Democratizing Finance*

Politics and Society

Volumn 42, Issue 1, 2014, Pages 3-28

  Block, Fred ^a  

^a UNIVERSITY OF CALIFORNIA   (United States)

Author keywords

banking; democracy; finance; political economy; Real Utopias

Indexed keywords

EID: 84893113745     PISSN: 00323292     EISSN: 15527514     Source Type: Journal    
DOI: 10.1177/0032329213512976     Document Type: Article

References (79)

1. Brett Christophers, Banking Across Boundaries (Chichester, West Sussex: Wiley-Blackwell, 2013).
2. Greta Krippner, Capitalizing on Crisis (Cambridge, MA: Harvard University Press, 2011).
3. Finance also plays a critical role in reproducing the power of employers in relation to their employees. One of the reasons that capital hires labor rather than the other way around is that worker-owned firms have generally found it difficult to find the financing they need. See Joan Scott, Glassworkers of Carmaux (Cambridge, MA: Harvard University Press, 1974).
4. Erik Wright, Envisioning Real Utopias (London: Verso, 2010)
5. See, also, the special issue of Politics & Society on this topic, June 2013.
6. There is a growing literature that addresses these questions. See Gerald F. Davis, Managed by the Markets (Oxford: Oxford University Press, 2009)
7. William Lazonick, Sustainable Prosperity in the New Economy (Kalamazoo, MI: Upjohn, 2009).
8. My own ideas about corporate reform are suggested in "Corporation with a Conscience?" New Labor Forum 15 (Summer 2006): 75-83.
9. For standard accounts, see Simon Johnson and James Kwak, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown (New York: Pantheon, 2010)
10. Joseph Stiglitz, Freefall (New York: Norton, 2010).
11. V. I. Lenin, Imperialism (New York: International Publishers, 1939 [1917])
12. Rudolf Hilferding, Finance Capitalism, tr. by Morris Watnick and Sam Gordon (London: Routledge and Kegan Paul, 1963 [1910]). Available at: https://www.marxists.org/archive/hilferding/1910/finkap/index.htm.
13. Under the Glass-Steagall regime established in the 1930s, there was a strict separation in the United States between commercial banking, based on taking deposits, and investment banking, which focused on underwriting securities. However, the distinction eroded beginning in the 1980s as US government policy favored consolidation in the banking sector and was formally ended with the Gramm-Leach-Biley Act passed in 1999. During the 2008 crisis, the historic investment banks either went bankrupt (Lehman Brothers), were bought by commercial banks (Merrill Lynch), or were reorganized as bank holding companies to receive government bailouts (Goldman Sachs, Morgan Stanley). Sandra Suarez and Robin Kolodny, "Paving the Road to 'Too Big to Fail': Business Interests and the Politics of Financial Deregulation in the United States," Politics & Society 39, no. 1 (2011): 74-102.
14. On Germany, see Richard Deeg, Finance Capitalism Unveiled (Ann Arbor: University of Michigan Press, 1999).
15. On both Germany and Japan, see Sigurt Vitols, "From Banks to Markets: The Political Economy of Liberalization of the German and Japanese Financial Systems,", The End of Diversity? Prospects for German and Japanese Capitalism
16. Steven K. Vogel, "The Re-Organization of Organized Capitalism: How the German and Japanese Models are Shaping Their Own Transformation" in K. Yamamura and W. Streeck, eds., The End of Diversity? Prospects for German and Japanese Capitalism (Ithaca: Cornell University Press, 2003).
17. The centrality of economies of scale and scope in the rise of large corporations is detailed by Alfred D. Chandler, Jr., Scale and Scope: The Dynamics of Industrial Capitalism (Cambridge, MA: Harvard University Press, 1990).
18. The measurement of economies of scale in banking remains a hugely controversial topic, but the studies used to justify consolidation in banking focused on banks with assets of between $10 and $25 billion. However, the three mega-banks now have over $2 trillion in assets and it is possible that they suffer series diseconomies of scale. See Robert DeYoung, "Scale Economies Are a Distraction" Federal Reserve Bank of Minneapolis, The Region (September 2010): 14-16.
19. Christophers, Banking Across Boundaries.
20. This argument is developed in Gary Dymski, "Genie out of the Bottle: The Evolution of Too-Big-to-Fail Policy and Banking Strategy in the U.S." Unpublished paper, UC Riverside, 2011.
21. Luigi Zingales, "Capitalism After the Crisis," National Affairs, no. 1 (2009). Accessed at: http://www.nationalaffairs.com/publications/detail/capitalism-after-the-crisis
22. For example, laws and government regulators privilege certain asset categories such as credit instruments with AAA ratings while other asset categories are defined as risky and speculative.
23. The strongest argument for structural necessity has been advanced by Giovanni Arrighi and Beverly Silver, Chaos and Governance in the Modern World System (Minneapolis: University of Minnesota Press, 1999). Their argument is that declining global hegemons have always turned to financialization as a way to preserve their global position. But they do not explain the mechanisms through which the interests of finance prevail over other economic interests or whether there are any contingencies influencing these processes.
24. Significant responsibility for this regulatory capture lies with Alan Greenspan, who brought his extreme libertarian ideology to the task of chairing the Federal Reserve Board.
25. On Greenspan's close ties to the great theorist of libertarianism, Ayn Rand, see Jennifer Burns, Goddess of the Market (New York: Oxford University Press, 2011).
26. Many households do not have any financial savings at all; many working-class and middle-class people are lucky if they have some equity in a home. However, among the wealthiest households, the composition of assets is different, with much more wealth held in businesses or in complicated trusts. Data are available in the Federal Reserve, Flow of Funds Accounts of the United States, release Z1, Table F100 available at: http://www.federal-reserve.gov/releases/z1/Current/z1r-3.pdf.
27. Additional data are available in the Survey of Consumer Finance administered by the Federal Reserve every third year. Available at: http://www.federalreserve.gov/econresdata/scf/scfindex.htm.
28. The documented collusion among big-money center banks to manipulate the London Interbank Loan Rate (LIBOR) suggests how easy it is for these institutions to cooperate against their customers. Jan Kregel, "The LIBOR Scandal" Policy Note no. 9 (2012), Levy Institute of Bard College.
29. Alexander Gerschenkron, Economic Backwardness in Historical Perspective (Cambridge, MA: Harvard University Press, 1962)
30. John Zysman, Governments, Markets, and Growth (Ithaca: Cornell University Press, 1983).
31. Jay R. Ritter, "Initial Public Offerings: Tables Updated Through 2011." Department of Finance, University of Florida, 2012. Available at: http://bear.warrington.ufl.edu/ritter/ipo-data.htm
32. This argument has been developed by Lazonick, Sustainable Prosperity and "The Explosion of Executive Pay and the Erosion of American Prosperity," Enterprises et Histoire 57, no. 4 (2010): 141-64.
33. Michael Useem, Executive Defense (Cambridge, MA: Harvard University Press, 1993).
34. David Cay Johnston, "Idle Corporate Cash Piles Up," (16 July 2012). Available at: http://blogs.reuters.com/david-cay-johnston/2012/07/16/idle-corporate-cash-piles-up/
35. John A. Laitner, "The Long-Term Energy Efficiency Potential: What the Evidence Suggests," Report Number E121, American Council for an Energy-Efficient Economy, 2012.
36. Philip E. Auerswald and Lewis M. Branscomb, "Valleys of Death and Darwinian Seas: Financing the Invention to Innovation Transition in the United States," Journal of Technology Transfer 28, no. 3-4 (2003): 227-239
37. Fred Block and Matthew R. Keller, eds., State of Innovation (Boulder, CO: Paradigm Publishers, 2011).
38. Nathalia Rogers, Ronald E. Roel, Edward T. Gullason, and Susanne Bleiberg Seperson, "Small Businesses in a Struggling Economy: Socio-Economic Issues and Measures to Improve the Small Business Climate," Dowling College, 2012. Available at: http://www.dowling.edu/aci/SBA_Report_Final_March2012.pdf
39. Federal Reserve, Flow of Funds Accounts, Table F103.
40. On the politics of funding infrastructure, see L. Owen Kirkpatrick and Michael Peter Smith, "The Infrastructural Limits of Growth," International Journal of Urban and Regional Research 35, no. 3 (2011): 477-503.
41. Jacob Hacker, The Great Risk Shift (New York: Oxford, 2005).
42. For a recent study of the role of the financial system in marginalizing the urban poor, see Michael Barr, No Slack: The Financial Lives of Low Income Americans (Washington, DC: Brookings, 2012).
43. In the aggregate, US student educational borrowing has arguably risen too rapidly in recent years with the total debt now exceeding $1 trillion and an increasing share of borrowers falling behind in their payments. The fear of excessive debt is particularly likely to discourage students from lower-income households. Two of the obvious solutions are returning to earlier levels of public support for higher education and significant reductions in the interest rates on a type of borrowing with considerable positive spillovers.
44. There is actually a third prong, which will be mentioned briefly in the conclusion-the fight for global economic reforms that would reinforce domestic reforms.
45. For some of the more recent history, see William H. Simon. The Community Economic Development Movement (Durham: Duke University Press, 2001).
46. The argument developed here rests on the idea that the power of finance is not an automatic consequence of the capitalist mode of production or a system of production for profit. I have begun to sketch such an argument in "Capitalism without Class Power," Politics & Society 20, no. 3 (1992): 277-303
47. "Deconstructing Capitalism as a System," Rethinking Marxism 12, no. 3 (2000); 83-98.
48. Karl Polanyi, The Great Transformation (Boston: Beacon, 2001 [1944]).
49. The internal contradictions in the Federal Reserve System are discussed in William Greider, Secrets of the Temple (New York: Simon & Schuster, 1985).
50. For a survey that conveys the magnitude of the governmental role, see Sarah Quinn, "The Hidden Credit State: A Sociology of Federal Credit Programs in the United States," Unpublished paper, Department of Sociology, University of Washington.
51. Deeg, Finance Capital Unveiled.
52. Hyman Minsky, Stabilizing an Unstable Economy (New Haven: Yale University Press, 1986).
53. William Baumol, The Cost Disease (New Haven: Yale University Press, 2012). Baumol's point is that a string quartet will continue to require four members, so the cost of the concert ticket will inevitably rise relative to the costs of goods produced with less and less labor input.
54. Separating government budgets between current accounts and capital accounts, as private firms do, would help to assure that outside of economic slowdowns, government borrowing would be limited to financing those expenditures that produce a continuing flow of future revenues.
55. Zysman, Governments, Markets, and Growth.
56. Connie Bruck's description of investment banking before the arrival of Michael Milken in The Predator's Ball (New York: Penguin, 1988).
57. Jesus Hernandez, "Redlining Revisited: Mortgage Lending Patterns in Sacramento 1930-2004," International Journal of Urban and Regional Research 33, no. 2 (2009): 291-313
58. Akos Rona-Tas and Stefanie Hiss, "The Role of Ratings in the Subprime Mortgage Crisis," in M. Lounsbury and P. M. Hirsch, eds., Markets on Trial (Bingley, UK: Emerald Group, 2010), 113-54.
59. For recent evidence of the advantages of combining employee ownership and participation, see Brent Kramer, Employee Ownership and Participation Effects on Outcomes in Firms Majority Employee-Owned Through Employee Stock Ownership Plans in the US, Economic and Industrial Democracy 31, no. 4 (2010): 449-76
60. On the resilience of employee-owned firms, see Johnston Birchall and Lou Hammond Ketelson, Resilience of the Cooperative Business Model in Times of Crisis (Geneva: International Labour Office, 2009).
61. Michael Piore and Charles F. Sabel, The Second Industrial Divide (New York: Basic Books, 1984).
62. Paul Alan Gompers and Josh Lerner, The Venture Capital Cycle, 2nd edition (Cambridge, MA: MIT Press, 2004).
63. A useful source of data is Office of Advocacy, Small Business Administration, Small Business Lending in the United States 2012, available at: http://www.sba.gov/sites/default/files/files/sbl_12study.pdf
64. The data show a negative correlation between bank size and small-business lending as a percent of total assets. In 2012, banks with assets exceeding $10 billion held 77.7 percent of total bank assets, but only 48.2 percent of small business loans (10).
65. Marc Schneiberg, "Toward an Organizationally Diverse American Capitalism?" Seattle University Law Review 34 (2011): 1409-34.
66. Deeg, Finance Capital Unveiled.
67. Marguerite Mendell, "The Three Pillars of the Social Economy: The Quebec Experience (1996-2007)" in A. Amin, ed., The Social Economy (London: Zed Books, 2009)
68. Gilles L. Bourgue, Margie Mendell, and Ralph Rouzier, "Solidarity Finance: History of an Emerging Practice," In M. J. Bouchard, ed., Innovation and the Social Economy: The Quebec Experience (Toronto: University of Toronto Press, 2013), 180-205.
69. However, activists in a number of communities are organizing on a parallel track-the creation of municipal banks that would operate on a model similar to the state bank in North Dakota. Local government would use the municipal bank for its own deposits and transactions and the bank could relend in cooperation with local banking institutions to accelerate economic development. See, for example, Aaron Sankin, "A Municipal Bank for San Francisco? City Explores Revolutionary New Model," Huffington Post (4 November 2011). Available at: http://www.huffingtonpost.com/2011/11/03/municipal-bank-san-francisco_n_1074600.html.
70. Axel Schmidt and Guy Selbherr, "Tasks, Organization and Economic Benefits of German Guarantee Banks," The Journal for SME Development 11 (2009): 45-86.
71. These institutions would also be able to develop new instruments such as the long-term loans developed in Quebec to finance nontraditional firms.
72. The costs of initially creating the market could be financed with a combination of federal dollars and matching funds from public pension funds and other large institutional investors who have an interest in long-term economic growth. The ongoing costs of maintaining a staff that would monitor new entrants and existing firms for compliance with the rules could be covered by a small tax on share purchases.
73. B Corporations, or Beneficial Corporations, have been created by legislators in a number of US states. Such firms are allowed to prioritize other goals such as environmental sustainability or good working conditions over and above profitability. See Dana Brakman Reiser, "Benefit Corporations-A Sustainable Form of Organization?" Wake Forest Law Review 46 (2011): 591-625.
74. Herman Schwartz, Subprime Nation (Ithaca: Cornell University Press, 2009)
75. Barry Eichengreen, Exorbitant Privilege (New York: Oxford University Press, 2011).
76. Fred Block, "Breaking with Market Fundamentalism: Toward Domestic and Global Reform," in J. Shefner and P. Fernandez-Kelly, eds., Globalization and Beyond. (University Park, PA: Penn State University Press, 2011), 210-27.
77. For an effort to bring Keynes' ideas up to date, see John Eatwell and Lance Taylor, Global Finance at Risk (New York: New Press, 2000).
78. Sheri Berman, The Primacy of Politics (New York: Cambridge University Press, 2006)
79. Fred Block, "Reinventing Social Democracy in the 21st Century," Journal of Australian Political Economy 67 (2011): 5-21.