A good one on finance…

From http://www.peri.umass.edu/fileadmin/pdf/programs/globalization/financialization/chapter1.pdf by Gerald A. Epstein…

On the contrary, finance benefits

handsomely from the same processes that create economic crises and injure

so many others. Hence the costs of financial crises are paid by the bulk of the

population, while large benefits accrue to finance.

Chapter 3, Epstein and Jayadev present a profile of similar

distributional issues in a larger group of countries. They show that rentiers –

financial institutions and owners of financial assets – have been able to

greatly increase their shares of national income in a variety of OECD

countries since the early 1980s. Apart from changes in the nature and

operations of financial markets, they identify important government policies

that help to account for these significant increases in rentier incomes in these

OECD countries. The most important factors include higher real interest

rates, partly created by conservative central bank policy in the late 1970s and

early 1980s in the USA and the UK, financial liberalization that enhanced the

power of financial institutions, and reduction in the power of labor unions

and labor more generally, which reduced labor costs and thereby increased

the share of national income available to capitalists in general.


A comprehensive set of alternative policies to deal with the problems

associated with financialization are well beyond the scope of this volume, not

least because appropriate economic structures will vary from country to

country. But in Part Five, authors present outlines of a battery of policy

suggestions which, in conjunction with policy suggestions presented in some

of the book’s other chapters, offer some important examples.

The case studies contained plenty of vivid and sorry tales in which

financial liberalization and open capital markets have contributed to severe

economic crises in a variety of developing countries. When ‘speculation

dominates enterprise’ as Keynes put it (see Pollin, Chapter 17), investment is

often poorly allocated and society is poorly served. Grabel (Chapter 15) outlines a host of policies that can ameliorate some of

the crisis tendencies resulting from excessive financialization. Grabel

identifies the following risks from international capital flows: currency risk,

flight risk, fragility risk, contagion risk and sovereignty risk, the latter being

the possible loss of economic and political sovereignty, as happened,

according to Crotty and Lee, in South Korea.

Grabel then outlines several preventative and ameliorative financial

policies, describing the degree to which they can reduce or even eliminate

these risks and, in a thought experiment, whether they might have even been

able to prevent the Asian financial crisis. The policies include taxes on

domestic asset and foreign exchange transactions – so-called Keynes and

Tobin taxes – reserve requirements on capital inflows (so-called Chilean

regulations), foreign exchange restrictions, and so-called trip-wires and speed

bumps, which are early warning systems combined with temporary policies

to slow down the excessive inflows and/or outflows of capital. Grabel makes

a plausible case that had some of these policies been in place, the Asian

financial crisis in some countries could have been mitigated or even avoided


Felix (Chapter 16) continues in the same vein as Grabel. After

summarizing and then criticizing the underlying assumptions of financial

liberalization, Felix argues for the importance of capital controls to manage

the excesses of international capital mobility.

Whereas the previous two chapters focus on solutions to international

financial speculation, Pollin (Chapter 17) details a policy to simultaneously

reduce domestic financial instability and to raise tax revenue at the same

time. Pollin carefully analyzes the mainstream case against securities

transactions excise taxes (STET) and then outlines a response to them. Of

particular concern is the claim that STET will distort incentives. Pollin shows

that this concern is highly exaggerated and then presents carefully calibrated

calculations of the revenue that can be raised from the tax. Pollin shows that

the STET can raise significant amounts of revenue that could be used for

socially beneficial activities. Evidently, by taxing the excesses of

financialization and channeling the revenue appropriately, governments can

help to restore public services and investments which, otherwise, are among

financialization’s first and most severe casualties.


Baker D., G. Epstein and R. Pollin (1998), ‘Introduction’, in D. Baker, G. Epstein and

R. Pollin (eds), Globalization and Progressive Economic Policy, Cambridge:

Cambridge University Press.

Krippner, Greta (2004), ‘What is Financialization?’, mimeo, Department of

Sociology, UCLA.

Posted in Money Coup; Political Economy; Grotesque Inequality; New Gilded Age

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