from our 'old friend' Charles Hughes Smith' at
(snip)"What accounts for this unprecedented rise in corporate profits and equally unprecedented decline in labor’s share of the national income? The forces at work can be summarized in one word: financialization.
The Perverse Incentives and Feedback of Financialization
Financialization is the incentivization of debt, leverage, speculation, and regulatory capture (i.e., “deregulation”) that enables graft, fraud, and collusion as the “business model” for low-risk profits.
From the long view, modern-day corporate/State capitalism (Neoliberal Capitalism) ran aground in the 1970s on two shoals: the rise in energy costs and the exhaustion of consumerist demand driven by rising wages. After stumbling badly through the 1970s (adjusted for inflation, the S&P 500 stock index lost 67% of its value in that high-inflation decade), Neoliberal Capitalism developed a financialization model for growing profits.
As the cost of borrowing fell, a stagnant income could leverage (serve as collateral) for larger amounts of debt. This new debt-driven demand boosted the value of assets such as houses and stocks, which then provided new collateral for even more debt. Restrictions on leverage and speculation were loosened or gutted via State-mandated financial deregulation.
This created a self-reinforcing “virtuous cycle” of ever-rising debt, leverage, speculation, asset valuations, and financially derived profits. In the final stages of this debt-based “prosperity,” auto manufacturers were booking most of their profits on auto loans; the actual manufacture of vehicles was merely a step in the origination of new debt.
This increasing reliance on debt for “growth” and “prosperity” aligned perfectly with the interests of the stagnating middle class, which had turned to debt as a substitute for income to support its lifestyle. Thus in the early stages of financialization, the interests of the financial sector and the middle class borrowers were aligned, as were those of the Central State, which saw tax revenues climb as income and profits rose.
Ever-expanding debt rose faster than income, however, so leverage had to constantly increase if debt were to continue rising. This is why by the end of the financialization cycle in 2006, the housing bubble was being driven by “zero down payment” mortgages ($0 down leveraging a $500,000 loan) and “no-document” mortgages (“liar loans”), where phantom income served as collateral for phantom assets.
The “virtuous cycle” ends once leverage cannot be extended any further. As overall debt expansion ceases, the asset bubbles created by debt-dependent demand implode, and the cycle reverses into deleveraging: as assets decline in value, assets must be sold off and debt either paid down or repudiated/written off. The assets were phantom, but the debts left behind were real, and the losses were real, too. Real income must be devoted to paying down debt that was based on phantom assets.
The middle class gorged on debt for 30 years as a “work-around” for stagnant income, and its wealth rose as its investments in housing and stocks reached bubble heights. Now that the credit-based expansion of asset valuations has reversed, middle class wealth has been gutted even as its income is largely devoted to servicing underwater mortgages, high-interest student loans, and other household debt.
The interests of the middle class have now diverged from the vested interests of the Central State and the financial sector, which used its expanding profits to capture regulators and buy political protection of its financialization rackets. Even now, four years after the implosion of the financialization model, we are treated to headlines such as “Rigged Rates, Rigged Markets.”
The Neofeudal Colonization of Home Markets
The use of credit to garner outsized profits and political power is well-established in Neoliberal Capitalism. In what we might call the Neoliberal Colonial Model (NCM) of financialization, credit-poor developing world economies are suddenly offered unlimited credit at very low or even negative interest rates. It is “an offer that’s too good to refuse,” and the resulting explosion of private credit feeds what appears to be a “virtuous cycle” of rampant consumption and rapidly rising assets such as equities, land, and housing.
Essential to the appeal of this colonialist model is the broad-based access to credit. Everyone and his sister can suddenly afford to speculate in housing, stocks, commodities, etc. and live a consumption-based lifestyle that was once the exclusive preserve of the upper class and State Elites. (In developing nations, this is often the same group of people).
In the nineteenth-century colonialist, model, the immensely profitable consumables being marketed by global cartels were sugar (rum), tea, coffee, and tobacco—all highly addictive, and all complementary: tea goes with sugar, and so on. (For more, please refer to Sidney Mintz’s landmark study, Sweetness and Power.)
In the Neoliberal Colonial Model , the addictive substances are credit and the speculative consumerist fever it fosters.
In the financialization model, the opportunities to exploit “home markets" were even better than those found abroad, for the simple reason that the U.S. government itself stood ready to guarantee that there would be no messy expropriations of capital or repudiation of debt by local authorities who might decide to throw off the yokes of credit colonization.
In the U.S. “home market,” the government guaranteed that lenders would not lose money, even when they loaned to marginal borrowers who could never qualify for a mortgage under any prudent risk management system. This was the ultimate purpose of Freddie Mac, Fannie Mae, and now the FHA, which is currently guaranteeing the next wave of mortgages that are entering default.
In my analysis, the Status Quo of “private profits, public losses,” and the incentivization of gargantuan household debt amounts to a modern financialized version of feudalism, in which the middle class now toils as debt-serfs. Their debt cannot be repudiated (see student loans), their stagnating disposable income is largely devoted to debt service, and their assets have evaporated as the phantom wealth created by serial credit bubbles has largely vanished.
Subsidizing a Parasitic Central State and Crony Capitalist Cartels
In broad brush, financialization enabled the explosive rise of politically dominant cartels (crony capitalism) that reap profits from graft, legalized fraud, embezzlement, collusion, price-fixing, misrepresentation of risk, shadow systems of governance, and the use of phantom assets as collateral. This systemic allocation of resources and the national income to serve their interests also serves the interests of the protected fiefdoms of the State that enable and protect the parasitic sectors of the economy.
The productive, efficient private sectors of the economy are, in effect, subsidizing the most inefficient, unproductive parts of the economy. Productivity has been siphoned off to financialized corporate profits, politically powerful cartels, and bloated State fiefdoms. The current attempts to “restart growth” via the same old financialization tricks of more debt, more leverage, and more speculative excess backstopped by a captured Central State are failing.
Neofeudal financialization and unproductive State/private vested interests have bled the middle class dry."(snip)




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