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Financialization and Its Discontents,
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This review is from: Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism (Hardcover)
For those who have read Kevin Phillips' American Theocracy: The Peril and Politics of Radical Religion, Oil, and Borrowed Money in the 21stCentury, many of the themes in the current work will sound familiar. In this book, as well as American Theocracy, he reminds us that previous empires such a 17th century Spain, 18th century Holland, and the late 19th and early 20th century Britain all succumbed to financialization as their global power reached its peak. He argues the the United States is now in a similar position. In the last 30 years financial services have grown from 11% of GDP to 21%, and manufacturing has declined from 25% to 13%. A reversal of roles that Phillips sees as very unhealthy.
This huge growth of the financial sector was not without adverse consequences: in the last 20 years public and private debt has quadrupeled to $43 trillion. How this came about has been expertly explained in another book called The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash by Charles Morris. There was easy money as the Federal Reserve was lending money at less than the rate of inflation. Money was risk-free for the lender since they collected fees up front and sold the securitized loans to investors. When this process was repeated millions of times, one ends up with hard-to-value securitized debt throughout the global economy. Then when housing prices start to decline and homeowners start to default on their mortgages on a grand scale, you have a global crisis of American capitalism. (Bear Stearns alone was estimated to be holding $46 billion worth of bad money.)
As in American Theocracy, Phillips writes that the oil industry is another component of the current crisis. In the US oil production peaked in the 1970s, on a global level it is peaking right about now. And with the ravenous appetite for oil from newly industrialized countries such as China and India, prices will continue to go up. The US still gets "cheap" oil relative to Europe since oil is priced in dollars, but that advantage may soon disappear. The weakening dollar is forcing OPEC countries to move to Euros and other currencies. And some oil producing countries such as Iran and Venezuela are moving to other currencies for reasons other than economic.
The author began his career as a Republican strategist, but he has long since disavowed them. Having a monetary policy of free money, a fiscal policy of tax cuts and increased spending, and an ideology of unregulated market fundamentalism, the Republicans have lost most of their credibiltiy. This does not mean Phillips has gone over to the Democratic side. He believes that Bill Clinton was instrumental in the financialization of the economy, and that currently Hillary and Obama are beholden to investment bankers and hedge fund managers. What used to be the vital center in Washington is now the "venal center."
The conclusion of this volume is very gloomy. Phillips believes that we are at a pivotal moment in American history when the economy has been hollowed out, we are saddled with trillions of dollars of debt, and our political leaders are dishonest, incompetent, and negligent. Given that all that may currently be the case, it may be instructive to further meditate on the empires of the past. Spain, Holland, and Britain all managed to survive and even thrive, hopefully the US will do the same.
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Showing 1-10 of 24 posts in this discussion
Initial post: May 14, 2008 1:01:47 PM PDT
James A. Haughey MD says:
Great review. A small error in line 3. He means to say Britain was dominant in the 19th century, not the 20th.
In reply to an earlier post on May 14, 2008 8:12:41 PM PDT
Izaak VanGaalen says:
Thanks for pointing that out. To be even more accurate I'll change it to say "late 19th and early 20th century Britain."
Posted on May 21, 2008 7:11:50 AM PDT
Last edited by the author on May 21, 2008 8:48:38 AM PDT
Amazon Customer says:
Just curious if these two sentences in the second paragraph of this review are on topics discussed in the book or opinions by the reviewer:
Money was risk-free for the lender since they collected fees up front and sold the securitized loans to investors.
Then when housing prices start to decline and homeowners start to default on their mortgages on a grand scale, you have a global crisis of American capitalism. (Bear Stearns alone was estimated to be holding $46 billion worth of bad money.)
Those two don't seem to reconcile with each other. If that kind of money is risk-free, how could Bear Stearns be "... holding $46 billion worth of bad money"? Should that much money possibly turn bad, that's not risk-free. That's HUGE risk!
Then on "[t]here was easy money as the Federal Reserve was lending money at less than the rate of inflation". A look at the Fed discount rate history, arguably the only monetary instrument the Federal Reserve Board can tinker, easily finds that below-inflation rates were more the exception than the norm. If Alan Greenspan is to believe, the Fed lowered the rates in a way to counteract deflationary pressure in that particular historical period. Disagreeing with him or not (as some Greenspan brashers with 20/20 hindsight are doing now), that could be an educated action. We also see the fact that other interest rates didn't go up correspondingly in the capital markets even when the Fed hiked discount rates. Money could have been easy but it had to be coming from somewhere else.
Posted on May 23, 2008 1:32:33 PM PDT
Phillips largely does excellently researched work, although his comments on government statistics belie the underlying complexity of GDP and CPI indexes, and the more insightful analysis of many economists. More importantly, he repeatedly refers to leadership needed to extricate us from the issues he raises, all the while ignoring the underlying American beliefs and values that perpetuate those issues through their support for failed leadership and flawed institutions. The problem is "us."
Posted on May 26, 2008 8:56:55 AM PDT
Thomas H. Greco says:
To say that the Republicans have a monetary policy of "free money" is to give that term a meaning opposite of it traditional and proper meaning. Yes, the central bank (Federal Reserve) has allowed the banking cartel to expand credit enormously on the basis of real estate, and that has caused the inevitable mortgage crisis. The continuing federal government budget deficits have also taken value out of the economy while adding "empty dollars" to the money supply, causing inflation and the slide in the dollar against the euro.
True free money policies would end that kind of abuse by removing legal tender status from Fed notes and eliminating the monopoly of credit by the banking cartel.
In reply to an earlier post on May 29, 2008 6:50:16 AM PDT
El Gallinazo says:
Money was risk free as these investment banks and hedge funds could borrow it at below the real rate of inflation. However, of course it was not risk free in the sense of making bad loans to uncreditworthy people and companies. The credit debacle could not have happened without the credit rating big three, S&P, Moody, and Fitch, putting lipstick on the pig of dead beat mortgage securitizations. People will believe anything, and it is quite excusable for say, the town pension fund in northern Norway, to believe that AAA meant AAA. And now they are laying off their teachers. We are seeing a race between the Fed trying to inflate the dollar to save the investment banks and huge amounts of money going up in smoke as the financial community deleverages. The trillion dollar question is whether the USA will settle into the hyper stagflation of the Weimar Republic or our more traditional deflationary Great Depression II. One's opinion on this matter will determine whether one runs into the mouth of the cannon or away from it.
Posted on Jul 6, 2008 8:13:39 PM PDT
T. Kalinos says:
This country is no longer of the people, by the people, for the people. The elites of this country have hoodwinked a very ignorant and superficial thinking populace in believing in myths that are very destructive to the economy of this country. Something massive and painful will have to occur before things will change. The slow moving, dumb,cud chewing cow (majority of american people) will only react when the club of reality slams into its skull.
Posted on Jul 7, 2008 2:09:47 AM PDT
F. Thomas Fiedler says:
On September 10, 2002 U.S. representative Ron Paul introduced a bill to repeal the Federal Reserve Act and thereby abolish the Federal Reserve. VanGaalen's review fails to show us whether Phillips considers that the very nature of the Federal Reserve makes all other considerations moot, or not. I came to that very conclusion in 1980 - three years before I ever heard of Ron Paul. People as diverse as Jane Fonda, Ralph Nader and Robert Welch share this conclusion. Differences arise in what to do about it.
In a logical syllogism, a conclusion depends upon agreement upon a first premise. Phillips' title begins with BAD MONEY which is promising. But VanGaalen's review leads me to conclude that either Phillips doesn't consider the nature of the Federal Reserve to constitute a first premise to his treatise, or if he did VanGaalen didn't pick up on it. Failure to see the root of a problem deserves little consideration. That's why I say his review was not helpful. Curiously, I read the most acclaimed critical review and it was even less helpful.
In reply to an earlier post on Oct 11, 2008 7:16:11 PM PDT
Michael Ngan says:
"The trillion dollar question is whether the USA will settle into the hyper stagflation of the Weimar Republic or our more traditional deflationary Great Depression II. One's opinion on this matter will determine whether one runs into the mouth of the cannon or away from it."
My bet is first Deflation of asset prices and then Hyperinflation of consumer prices.
There will first be deflation because after credit bubble burst, there will be no longer widely available easy credit or money to spend. As the government runs out of money to support the budget deficit, it will forced to print money at an ever increasing rate, and then we will get hyperinflation Wiemar Republic style.
In reply to an earlier post on Oct 29, 2008 2:30:27 AM PDT
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