Income Dynamics, Economic Rents and the Financialization of the ...

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tory role and became a cheerleader for new financial instruments allowing new organizational arrangements in the finance industry to flourish without regulatory oversight (Fligstein and Goldstein 2010). Even formally illegal cross-industry activity, such as investment, insurance, and banking all located in single firm became acceptable, even if still illegal. Eventually, and in re- sponse to an earlier merger of Citicorp and the Traveler’s Insurance Company, in the Financial Services Modernization Act of 1999 the US Congress repealed the last regulation on finance sector behavior from the Glass-Steagall Act, now making it legal for investment banks, commercial banks and insurance companies to combine operations. This lead to the expansion of consolidated bank holding companies, which operated simultaneously in all financial markets, created the consolidated financial services industry in which family and commercial banking, insurance, and investment services could all be provided by a single firm, and eventually generated the sys- temic (i.e. concentrated densely networked) risk associated with the financial collapse of the later 2000s. Although the key shifts in the regulatory field that led to financialization happened in the early 1980s, the 1999 Financial Services Modernization Act increased the concentration of the finance industry and the centrality of the largest financial institutions to the economy. Davis (2009) documents numerous instances in which these diversified large general financial service firms were beset by conflicts of interest and scandals after 2000. Finally, the Federal Reserve after decades long experimentation with methods to obscure their political role in limiting wage and employment growth as it prioritized inflation fighting over employment or wage growth, finally endorsed a policy of letting markets lead policy and by the end of the Twentieth Century embraced the efficient markets hypotheses which described financial markets as self regulating. The latter ultimately lead to support from Federal Reserve officials of bank requests to end the prohibition of multiple financial services within a single firm. 20
Together these shifts in the institutional rules reduced regulatory oversight over current and emerging investment devices, encouraged financial investment over physical capital investment, and unleashed speculation in financial assets. Because these policies led to increased volatility in interest rates and stock market performance they also encouraged the creation of new financial instruments to shift and profit from risk, ranging from variable rate mortgages, to credit default swaps, to mortgage based and other derivative securities (Krippner fc). Fligstein and Goldstein (2010) refer to the refusal of the Federal Reserve Bank and the Securities and Exchange Commission to regulate new financial practices as a form of regulatory capture. “This disjuncture between the regulators' actual role and their avowed role led to a type of regulatory capture. As the activities of banks expanded and they invented more and more financial products, bankers were consistently able to convince regulators and the executive and legislative branch of the government to stay away from regulating the market (Fligstein and Goldstein, page 6).” Institutional Shifts: Rise in Financial Sector Income and Finance Conception of the Firm Banking deregulatory happened in tandem with and encouraged other institutional shifts. Prior to 1980 commercial banks in particular had been pressing for deregulation particularly in their ability to merge, operate across state lines and for interest rate flexibility on both loans and savings accounts. This reflected not simply a rejection of regulation but attempts to increase market penetration and the scope of their operations. Declines in domestic investment by US manufacturing firms coupled with surges in bank deposits associated with the rise of capital sur- pluses in the OPEC and European countries also led to increased deposits in the US banks (To- 21
Page 1 and 2: Income Dynamics, Economic Rents and
Page 3 and 4: “I think everybody a few years ag
Page 5 and 6: economic sociology and political ec
Page 7 and 8: tion but since the two trends are l
Page 9 and 10: their profits as taxable income. Th
Page 11 and 12: While we have established that the
Page 13 and 14: ployees, a lower capital share of i
Page 15 and 16: income dynamics, which should follo
Page 17 and 18: serve Bank, led by Paul Voker, foug
Page 19: anks profitability, the second and
Page 23 and 24: nancial engagement of non-financial
Page 25 and 26: count suggests a certain happenstan
Page 27 and 28: The other finance sector industries
Page 29 and 30: from the society overall. The emplo
Page 31 and 32: as dramatic. In the Security indust
Page 33 and 34: egulatory relaxation and a general
Page 35 and 36: occurred if finance sector actors h
Page 37 and 38: of total national profits in the fi
Page 39 and 40: swaps. Clearly, the market and poli
Page 41 and 42: Our analysis points to the federal
Page 43 and 44: ents from other actors in the econo
Page 45 and 46: Krippner, Greta. 2005. “The Finan
Page 47 and 48: Stockhammer, Engelbert. 2004. “Fi
Page 49 and 50: %GDP 10 15 20 25 30 35 Figure 1. Fi
Page 51 and 52: Ratio 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1
Page 53 and 54: %Profits 0 5 10 15 20 Figure 5. Fin
Page 55 and 56: Ratio 1.0 1.5 2.0 2.5 3.0 Figure 7.
Page 57 and 58: Table 1. Summary of Institutional A
Page 59 and 60: Appendix A. Industry classification
Page 61 and 62: Appendix B. Sector and industry shi

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