Five Theses on Financialisation

By Gabriel Méndez Hincapíe, Critical Legal Thinking, March 11, 2014

The fact is that financialisation constitutes an impersonal system. Its aim is not to destroy the communities and ecosystems of the world per se, but rather to increase their dependency on finance.

1. The dual nature of contemporary capitalism resides in the separation of ‘politics’ and ‘economics’ on one side, and ‘finance’ and ‘production’ on the other. However, in financialisation ‘politics’ and ‘finance’ are connected, specifically by an unspoken pact of unity whose most significant features will be revealed below.

Financialisation is a typically capitalist separation between ‘finance’ and ‘production’. To paraphrase Ellen M. Wood, it is, first, a system whereby all economic agents — both buyers and producers — must buy or sell financial services to satisfy their basic needs. Second, this system organises and mediates, above our heads (or you could say from ‘the Cloud’, as with cloud computing), a system of global wagers (‘derivatives’) with which to speculate on the future value of commercial financial products: savings accounts, current accounts, insurance, mortgages, loans, foreign currency, options, bonds, shares, etc., from the murky depths of the shadow banking system. [1]

Through this global system, financial products are ‘blended, mixed and packaged’ (or ‘securitised’) in their millions by complex computer algorithms in the hope that the golden dream of eliminating the uncertainty over the future value of these assets (which is inherently impossible) will thus be achieved. Subsequently, supported in that numerical fantasy, the colossal platform of encrypted financial data that forms the nerve centre of financialisation proceeds to inundate the world with the commercialisation of new waves of financial products. These products must then be distributed among as many states, firms and families as possible, giving rise to the mechanism that can create enormous financial bubbles. [2]

2. With this typically capitalist separation between ‘finance’ and ‘production’, a ‘strange’ phenomenon develops which is nonetheless characteristic of all financial production systems: the appropriation and distribution of wealth precedes and often exceeds actual production. In other words, with financialisation occurring before a particular good is produced, finance has already ‘overtaken’ its real-life existence in the form of futures (papers representing virtual money) trusting that afterwards these values will be realised, which does not always happen. [3] As a result of this ‘unusual’ situation, it becomes possible for the system to predict distribution ex ante from the wealth that will be produced ex post. Put another way, through financialisation the markets can ‘know’ before production takes place who will end up with what (salaries, dividends, benefits, commission, etc.) and how. However, in order to have this visionary advantage, the system pays the high price of making itself inherently unstable, condemned to suffer periodic crises, some of which will be extremely severe. However, with financialisation the markets also acquire huge political benefits. It is un­likely that any of these crises will end up being the anticipated ‘crisis to end all crises’ since the Faustian pact of union between ‘finance’ and ‘politics’ provides the system with the means to restart itself, just like hitting the ‘reset’ button on a computer, at times of heightened social tension. Most importantly, this restart takes place before ‘the grapes of wrath’ can ripen, burst and put an end to the established order for good.

A corollary of this phenomenon is that producers are losing control both of the production of total economic surplus and of its value, passing these into the hands of their new owners – rentiers with no interest in their real existence, only in their virtual value.

Aiming to ‘eliminate’ the political risks that unwanted regulation would entail for them, the nerve centres of financialisation have taken refuge in offshore financial centres, making rentiers virtually immune to any potential state regulation that would not sit well with their interests, thereby consolidating a true empire of capital in amongst the cracks in the international ‘multistate’ system.

The point is that the great ‘economic’ powers have been migrating towards ‘finance’, [4] buying virtual sovereignty in ‘fiscal paradises’ scattered the world over. They leave the administration and supervision of the ‘production’ system in the hands of an industrial management army (of technocrats and bureaucrats), who follow ‘company’ and ‘government’ orders to exploit and discipline the entire global workforce.

3. For financialisation, it is essential that a monetary regime featuring ‘watertight compartments’ of currencies (including the dollar, euro, sterling, yen, yuan, rupee, peso, etc.) be managed and maintained. The primary rationale for these ‘compartments’ is to allow the exploitation of the asymmetries between low-, medium– and high-cost labour regulations, and they additionally serve as floodwalls to buffer against the devastating effects of financial bubbles bursting and to prevent their shockwaves reverberating across the world.

4. Proof of the clear global dominance of ‘finance’ over ‘production’ and of the Faustian union between ‘finance’ and ‘politics’ can be found in the events that took place after the megabubble burst in 2008. With preventing the complete implosion of capitalism as their top priority, experts in those monetary sectors worst affected by the disaster orchestrated an enormous salvage operation for the global financial sector (and the governments gave it their approval via opaque, anti-democratic means). The governments agreed that the central banks would reabsorb the toxic assets that were scattered throughout the banking systems of the G7 (and its satellite nations in the G20). Otherwise, the experts told us, the world would be plunged into an economic and social apocalypse. What is most appalling is that this blackmail, on whose success the survival of threatened production sectors (and their wages, machinery, buildings, harvests, patents, etc.) depended, or so we were told, was realised by supporting the very financial instruments with which the toxic assets had been cre­ated. Through this ritual of financial necromancy, the system was reborn like the ‘phoenix from the ashes’ by ridding itself of the heavy burden of the toxic products. Those poisonous assets were ‘taken off the books’ of those private financial institutions that were ‘too big to fail’, were replaced by fresh virtual funds, and were placed instead on the balance sheets of the central banks of the United States, Western Europe and Japan. As this salvage operation was carried out, salaries decreased or stagnated in real terms and unemployment skyrocketed. And as if this ‘freebie’ were not enough in itself, as payment for managing the rescue process the financial sector has received benefits from the system that reach into the millions.

5. The fact is that financialisation constitutes an impersonal system (like the machines in the Matrix trilogy). Its aim is not to destroy the communities and ecosystems of the world per se, but rather to increase their dependency on finance (such as with carbon credits, as well as other forms of ‘green capitalism’). However, such an operation comes at the cost of dreadful and unnecessary social suffering and a horrifying level of environmental destruction, both of which originate from the spread of this new and brutal dependency.

What can be done in the face of this damaging global power mechanism? How can we take a stand against such power of expropriation? One option is civilian resistance to financialisation, which can only be effective by eroding the acceptance of financialisation’s perverse logic from its social foundations. Specifically, this would be achieved by demystifying financial power through constant counter-hegemonic activity in the anarchist tradition, at the heart of all the nation-states that have fallen victim to the perverse union of global politics and finance. In seeking an example to follow, the actions of the anti-systemic movements in Iceland come to mind, as well as WikiLeaks and similar sites online, Colombia’s indigenous rights groups, critical studies of society and culture, social movements such the online Anonymous group and the Occupy Wall Street movement, the Indignado protests in Spain, the anti-capitalist constitutional rulings in Ecuador and Bolivia, the leaking of confidential political data, the violation of bank secrecy, the struggle for the liberation of the 99%, and so on.

Gabriel Méndez Hincapíe is a professor of political science and law at Universidad Autónoma de Manizales and Universidad de Caldas (Colombia).

Translated by Alex Higson.

[1] Ellen M. Wood (2005) Empire of Capital, London, Verso
[2] Richard Duncan has labelled this feature of today’s capitalism ‘creditism’. See his interview in New Left Review, 77 (Sept – Oct 2012), http://newleftreview.org/II/77/richard-duncan-a-new-global-depression.
[3] It was the great John Maynard Keynes who best described this peculiarity of monetary systems of production in Chapter 17 of The General Theory of Employment, Interest and Money and in a selection of articles published after the first edition of the Economic Journal.
[4] ‘At the end of 2013, the total wealth controlled by investment funds across the globe was 22.1 tril­lion euros, and the total in pension funds was 18.1 trillion. Between the two, they have combined assets of 40.2 trillion euros, equivalent to 75.5% of global GDP. The 20 largest funds accumulated 41.4% of global assets.’

Published at: http://criticallegalthinking.com/2014/03/11/five-theses-financialisation/