Capitalism, Macroeconomics and Reality
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Capitalism, Macroeconomics and Reality

Understanding Globalization, Financialization, Competition and Crisis

James Crotty

The essays comprising this collection analyze the deep flaws in the methodological foundation of mainstream economic theory, and explain how these flaws make mainstream economics more ideology than sound social science. James Crotty develops alternative theories built on realistic assumptions that can explain most of the disastrous economic and financial developments of the past four decades. His work contributes to the collective creation of a solid theoretical foundation on which to build an understanding of the ‘laws of motion’ of capitalism in the post WWII era.
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Chapter 6: How Bonus-Driven “Rainmaker” Financial Firms Enrich Top Employees, Destroy Shareholder Value and Create Systemic Financial Instability

James Crotty

Extract

It is now universally agreed that the US and global economies recently experienced their worst financial crisis since the 1930s. From a US-centric perspective, it is clear that the evolution of financial markets since the end of the 1970s led almost inevitably to a crisis moment such as this. In the late 1970s and very early 1980s, the US government began to accelerate an ongoing process of financial market deregulation. A combination of deregulation and fast-paced financial innovation led to a series of financial crises both in the US and elsewhere. These crises were always met by government bailouts, which restored stability and vitality to financial markets, but also created an increasingly assured belief among leaders of financial institutions that the government would always intervene to limit the depth and duration of future financial crises. This reduced expected future losses associated with risk-taking in a financial boom, which increased the incentive for financial institutions to take more risk and use more leverage. This risk-taking strategy maximized the expected compensation of key decision-makers in financial firms – hereafter known as “rainmakers. ” The term rainmaker is usually taken to mean those who can generate high sales for the firm. I use it here to denote all key people in financial firms who are responsible for generating high revenue and profit. It thus includes top executives, traders, sales people, wealth managers, and mergers-and-acquisitions and initial-public-offerings team members.

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