As we tour the four-hundred-year history of capitalism through its various phases of development, we see that financial system instability is always there lurking in the shadows. For at least four centuries the historical record is littered with periodic events of wild swings in financial markets, massive debt defaults, bank failures, and general economic instability. Historically, booms, busts, crises, and bailouts have run through familiar patterns of repetition, though they are becoming more frequent now and more severe. The major stock market crash and banking crisis that occurred in 1929 seemed to be a once-in-a-lifetime event, but similar patterns of instability are occurring at least once every decade now and are happening simultaneously around the world with growing magnitude. This is particularly noticeable in the last thirty-plus, or what we will be referring to as the Greenspan Era: from 1987 when the stock market took a serious tumble and Alan Greenspan assumed the chair position at the Federal Reserve to the Banking Crisis of 2007â2009 and on.
Like all financial crises, the ones that have occurred during this period have multiple causes. Arguably the most significant during the Greenspan Era is the phenomenon of financialization . Since the banking crisis, there has been much discussion in heterodox circles about the economics of financialization, though it is largely ignored in the mainstream. Financialization is a process in which financial institutions and markets systematically gain influence and control over increasingly large segments of the economy. The process has roots that go back to the beginning of capitalism, but has risen to a very high profile during the Greenspan Era. It is a reflection of a broader systemic crisis that has been erupting in this period in which companies in significant numbers are finding it increasingly difficult to generate profits through traditional means of actual producing things for sale in markets.
Built into the core logic of capitalism is the need to generate returns for investors and to plow back a portion of those returns to fuel expansion. The imperative to generate investor income drives businesses to continuously seek out or fabricate markets and opportunities for investment. Eventually, this exploration reaches limitations, sales slow to a trickle, and economic activity gets stuck in the mud. Authors John Bellamy Foster and Robert McChesney describe this process as capitalismâs long-run tendency toward an âendless crisis,â which relies on injections of âexternal stimuliâ to keep it going such as government spending programs or new technological innovations or the discovery of new markets. 1
The financial system has served to extend this process of innovation . As the hunt for profitable opportunities becomes more desperate, companies are scurrying into profitable opportunities as quickly as possible and jump out just as quickly when profits disappear. This requires a facile investment ecosystem in which capital is liquid enough to be moved anywhere swiftly, then settles in an investment fund, then briskly turn to cash and move to yet another location, like bees going from one flower to another searching for nectar. The more rapidly this takes place, the more pressure there is on the financial system to mobilize investment funds, and to underwrite and continually recreate new instruments: securities, commodities, derivatives. This drives the securitization, commodification, and financialization of every possible thing imaginable. Financial services are indeed becoming an increasingly significant sector. In the mid-twentieth century, financial services constituted about 2.5% of national output, then it grew to about 4% in 1980, then soared to 8.3% by 2006 right before the banking crisis began. 2 This goes a long way to explaining how and why our economies are becoming increasingly unstable; for in the historical view, there is always boom-bust instability that follows.
There are other causes of economic undulations during the Greenspan Era including the policies of the Federal Reserve. Among the most outstanding characteristics of the Greenspan Fed is its commitment to flooding the financial system with generous amounts of cheap credit, which stimulated a massive debt bubble. Household debt was 56% of national output in 1987, then it steadily rose to reach 63% in 2000, and then soared to 98% by the first quarter of 2008 on the eve of the banking crisis. 3 Household debt has been trimmed back to 78.7% yet remains persistently high by historical comparison. 4
Public debt as a percentage of GDP has also increased during the Greenspan Era. It was 48% in 1987, hit a 65% peak in 1995, then tapered off temporarily. When the George W. Bush tax cuts for the wealthy were put into effect in 2001, public debt resumed its upward climb, and then soared during the Great Recession and continued to climb after the recession was over to hit 105% of GDP by 2016. 5 The Trump tax cuts have pushed public deficits and debts to new highs. Cheap and abundant credit flowing out of the Fed also served to keep interest rates on Treasury bonds at rock bottom. Pension fund managers could not meet the expectation of their retireesâ financial plans and became compelled to seek out other securities for investment. As they did, they and other fund managers ventured further and further into the higher risk territories of corporate bonds that are rated in a range from sterling triple A to junk.
Among the biggest concerns regarding the debt bubble is the high amount of corporate debt and the concern that the low-interest rates on this debt do not accurately reflect risk. To give some perspective on this, the total dollar amount of capital traded in the US stock markets sums to about $30 trillion the ups and downs of which we hear about throughout each working day. The corporate bond market is much largerâabout $41 trillion as of this writing. To help facilitate this expansion of debt, the Federal Reserve has jumped from holding about $800 billion in bonds, to over $4 trillion, which is about a 400% increase (see Appendix). Incentivized by low rates and available credit, corporations have charged up their debt over the last decade from 16% of national output to about 25%. 6 As the profile of corporate debt increases, so does the element of risk making the financial system increasingly vulnerable.
Another aspect is technology and the constant push for financial innovation . As the financial sector grew to be the glistening centerpiece of the economy during the Greenspan Era, Wall Street was the most seductive place to pursue a career in ways that traditional banking could never be. People with real talent, particularly those gifted with skills in creating mathematical algorithms, gravitated toward the steel and glass towers in the financial district of New York. Math models and computer models for trading became more complex and sophisticated and the cult of technological wizardry gave the illusion that the more complex the instruments created by investment banks, the more investors could speculate without risk. Innovation thus became the justification for the creation of new generations of securities and derivatives and new markets for trading. This combined with a growing digital infrastructure heightened the process of financialization . Financial engineers on Wall Street have been continuously contriving new ways to aggregate massive amounts of cash for multinational corporations and to make speculative trades in staggering amounts on computer screens. Wall Street corporations were at the center of financial world and the people there knew it. Their careers have been centered on a mandate to score profits for themselves and for their clients, even if this meant running the risk of destabilizing economies everywhere, which is precisely what they did. All of this carries on under the banner of anti-government, pro-market neoliberal propaganda. But there is a deeper institutional aspect to both the phenomenon of financialization and the instabilities it has engendered.
The aim of Financing the Apocalypse is to add this dimension to the discourse. The core narrative in the story presented here is that financialization and the fragilities that come with it are the outward manifestations of deep institutional pathologies that have been building in the system for over a century. Specifically, we are referring to system conditions that are associated with the ascent of corporate hegemony that came into its full maturity during the Greenspan Era. Several decades before the Greenspan Era began this institutional perspective on the evolution of corporate hegemony originated with the long-term vision held by economist and grandfather of institutional economics, Thorstein Veblen .
Veblen âs Secular Trend
A century ago, Thorstein Veblen looked to the future and didnât like what he saw. In one of the very last pieces of writing toward the end of his life, he outlined what he called âThe Secular Trend.â 7 He examined past trends, present conditions, and extrapolated to the future of economic society in America that seems certain to tear itself apart into an almost biblical state of antagonistic dichotomy among economic institutions. For Veblen economic institutions are simply habituated ways that humans behave in society economically or âaction-patterns induced by the run of past habituation.â 8 What he saw for our future was a deep schism opening between healthy, well-adjusted institutions and those that are pathological and maladjusted.
On the well-adjusted side, Veblen identified habitual ways of behaving that are grounded in science, problem-solving, creativity, and are useful to the human life process. They guide our work in ways that are more useful to people, not because there are fortunes to be made, but because of the historically rich craft traditions in which humans are fascinated with the idea of doing things better. These stand on the side of progress, appropriately implemented technology, stability, and the provision for the general wellbeing of the population.
On the other side are maladjusted institutions that exist to accumulate ostentatious fortunes, status, and conquests for a small class of the wealthy and powerful âabsentee owners.â Rather than contribute to progress, they smother the economy with greed, corruption, and stagnation. They do not create, they own and extract it. For Veblen , the large publicly traded corporation emerged on this side of the rift and came to dominate the economic scene completely. Veblen attested to the rise of the corporation, not as a business model, but as a dominant institution that he called, âthe Interests.â By its own mandate, it is fashioned to be indifferent to social provisioning , and is governed by the narrowest of objectivesâto make money for vested owners, âThe effective control of the economic situation, in business, industry, and civil life, rests on the on the control of credit. Therefore, the effectual exercise of initiative, discretion, and authority is perforce vested in those massive aggregations of absentee ownership that make the Interests.â 9 What was most troubling for Veblen was that he saw a future in which the corporate world would push all else aside and the entire economic system would cease to be concerned about providing for the needs of people and only about financial gainâa pathological end game.
A century before they became household names, Thorstein Veblen warned of the formidable power of Wall Street and giant corporations. He looked to the future and saw that if our society allows corporate entities to become the size of Jupiter, all else will become its moons and satellites, with a gravitational bind among them that is so strong that, âthe rest of the community, the industrial system and the underlying population are at the disposal of the Interests.â 10 For Veblen, the Interests represents the principal shareholders and the corporate class of professionals that work at the top of the hierarchy. He sees the members of this class positioning themselves to take control of the economy with a patent indifference to economic stability, industrial progress, or...