All complex economies need a strong financial sector. Finance, unlike traditional banking that slowly accumulates capital, can be thought of as a capability for making capital - and hence enabling the launch of major projects. Financial assets are basically debt, but debt with the special feature that it promises to make great profits. This ingredient of finance rests in turn on the need to "financialise" non-financial economic sectors. Because finance is about debt it needs grist - bits and pieces of the "real" economy - for its mill.
The larger economies are among the most dependent on their financial sectors. The value of financial assets in (for example) the United States, Japan and Britain by the time the global crisis erupted in 2008 was 450% to GDP (see "Mapping global capital markets", McKinsey Global Institute Report, January 2008). The European Union average is 350% to GDP, while Germany and France - at 250% - are at an even lower level, in a way that bears on their economies' comparative performance in the recession.
From the 1980s, the grist that finance requires was provided by the "bundling" of large numbers of corporate debt, but also of millions of small individual credit-card loans, automobile loans, and residential mortgages.
By 2000, the complexity of what was getting bundled had intensified - via derivatives on interest rates on long chains of corporate debt, credit default swaps (CDS), and other mechanisms. In fact CDSs had become the ultimate power-tool, a "made-in-America" product whose quantitative value jumped from $1 trillion in 2001 to $62 trillion in 2006 (more than the combined GDP of all the world's countries, $54 trillion). This rampaging innovation was the system's demiurge: when these swaps were called in during 2008, amid rising alarm among investors that something was wrong, the result was an all-consuming financial crisis (see "Too big to save: the end of financial capitalism", 1 April 2009).
By September 2008, finance had run out of grist and was reduced to scraping the bottom of the barrel - taxpayers' bailouts and (in the US) over 15 million sub-prime mortgages to modest and low-income households (most of which have or will wind up in foreclosures long after many investors had made their profits).
The relentless finance-mill found a respite in taxpayers' bailouts. But it is still in trouble. The major economies face a critical choice: do they really want to rescue a system with such a high level of financialisation - especially when there are other ways for the average firm and household to secure credit?
From the 1980s, the grist that finance requires was provided by the "bundling" of large numbers of corporate debt, but also of millions of small individual credit-card loans, automobile loans, and residential mortgages.
By 2000, the complexity of what was getting bundled had intensified - via derivatives on interest rates on long chains of corporate debt, credit default swaps (CDS), and other mechanisms. In fact CDSs had become the ultimate power-tool, a "made-in-America" product whose quantitative value jumped from $1 trillion in 2001 to $62 trillion in 2006 (more than the combined GDP of all the world's countries, $54 trillion). This rampaging innovation was the system's demiurge: when these swaps were called in during 2008, amid rising alarm among investors that something was wrong, the result was an all-consuming financial crisis (see "Too big to save: the end of financial capitalism", 1 April 2009).
By September 2008, finance had run out of grist and was reduced to scraping the bottom of the barrel - taxpayers' bailouts and (in the US) over 15 million sub-prime mortgages to modest and low-income households (most of which have or will wind up in foreclosures long after many investors had made their profits).
The relentless finance-mill found a respite in taxpayers' bailouts. But it is still in trouble. The major economies face a critical choice: do they really want to rescue a system with such a high level of financialisation - especially when there are other ways for the average firm and household to secure credit?
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