Heterodox Analysis of Financial Crisis and Reform
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Heterodox Analysis of Financial Crisis and Reform

History, Politics and Economics

Edited by Joëlle Leclaire, Tae-Hee Jo and Jane Knodell

Though the worst of the financial crisis of 2008 has, with hope, ebbed, it has forever changed the economy in the United States and throughout the rest of the world. Using the financial and economic crisis as a catalyst, this volume examines how to better regulate the financial system and what to expect in the future if no steps are made toward reform. This book lays the foundation for those steps by providing concrete ideas that will push policy in the direction of jobs growth and widespread prosperity.
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Chapter 7: Money Manager Capitalism, Financialization and Structural Forces

Yan Liang

Extract

7. Money manager capitalism, financialization and structural forces Yan Liang INTRODUCTION Defined as ‘an increase in size and significance of financial markets, transactions and institutions’ (Orhangazi, 2008, p. 5), financialization is not a new phenomenon and its origin can be traced at least to the infamous ‘Mississippi bubbles’ in 1819 (Galbraith, 1993). Financialization has been accelerating in the USA since the 1970s and brought forward a new capitalist system – money manager capitalism (MMC) – as Minsky called it. Two of the major characteristics of MMC are first, that the dominant share of liabilities of corporations is held by financial institutions or by managed money and second, that the ‘intrusion of a new layer of intermediation, the pension and mutual funds, into the financial structure is prevalent’ (Minsky, 1996, p. 3). In MMC, the financial structure becomes increasingly complex and financial power permeates every aspect of economic and social life. As Kregel (2007) points out, financial markets tend to be naturally unstable. Without a commensurate increase in ‘big government’ and the ‘big bank,’ it is not surprising that the exponential growth in the financial market has produced increasing instability in the economic system. In this chapter, we attempt to follow Minsky and account for the two major structural forces that drive the financialization process and shape MMC. These two forces include the rise of managed money, especially pension funds and mutual funds; and financial deregulation in the midst of frenetic financial innovation. The rise of pension funds is largely attributable to...

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