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Capitalizing on Crisis: The Political Origins of the Rise of Finance Paperback – August 6, 2012
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With Capitalizing on Crisis, we finally have a persuasive account of the roots of the 2007-2008 financial disaster. While most studies focus on the proximate causes, Krippner makes sense of the dramatic expansion over decades of the financial sector of the U.S. economy. She explains brilliantly how and why government officials encouraged financialization as a way to solve the most vexing problems of our political economy. (Fred Block, University of California at Davis)
In this wonderfully researched and tightly argued book, Greta Krippner shows how the expansion of the financial sector in the United States not only helped delay the 'day of reckoning' for spendthrift American households, corporations and government, but also conveniently depoliticized the distributional conflicts that had plagued the nation since the 1960s. Nobody expected these providential outcomes, not even the policymakers who had opened up this space for finance in a rather ad hoc fashion, through repeated efforts to fend off crisis. By the end of the process however, the markets were in charge, and government officials were only too happy --and relieved-- to follow their lead. Capitalizing on Crisis is an absolute must read for anyone who cares to understand the origins of our current financial quagmire and the distributional dilemmas that policymakers inevitably and uncomfortably face. (Marion Fourcade, University of California, Berkeley)
Amidst the tsunami of books coming out in the wake of the recent financial crisis, Krippner's work stands out for its unusual approach. Rather than addressing the venality and incompetence of those with responsibility for regulating the economy, Krippner tells the history of the growth of financialization from the perspective of the regulators...In her account, the regulators were searching for ad hoc responses to what were deeper, perhaps even intractable problems. The high point of the book is her magnificent analysis of the erosion of Regulation Q, in which regulators cracked open the door to financial deregulation, unleashing the massive deregulation that came later. (M. Perelman Choice 2011-09-01)
About the Author
Greta Krippner is Associate Professor of Sociology at the University of Michigan.
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1. Benign: The world got to be so “financialized” because due to intense competition the model of the firm transitioned from the old one that looks out for multiple stakeholders to the one that looks out only for the shareholder, and the shareholder does best when the firm uses leverage.
2. The Minksy / Kindleberger critique that “the fundamental instability of capitalism is upwards,” which takes the above observation that competing firms must borrow and via the three stages of finance (not mentioned by name in this book, but they are “hedged,” “speculative” and “ponzi”) leads to the conclusion that we wil forever create bubbles and forever take them to the point of bursting
3. The Neo-Marxist critique that says that post-WWII the state made and delivered to the peoples of the Western world promises of entitlements that became increasingly difficult to keep as the post-war growth slowed down, leading to financialization of the economy as the only way these promises could be kept and offering a solution to what the author describes the “three crises of the state:” (i) the social crisis of who gets what (ii) the fiscal crisis (self-explanatory) and the (iii) legitimation crisis of sinking public confidence in the state’s ability to provide.
She never says it in so many words, but it’s the Neo-Marxist explanation she seeks to explore in the book.
Before she starts, there’s a 29 page expose on what financialization means and how prevalent it is. Long story short, she defines it as 1. a bigger chunk of all companies’ profit coming from financial activity and 2. a bigger chunk of all corporate profits across America coming from companies one would officially classify as belonging to the financial sector. She defines how she went about measuring the increasing financialization, defends her methods well against standard critiques and proves from the official numbers that it’s been happening.
What follows is the meat of the book: How exactly did the state go about pandering to the masses? Well, the building on the cover of the book is Eccles Building in Washington, where the Fed is housed. Turns out that this is not a book about the Neo-Marxist critique. It’s a book about the Fed.
So first the author discusses how Regulation Q used to work and how it regulated the supply of credit to the US economy for 40 years following the Great Depression and how, faced with rampant inflation on top of a stagnant economy the decision was taken to liberalize interest rates.
The expectation had been that “leaving the level of interest rates to the market” would allow price (the interest rate) to ration credit. As it turns out (and as we are observing in places like China today, for example) credit became readily available to all, because the high price of credit created its own supply. So the abolition of Regulation Q was a big first step toward the financialization of the US economy.
Next comes the story of how Paul Volcker himself, the man who killed inflation, ushered in not one but two important trends in the history of financialization of the US economy:
First, by targeting the size of the money supply rather than rates, he introduced the practice of fudging the goals of monetary policy: The idea behind targeting the money supply was to hide the fact that this would result in higher interest rates, against which people were fully prepared to complain. Couching this approach in “monetarist theory” and invoking Milton Friedman was but a trick, and indeed a trick that was abandoned as soon as it became clear that M1 could no longer get pinned down due to the emergence of NOW accounts. But the precedent was established of invoking a strategy to deflect the public’s criticism of monetary policy. This echoes all the way to this day’s Quantitative Easing, though the author does not mention this.
Second, by causing rates to touch 20%, Volcker was hoping to strangle growth by limiting the demand for credit. Instead, he made the US the destination of the whole world’s spare cash. Money rushed to US investments like it had never done before. This, in turn, aided financialization in two distinct ways:
1. Reagan was able to borrow via the Treasury market amounts nobody had dreamt of before, leading to deficits that were unheard of in peacetime before his presidency
2. Companies that used to earn their bread selling goods and services found that they had to be involved in the financing of their customer purchases, both to compete with others who did, but also because very often that’s where the profit was lurking. For example, the auto giants had to get involved in the financing.
Next comes the history of how the Fed moved toward “transparency.” This has zero to do with financialization, so it does not really fit that part of the story, but it is weaved very well into the other theme of the book: the move toward Fed “transparency” is all to do with the branch of Government called “the Fed” being able to tell the masses that its hands are tied as it goes about doing whatever it has pretty much decided it will do, provided of course the target it has in mind behaves in the manner it expects. So for example, this would be a good way to describe the Fed’s most recent unemployment target that was meant to act as the condition for QE to end. And now unemployment is at 5.5% and rates are still at zero we know that this goal, while transparent, was not necessarily an honest goal.
So it’s fair to say that, while the book could not possibly hope to hold the promise offered in the introduction, it tells a very interesting story and it even predicted in 2011 stuff that’s happening right now.
Neo-Marxist or not, I loved it.
The case studies are unparalleled and highly original. It is obvious that Krippner read through the minutes of every Federal Reserve Board meeting over the last few decades. If you have ever read the meeting minutes of the Fed Board, then you will appreciate the author's courage in this endeavor.
The author is a university professor of sociology. The book will appeal to graduate students, like myself, who are interested in the historical development of the US economy. I think many general readers would also enjoy the counter-narrative provided here, in particular those interested in financial markets, critical economics, and political economy. It is not a long book--the core material runs roughly 200 pages. It is not a quick read either; there is quite a bit of information contained in the three main chapters, although I found that the analytical components in the introduction and conclusion were easy to follow and well-written, if not a bit repetitive (which I do not necessarily fault her for). The book is also reasonably priced at about 15 dollars on Kindle.