It’s become common to assert that our economy’s dependence on financial instruments has risen over the past decades, but, like finance itself, financialization is a fairly fuzzy concept—tough to understand, tough to track. For the study that became Capitalizing on Crisis, sociologist Greta Krippner set out to define financialization in a way that would allow it to be accurately and empirically measured. Having done so, she argues that the rise of finance in America was driven by political concerns, rather than manipulations by the financial industry itself, as she explains in a video we shared a couple weeks back.
In another part of that conversation, Krippner also offered up the most concise colloquial explanation we’ve heard for what we’re talking about when we talk about financialization.
It goes like this. Think of a car company. We’ll call it American Vroom. For decades, American Vroom got rich building and selling cars. The company wanted every American to be able to afford one of its cars, because more customers equaled more profits. In fact, AV was so interested in ensuring that the public had access to the money for its vehicles that, somewhere along the way, it opened its own financial subsidiary and began directly financing loans for its customers. Basically the company now owned a bank. And all of its competitors did the same, so that eventually all of the American car companies had opened their own financial arms so as to facilitate the sale of their vehicles. The business model remained the building of cars, and that’s still where the profits were made; American Vroom just sold the loans sort of on the side to help people buy the cars.
But in the era of greater financialization, we’ve essentially come to see the tail wagging the dog. Gradually the auto market changed, as did the laws regulating financial operations, and AV became more and more dependent on the income from its financial ventures, with money from selling the cars thus representing a decreasing portion of its overall revenues. And the trend continued, until eventually the entire business model had flipped: whereas once they’d given you a loan in order to sell you a car, they were now giving you a car so as to sell you a loan.
That may be slightly overstating things, but in the years of hyper-financialization it became par for the course for the quintessential American manufacturing companies to have years in which the profits from their financial subsidiaries outstripped the profits from the sale of the goods they manufactured and for which they were best known. This wasn’t just the case for car companies. And even companies that didn’t actually own their own captive banks became heavily involved in financial activities from which they derived an increasing share of their revenues.
So that’s generally what financialization entails: a shift from an economy that is generating profits primarily through productive activities to an economy that generates profits primarily through financial activities. Our little American Vroom, writ large across the American economy.
Now, the fact that auto companies stand as one of the clearest and most illustrative sites of financialization could perhaps inspire some recalibration of opinions on some of the U.S. government’s most visible interventions in the wake of the crisis of 2008. Throughout this month’s Democratic National Convention, for instance, we heard quite a bit about how President Obama’s decision to bail out the American automobile industry—apparently against the counsel of his advisors—is testament to his political courage and enduring faith in American workers. That decision, which most agree has paid off handsomely in the preservation or creation of thousands of American jobs, is, of course, always contrasted with Mitt Romney’s infamous op-ed advising that the government should “let Detroit go bankrupt.”
That bailout for the automakers is far more popular than the bank bailouts, and so it makes sense that we hear the cars touted in stump speeches. But there’s perhaps a sense in which we should consider the auto bailout as itself a form of bank bailout, or at least reconsider the wide chasm between perception of the two. Obama’s case for reelection seems dependent on presenting the now-popular rescuing of Detroit as indicative of his acumen and bravery, while the bank bailouts remain cast as a politically unpalatable but regretfully necessary act. And yet, it’s maybe not much of a stretch to argue that, underneath, these were both bailouts of the financial sector.
Of course, we ought not go too far with this. For the voting public there are certainly solid, non-sentimental reasons to be more enthusiastic about the preservation of thousands of blue-collar autoworker jobs than about having broken the fall of so many fat cat bankers. Still, one can’t help but wonder whether public perception has just not yet caught up with the extent to which our economy is now based on finance.
