Headline: What is financialization?

Date: 10/23/2022

Body:  I have been looking at the literature related to cryptocurrency and blockchain and I keep seeing a word I am not familiar with.  The word is “financialization.”  In the context presented, it seems to be important, so, let’s take a look at what it means, and what we might learn from it.

What Is Financialization?

When I see it in print, “financialization” seems to refer to the increase in size and importance of a country’s financial sector relative to its overall economy.   This is a semi-confusing and academic way to say that the financial world is seeping into many other aspects of our lives.  (Think of the cryptocurrency you use to buy things in the online games you enjoy.)  On an individual basis, it seems important to note that this process can easily lead to chronic stress on community members.  Just to put things in perspective, in the United States, the size of the financial sector as a percentage of gross domestic product (GDP) grew from 2.8% in 1950 to 21% in 2019.  This is far from a new thing; In fact, it has been happening since the 1980s as people started looking at shorter term investments.

The outfall of this has been seen in a process known as securitization  Think of this like a financial burrito.  The bank takes all of these investments and rolls them together into a holdable package, then they can cut this in almost any way to sell the pieces to different kinds of investors.  And, like a burrito, one cannot really see inside of it until it  is too late (sometimes messing up your hands severely.)  This is exactly what happened in 2008 with mortgage backed securities.  (Forgetting for a moment that these same banks then made bets AGAINST these investments, a.k.a. credit default swaps.)  Point is, in the financial world, things seem to be becoming more like the Wild West all the time.   The opportunities for profit abound, but getting yourself killed is REALLY easy.  As if this were not bad enough, as you add liquidity and borrowing (think of the pandemic payments?), inflation will invariably result.  

Is this REALLY a problem?

It might be.   For an economy to be robust, it must have a large variety of healthy industries and sectors.  But, since globalization has really gained a foothold, things are produced and services are rendered where they can most profitably be performed.  This usually leads to a less robust array of industries within a country, and this has happened to the U.S., for sure.   In 1982, only 10% of corporate profits were from financial services.   In 2003, over 40% of corporate profits were within the financial services sector.  I would intuit that this trend has probably continued and accelerated over the intervening 20 years.

What exactly do we lose due to financialization?

Quite a lot, actually.   In this short-term profits view, anything with ROI under a certain value is curtailed or terminated altogether.   One thing given short shrift is training.   In the past, many companies were happy to pick up high school graduates and train them in an apprenticeship type program.  While certainly valuable, the value of this program is only seen in the long-term.    So, these training type programs have all but disappeared from the corporate landscape.   Development too has suffered.   To roll out new products or services requires a short-term sacrifice to maximize long-run profits.  This process is seen as less essential than the parts of the business that can make money NOW!!  So, the budgets for these activities are minimized or eliminated entirely.

By similar logic, as a nation we are much less likely to see the value of public works projects, especially the routine maintenance projects that would serve the useful purpose of keeping our industrial capacity. (John Oliver had a wonderful episode based upon this.)  If it can make it to a comedy program on HBO, I consider the problem to be “known.”

So, is financialization ALWAYS bad?

No.   In some ways, the additional liquidity makes it possible for more enterprises to  make a go of it, and really try to bring novel products and services to the marketplace, and this is happening around the world.  International trade is also encouraged through financialization.  This is probably good.  One of these novel services is fractional stock ownership made easy a’ la Robinhood, Acorns or any of a dozen other similar apps.  They make it very simple for the common citizen to invest in stocks and do so regularly.  And, the offspring of these sites were all too ready to take your money in exchange for cryptocurrency, and this, I think, is where we went a step too far.  Investing a little bit in cryptocurrency might be good, but I don’t think you want to do it without considered judgement.   And that, gentle readers, takes time.

To be absolutely clear, the financialization of everything isn’t an unalloyed benefit. The phenomenon has a dark side. If everyone becomes an investor, the inverse is also true: Everything—and everyone—becomes a potential investment. As part of $ALEX, Alex Masmej designed a “Control My Life” component. Token-holders could vote on his life decisions—whether he should run three miles every day, stop eating red meat, wake up at 6 a.m. Token-holders had a financial stake in his success, so Masmej followed through on their commands. (To be fair, Masmej admits this was just “a fun experiment.”)

 The Verdict

Financialization is a tough one.  So, let’s finish by looking at it through a different lens, and I’m sure this will bring it home.   Literally.   We are speaking of the financialization of homes.  In the 1980s, 90s and the early 2000s, it seemed as if housing prices just went up, without rest.  As a result of this and the relentless pace of change in all other areas of the economy, homeowners began to see their homes in terms of how much profit they could lock in when they sold it. They began to prioritize at a lesser value, the home’s ability to server a social good of supportive living.   Thus began the process of financialization.  It is an unfortunate, but I might argue human reaction to rapid globalization and changing technologies almost makes it unavoidable.

The real question is what do we do about it.  I think a good first step is to be aware of it when we see effects of this process.  Then, perhaps we can remind ourselves of the true value of a house or an education.



Financialization Definition (investopedia.com)

Wall Street And The Financialization Of The Economy (forbes.com)

The Financialization of Everything – The Atlantic

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.


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