: roots, policies, results Roots: From the 1970s, 1st generation monetarism (a-monetary real equilibrium statements) & 2nd generation monetarism (rational expectations, super-neutrality of money) gain ground. Modern macroeconomics becomes the new (more pragmatic) microanalysis to deal with classical impasses (market imperfections, exogenous growth, state intervention, and rationale for public policies, etc.). New Consensual Theory (NCT): opportunistic agglomeration (Neo Classical, New Classical, Real Business Cycles, New Keynesian): the (liberal) belief that (unregulated) free markets (whatever the possible short-term imperfections-incompleteness) are the (only) best way to guarantee economic efficiency and social welfare (political mantra, public acceptation between elites). Washington Consensus, The End of History, Universal Truth“Pensée unique”, etc. 3
• • • • •
LET “IT (the market)” BE (BUT THEN “IT (the crisis)” HAPPENS!) Rule of real equilibrium: Ergodic axiom (pre-determined future (P. Davidson, 2012)). NCT-FME (Free Markets Efficiency): self-regulation (no restrictive public constraints) > mechanisms of public/societal regulation for systemic stability. Money/finance: technical details related to real equilibrium (no room for analysis of fin. structures and related insolvency/illiquidity concerns). Institutional framework rests on market-friendly “good institutions” and incentives (market mechanisms against exogenous shocks). (Basel I, II, III, etc.; Greenspan speeches: even though markets may give rise to systemic concerns, they are able to deal with without structural public intervention (SELFREGULATION). 4
• POLICIES: • Liberalized finance-K account liberalization → Financial Development • Financial modernization →financial innovation, institutional and organizational improvements (reduce asymmetric information, increase the completeness of markets and contracts, reduce transaction costs) • Intensification of competition and importation of efficient finance from abroad EXPECTED RESULT: ACCELERATED ECONOMIC GROWTH (standard competitive hypotheses/Public-choice approach) (Chinn and Ito, 2005; Papaioannou, 2007) 5
• Privatization of financial regulation: Preventing public intervention in fin. markets • Massive substitution of decentralized/private self-financial-evaluation to public regulation (use of banks’ own models of risk assessment, Internal Rating Based, cf. Basel II, and rating agencies marketable assessments. • Dominant institutional form (Boyer and Saillard, 2002): liberalization policies, economic policies submitted to the private interests, horizon of speculative rent decides of the best way of governance (don’t worry about LT productive needs). 6
• RESULTS:
New accumulation regime: Fin I ↗+related speculat activities -home industry (disconnection between ↗I-Ind productivity) (Hudson, 2010). • Finance-dominated capitalism: w↘; indusπ↘ (Guttmann, 2008; Stockhammer, 2010; Eckhard, 2011) • Fin rent ↗ and bubbles fuelled without income ↗ (dotcom; mortgage). • Financialization of aggregate demand and growth (and the future). • US economy (and the subsequent world): a real estate agency completely buried in speculation. 7
• Attractiveness of productive activities↘ • Finance replaces production • Rent-seeking replaces LT profit expectations. Finance↗>real activity (Bayer, 2009) • Traditional banking out, financial engineering – securitization-derivatives in, irrespective of industrial needs and evolution→ Banks = financial acrobats • “Uncovered growth” (not sustained long enough to provide/to support profit and G). 8
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II. Systemic inconsistency of liberal finance: fundamental characteristics of monetary capitalism
The finance-led growth regime is not a viable alternative to Fordism (Epstein, 2002; Boyer, 2013) because Capitalism is a monetary economy and cannot be thought of in real equilibrium terms. Capitalist monetary and financial structure (regulatory design and rules, related policies and incentives, etc.) does play core role in the working and operation of the economy. 10
Capitalist prime relationship: debt-financing process of private expectations (endogenous money creationcirculation-annulment process). (Keen (2011): “We have to start with foundations from which the phenomena of reality emerge naturally by constructing monetary models of capitalism built on the melded visions of Marx, Schumpeter, Keynes and Minsky.”)
Economic activities rest on private/decentralized decisions that generate debt relations involving bank credit and financial intermediation. Debt-financing processcapitalism a highly dynamic expansionary but uncertain economic system. Time consistency of this process determines continuity/viability.
This process rests on the peculiar twofold nature of money 11
1. Ambivalence of money Creation of money rests both on private units’ decisions and on non-private/public rules. Money creation through private/decentralized decisions of banks/entrepreneurs to finance profitexpectations related projects “Money is money” thanks to its general society-wide validity (ua-mp-ms) that rests on non-individual, system-valid public rules. 12
2. Transversality of money The market-based capitalist economy is a monetary one since the economic relations (mainly resting on decentralized private decisions and actions) are economically and socially possible through the monetary system (core role of monetary-debt-financing relations). And every decision, action, individual, etc. is directly or indirectly involved in these relations and takes advantage of or suffers from their consequences. Money and subsequent fin. relations dominate the whole economic society and each of its components. 13
Therefore, money and the related financial system should be regarded as a social provisioning process
Capitalism: Monetary/financial system’s continuity is of paramount importance: monetary rules, regulatory mechanisms and financial markets allow (or not) private agents to undertake profit-seeking activities without any central plan/coordination (Ülgen, 2014). Private expectations-based economic activities rest on the process of financing (debt relations) involving bank credit and fin. interm. The process of creation and accumulation of debts generates money creation ⇰ monetary production ⇰ monetary incomes ⇰ monetary consumption.
Each step is dependent on the previous one but every step’s expectations need to be confirmed by the occurrence of the next step. Debt-money circulation across the economy feeds financial relations-markets and involve (directly/indirectly) everyone. 14
THEN: Fin instability generates externalities: severe underprovision / malprovision of public provisioning (of money and financing means but also public spending. Then ⇩wellbeing of low income pop). In times of crisis, citizens shoulder negative consequences (unemp, fall of I, credit rat, huge taxes, etc.) even if they are innocent bystanders. Also no individual could/would provide Fin Stability for the whole society (Ülgen, JEI 2015). 15
III. Definancialization and alternative macro-regulatory framework
* Financialization: - Dominance of free-deregulated financial rules (financial liberalization, ascendency of decentralized-private market mechanisms over public mechanisms and objectives) and - Dominance of rapid-return aims (private profitability, private-individual interest-seeking economic initiative freedom without restrictive public constraints) over the public/private matters, decisions, actions and long-term plans. 16
* Definancialization: - Reframing rules and aims, financial structures, market design according to social/societal stability and development prerequisites (ex: poverty, environment, humanly sustainable activities, solidarity, etc.) related to the vision of: - Markets are socially organized tools that let individuals undertake socially coherent free actions; - They do not contain magic self-adjusting that could spontaneously make private interest and society welfare compatible with each other. 17
* (Some) Institutional roots (amongst Veblen, Commons, Schumpeter): Minsky (1982): market mechanisms cannot lead to fullemployment equilibrium since: “The tendency to transform doing well into a speculative investment boom is the basic instability in a capitalist economy”.
Gruchy (1974): laissez-faire cannot be count on to provide social control, and the working of markets calls for continuous public vigilance. This calls for alternative public regulation seeking systemic stability for societal viability. “Moreover, with agency and the provisioning process bracketed by the social fabric and social activities, the going economy as a whole cannot be reduced to simply a circuit of capital where the only interest of business enterprises and the capitalist class is to make more money.” (Fred Lee, 2011: 1311) 18
• Relevant way of provisioning of social development financing and fin stab through public organization/supervision that would make financial markets able to improve cohesion but also productive efficiency. • This might result in a sort of balanced equilibrium under governmental direction in the tradition of Common’s social/public control in economic affairs (Gruchy, 1952). 19
Because of the characteristics of monetary/financial capitalism and the non-ergodic nature of decentralized decision process (price of freedom), stability cannot be entrusted to market vicissitudes and liberal “after-deluge fine” imposed to individuals. The emphasis might then be put on the government (or its agencies) role as a provider of a stable credit and financial regulatory structure. Tight regulation and prevention of financial speculation are the taxes that the market actors would have to pay for a sustainable system to which they belong. 20
How to reframe a socially fair economics? 1) Abandoning the wrong/doctrinal/unscientific neoliberal belief of FME and replace it by openminded 5-S efficiency-like paradigm (pointing to systemic stability/viability). 2) Sustaining societal efficiency-seeking public interventions, making individual actions socially consistent according to collective objectives. 3) Distinguishing between ‘Finance to finance’ and ‘finance to produce’. 4) Asking how finance could better serve economic, social and environmental needs. 21
5-S efficiency paradigm: 1. Societal efficiency: rules, policies and measures/incentives (RPMI) must aim at ensuring and improving the welfare and wellbeing of citizens in the entire society; 2. Sage efficiency: RPMI must be judicious, prudent and acceptable with regard to the common “societal” objectives; 3. Structural efficiency: RPMI must aim at strengthening society’s foundations and cohesion among citizens through common objectives. Organization of markets must prevent “”out of control strategies”. 4. Sailing efficiency: the design and implementation of RPMI must be organized and directed transparently and with large participation from different social stakeholders. The society governance must be as democratic and open as possible and supra-individual (beyond local and group interests); 5. Stability efficiency: stability must be understood in a more general sense, e.g. macroeconomic stability, political stability, cohesive and inclusive stability; (The societal stability and welfare are too important to be entrusted to free market mechanisms.) 22
• Some possible policy alternatives: 1. Regulatory reforms - Separating securitization and productive sphere financing activities (even if banks can create branches in these two sectors, their engagements should be clearly separated with regard to their balance-sheet positions.) - Tightening capital and liquidity requirements and severely limiting speculative engagements. That is the rule of preventiveconstrained financial structure which would be not conducive to systemic interconnectedness among individuals and institutions able to lead to financial degeneration. - Creating strong incentives to direct banks’ decisions through less fragile and less unproductive engagements (increasing charges and commitments for banks’ activities as zero or punishment bonus-minus system and unlimited liability partnership): That is the rule of preventive-binding funding to directly involve banks/speculators into preventive funding and crisis losses financing. 23
2. Lending policy (designing and developing alternative long-term and publicly sustained bank and fin intermed) - Experience of the Community Reinvestment Act (CRA, introduced in 1977 and revised in 1995): banks and fin instit are required to loan to the local community; - Development banks (green lending, etc.); - Cooperative-community lending institutions; - State-owned and sector-supporting banks (designing transparent supervision) 24
• “Hope is the bread of the poor” (A Turkish proverb). • But at the systemic level, we need more than a hope, we need coherent collective action for a humanly better future. • If we keep living in capitalism, we must reframe monetary and financial rules and mechanisms to make individual freedom and private interests compatible with social and societal viability, that is, to make private behavior consistent with social/societal life. • In this aim, institutional frame of markets is a prerequisite. 25
