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Capitalizing on Crisis: The Political Origins of the Rise of Finance

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In the context of the recent financial crisis, the extent to which the U.S. economy has become dependent on financial activities has been made abundantly clear. In "Capitalizing on Crisis," Greta Krippner traces the longer-term historical evolution that made the rise of finance possible, arguing that this development rested on a broader transformation of the U.S. economy t In the context of the recent financial crisis, the extent to which the U.S. economy has become dependent on financial activities has been made abundantly clear. In "Capitalizing on Crisis," Greta Krippner traces the longer-term historical evolution that made the rise of finance possible, arguing that this development rested on a broader transformation of the U.S. economy than is suggested by the current preoccupation with financial speculation. Krippner argues that state policies that created conditions conducive to financialization allowed the state to avoid a series of economic, social, and political dilemmas that confronted policymakers as postwar prosperity stalled beginning in the late 1960s and 1970s. In this regard, the financialization of the economy was not a deliberate outcome sought by policymakers, but rather an inadvertent result of the state's attempts to solve other problems. The book focuses on deregulation of financial markets during the 1970s and 1980s, encouragement of foreign capital into the U.S. economy in the context of large fiscal imbalances in the early 1980s, and changes in monetary policy following the shift to high interest rates in 1979. Exhaustively researched, the book brings extensive new empirical evidence to bear on debates regarding recent developments in financial markets and the broader turn to the market that has characterized U.S. society over the last several decades.


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In the context of the recent financial crisis, the extent to which the U.S. economy has become dependent on financial activities has been made abundantly clear. In "Capitalizing on Crisis," Greta Krippner traces the longer-term historical evolution that made the rise of finance possible, arguing that this development rested on a broader transformation of the U.S. economy t In the context of the recent financial crisis, the extent to which the U.S. economy has become dependent on financial activities has been made abundantly clear. In "Capitalizing on Crisis," Greta Krippner traces the longer-term historical evolution that made the rise of finance possible, arguing that this development rested on a broader transformation of the U.S. economy than is suggested by the current preoccupation with financial speculation. Krippner argues that state policies that created conditions conducive to financialization allowed the state to avoid a series of economic, social, and political dilemmas that confronted policymakers as postwar prosperity stalled beginning in the late 1960s and 1970s. In this regard, the financialization of the economy was not a deliberate outcome sought by policymakers, but rather an inadvertent result of the state's attempts to solve other problems. The book focuses on deregulation of financial markets during the 1970s and 1980s, encouragement of foreign capital into the U.S. economy in the context of large fiscal imbalances in the early 1980s, and changes in monetary policy following the shift to high interest rates in 1979. Exhaustively researched, the book brings extensive new empirical evidence to bear on debates regarding recent developments in financial markets and the broader turn to the market that has characterized U.S. society over the last several decades.

30 review for Capitalizing on Crisis: The Political Origins of the Rise of Finance

  1. 4 out of 5

    Athan Tolis

    This 150 page little book starts with a 28 page introduction that is a very strong candidate for “best 28 pages I’ve ever read.” Author Greta Krippner explains that there are three official versions of how we got here: 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 lev This 150 page little book starts with a 28 page introduction that is a very strong candidate for “best 28 pages I’ve ever read.” Author Greta Krippner explains that there are three official versions of how we got here: 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.

  2. 5 out of 5

    Mehrsa

    I can't believe it took me until now to read this book--it is so good! I have heard the content before in various different parts, but Krippner's book is an absolute must-read for anyone trying to make sense of the modern credit markets, he financial crisis, and the economy in general. I am a converted Krippner fan.

  3. 5 out of 5

    Nils

    Krippner's thesis: The decision of the USG, starting in the 1970s, to turn to financialization was designed to kick the can down the road on an interlocking series of economic social and political dilemmas confronting policymakers. Her point is that "financialization was not a deliberate outcome sought by policymakers but rather an inadvertent result of the state's attempt to solve other problems." By financialization, Krippner means the broad-based transformation in which financial activities ha Krippner's thesis: The decision of the USG, starting in the 1970s, to turn to financialization was designed to kick the can down the road on an interlocking series of economic social and political dilemmas confronting policymakers. Her point is that "financialization was not a deliberate outcome sought by policymakers but rather an inadvertent result of the state's attempt to solve other problems." By financialization, Krippner means the broad-based transformation in which financial activities have become increasingly dominant in the US economy over the last several decades. This can be measured, for example, by the percentage of the total profits in the economy captured by financial services firms, and also the development of financial services arms in traditional industrial and services companies - arms that are often more profitable than the "core" business. The growing emphasis on finance is not merely a result of speculative mania in the face of what Kindleberger referred to as a "displacing event" (e.g. tech booms), nor just a result of new concepts of shareholder value that involved reconceiving the firm not as devoted to particular productive activities but rather as a set of revenue streams, the maximization of which was not just the primary but the sole fiduciary duty of managers. Rather, her argument is that state action was directly responsible for the growth of financialization, actions that were taken in order to confront structural crises that began to emerge in the late 1960s and reached full bloom by the mid-1970s. Now, Krippner is friendly but skeptical of traditional Marxian accounts of the crisis of the 1970s, whether that was Arrighi claiming that the slowing of productivity growth was leading to a crisis of protiability or Sweezy arguing that increased monopolization was undercutting mechanism designed to redistribute income to the working classes. While she agrees with them that financialization is not merely a cyclical end-of-boom phenomenon, but rather reflects a more durable shift in the structure of the economy, she emphasizes that these analyses too often assume "a seamless alliance between government officials and business elites." (13) The core of her analysis is on three interrelated policy shifts: (1) the deregulation of US financial markets, which occurred incrementally over the course of the 1970s, culminating in landmark legislation passed in 1980; (2) the growing dependence of the US economy of foreign capital inflows to finance deficit spending, and (3) the Fed's turn to monetarism and concomitant abandonment of the dual mandate in favor of strict inflation control - signaled by the so-called Volcker shock of 1979. These policy decisions emerged as a way to confront what Krippner calls the "triple crisis" of the 1970s - one that was simultaneously a social crisis, and fiscal crisis, and a legitimation crisis. The social crisis, reflected the heightened distributional conflict as economic growth slowed, requiring various social groups to scale back claims to resources; the problem was, there was no viable social or political mechanism for negotiating these reductions: technically, it was the domain of the market, but in the post-New Deal era the state had increasingly guaranteed the claims of various social groups. Inflation became "a surreptitious way for the state to say 'no' when it could not do so openly." (17) The fiscal crisis refers to the structural gap between state expenditures and tax revenues, a gap that emerged partly because the state was increasingly expected to provide the inputs for productivity growth whether that meant infrastructure or funding basic research, and because there were growing demands for social spending. "If the robust economic growth of the immediate postwar years had eased latent distributional conflicts and financed an expansive state, inflation would accomplish these same tasks through other means when growth faltered." But if permissive attitudes toward inflation enabled policymakers to pursue their objectives for a few years, the solutions offered by inflation became increasingly dysfunctional over the course of the 1970s, and eventually entirely unsustainable. The failure of the state to adequately address either of the former crises in turn led directly the legitimation crisis, defined by a loss of public confidence in the state and its elites, a process often seen by those elites as manifesting as a problem of "governability" (in Huntington, Crozier, and Watanabe's infamous characterization). The legitimation crisis was either a reflection of a fundamental crisis within capitalism (according to Marxists), or a crisis of democracy (for liberals), or a crisis of values (for conservatives). The ghost of Daniel Bell hovers over the book, especially in its normative call at the end for the country to actually have an honest political debate with itself about how distributional issues should be addressed, which in turn needs to be grounded in "a broader public debate regarding our social priorities." (150) Bell in the 1970s argued that Americans needed to have an explciit conversation about adjusting national expectations, to create a new social compact that would guide allocation decisions. Needless to say, this never really happened, and indeed the closest any senior leader came to proposing such a conversation, namely Jimmy Carter's "crisis of confidence" speech in 1979, would be demagogued by political opponents as a form of domestic surrender. What happened instead was "something like an inversion of Bell's vision was realized: rather than decisions about allocations moving into the strong light of public debate and discussion where a new social consensus could be forged, these decisions drifted ever further into the shadowy realm of the market." (20) Krippner refers to this process as "depoliticization" - by which she means an abdication of responsibility on the part of the state in favor of letting the social chips fall where they may within increasingly deregulated markets. But markets of course were incapable of resolving divisive distributional issues that were inherently political in nature. Nonetheless, the three major policy shifts noted above did enable "policymakers to avoid politically difficult decisions about how to allocate limited resources between competing social priorities" which in turn allowed them "to extricate themselves from the problems they confronted in the social crisis, fiscal crisis, and legitimation crisis of the state." (22) Specifically: removing controls on credit in the US economy, policy makers effectively opened the taps on credit expansion with the result that markets, rather than regulators, would determine access to credit. In the context of newly floating exchange rates (and the piling up of enormous petrodollar reserves in oil producing countries), the high interest rates in the US pulled foreign capital into the US in unprecedented (and to policymakers entirely unanticipated) amounts. (Krippner notes that in a closed economy, Volcker's draconian move with interest rates in 1979 and again in 1981 would likely have choked off demand for credit for private borrowers, likely forcing the Reagan administration back on the path of fiscal austerity, rather than allowing it to happily pursue what at the time was called a "twin deficits" fiscal strategy.) It was in this context that the Fed's adoption of monetarism (that is, the targeting of the money supply rather than the state directly setting interest rates) emerged as an effort to balance the competing imperatives of trying to exercise some policy control over the economy while at the same time allowing elected officials to avoid blame for unfavorable economic outcomes. If this is story of how what we call neoliberalism was actually implemented through a series of tactical policy choices rather than because of a grand ideological vision, it is also a story of how these strategies deferred rather than resolved the underlying social and political tensions that gave rise to them. Despite the endless crowing of Reagan and his followers, all these moves did not unleash a wave of massive new growth, and indeed the turn to the market as an arbiter of distributional outcomes is entirely noncoincidental with the dramatic rise of income inequality documented by Piketty et al. Financialization removed internal and external constraints on the expansion of credit in the United States, which quite literally papered over the implications of growing income inequality by allowing those without growing incomes to instead increase their consumption by relying on cheap credit. In other words, the market turned out not to be the "strict disciplinarian" imagined by some moralizing neoliberal visionaries, but rather as surprisingly lax master. In the end, Krippner asks, can this process of depoliticization work? Is it really possible to move all the key decisions about distributional matters out of the control of elected officials and hand it off to technocrats? Several problems present themselves. First, it involves a real abnegation of control which may lead to notably poorer outcomes. The divergence in outcomes on the backside of the 2008 financial crisis in the United States versus China highlights the risk: Americans allowed the Fed to do to all the policy work, with only a minimum of stimulus, whereas China had no qualms about using a variety of fiscal instruments to reinflate the economy; the result is that China's economy over that time span has doubled in size relative to the United States's. Second, despite the ideological beliefs of market fundamentalists, it is not at all clear that markets do not require normative foundations, and that the people will simply fatalistically accept market outcomes as just ones. The Keynesian episode, however far behind us it may be, remains a folk memory of how a muscular state can propel robust economic activity. At the end of the day, what still needs to be confronted is the inability of an affluent society to face the political challenges imposed by the end of affluence.

  4. 4 out of 5

    Chase R

    replace all introductory macroeconomics textbooks w this please

  5. 4 out of 5

    Eugene Kernes

    This book details the rise of finance in the U.S. since the early 1960. Each political and economic crisis carried with it a response, policies which facilitated an increase in financial activity. Krippner starts with explaining the financialization of the economy, to the major policy decisions which gave it more power. Rather than some deliberate decision to increase financialization, these policies were ad hoc responses to political and economic problems. The focus of this book are the governm This book details the rise of finance in the U.S. since the early 1960. Each political and economic crisis carried with it a response, policies which facilitated an increase in financial activity. Krippner starts with explaining the financialization of the economy, to the major policy decisions which gave it more power. Rather than some deliberate decision to increase financialization, these policies were ad hoc responses to political and economic problems. The focus of this book are the government institutions whose policy response created an environment for finance to thrive. Financialization reference to the ever-growing profits from the financial sector and the declining profit from the non-financial sectors. Krippner detailed how to measure it the financialization of the economy. From axiomatic accounts of corporate earning coming more from their financial activity than their production activity, to the general statistics of where profit comes from. Although the impacts of the financial sector are not given, as there are other books which cover the impacts, this book makes clear the power of the finance sector to dominate policy. The crisis under observation are those of social, fiscal, and legitimation. The problems presented were that of scarce credit and inflation. Credit is and always be a scarce resource, with multiple uses for the same amount of available credit. Rather than find a proper allocation for competing services, the government deregulated Regulation Q which allowed for higher interest rate loans. Demand for fiscal services kept growing, for which government used the international community to finance the deficits. As more credit entered the economy, inflation began to be problematic. To contain inflation, the evolution of Federal Reserve policies is shown to have found transparency in their policies to help the stem inflationary expectations. Each crisis was caused by a limitation but producing policies which enabled the growth of financial services. Rather than take accountability of the problem, and target the source of the problem, politics found a way move the decisions of allocation to the world of finance. How Krippner expresses the development of financialization as being ad hoc rather than planned makes this book a wonderful addition to the economic, financial, and political literature. Each topic which Krippner reasons is important in the history of the rise of financialization, has been written with all the complicity involved while making the event easy to understand.

  6. 5 out of 5

    June

    Objective (covered sources of complex data), focused (yet comprehensive on points), elucidative discussions make the subject accessible (even for readers non-well-versed in economics), educational (for me to learn about Federal Reserve System). Solutions are not in the scope, though the brevity of "a public philosophy to guide decision about distribution" sounds dubious, a bonus point. Resource deplete, demand high; Market heat, who can buy. Population grow, democracy glow.

  7. 4 out of 5

    Peter Harrison

    This is a technically complex work of sociology unpicking and analysing trends in US society, economy, and politics over the course of forty years from the 1960s to the 2000s. Krippner's basic thesis is that successive policy decisions over the course of this period, each in response to immediate challenges, have 'financialised' the US economy. In other words, have shifted the focus of profit making from investment in productive activity to the ownership and exchange of financial instruments. Eve This is a technically complex work of sociology unpicking and analysing trends in US society, economy, and politics over the course of forty years from the 1960s to the 2000s. Krippner's basic thesis is that successive policy decisions over the course of this period, each in response to immediate challenges, have 'financialised' the US economy. In other words, have shifted the focus of profit making from investment in productive activity to the ownership and exchange of financial instruments. Even major industrial companies come to make significant portions of their profit from activity in the financial market. This shift has significant implications for how the economy is managed, and the location of future crises. Krippner demonstrates this through a detailed analysis of economic data and a systematic review of policy shifts during this period. Although this is somewhat dry in places the case is convincing. She defines three separate phases. First the deregulation of the domestic financial market as an attempt to get to grips with the social crisis of the 1960s and 1970s, offering policymakers a 'reprieve from difficult political choices'. Second the response to the fiscal crisis of the late 1970s and 1980s with growing government deficits which altered the relationship between the domestic and global markets driving a 'dramatic expansion of credit in the US economy'. Finally on the realisation relying on market mechanisms offered in fact very little restraint on consumers, corporations, or governments how approaches to monetary policy developed incrementally in the period up to 2001 to control the demand for credit through interest rates (as opposed to regulation of the supply). Although the book was first published in 2011, Krippner stops short of the 2007-9 financial crisis, indicating in the introduction that she considers this to represent a separate stage of development that requires a separated analysis. That said it is clear that the 'depoliticisation' of economic decision making that Krippner outlines is a significant factor underpinning the later crisis. As Krippner explains, in making this change the expectation had been that the market would impose a discipline on economic behaviour that political actors were unwilling to do. In fact this has turned out not to be the case at all. The market has promoted and validated a lack of restraint particularly in relation to credit which has left us more exposed than ever to the risk of financial crisis. Although this is not Krippner's intention, her analysis is a neat fit for the Marxist view of the long term tendency of the rate of profit to decline (see writers such as Robert Brenner and Michael Roberts). The declining profit possible in productive industry leads to speculation in what Marx called 'fictitious capital'. This growing financialisation becoming increasing unstable and leading inexorably to crisis. The picture here is one that provides a deep-seated explanation for the financial crisis of 2007-9. So this is a fascinating book with many implications for further analysis. If a touch dry in places, it is detailed, well researched, and a thought provoking discussion of what underpins the modern economy. I added some further thoughts on Financialisation here: https://marxadventure.wordpress.com/2...

  8. 4 out of 5

    Hui

    An incredibly concise narrative of the financialization of the US economy. The core argument is that policymakers, in an attempt to avoid directly responding to social crisis (allocating credit among different social groups, i.e., large vs. small business, the wealthy vs. the middle class), fiscal crisis (trade deficit, strong dollar, financing the Vietnam war and social programs), and legitimacy crisis. The second chapter sought to establish the phenomenon of financialization. It offered a soph An incredibly concise narrative of the financialization of the US economy. The core argument is that policymakers, in an attempt to avoid directly responding to social crisis (allocating credit among different social groups, i.e., large vs. small business, the wealthy vs. the middle class), fiscal crisis (trade deficit, strong dollar, financing the Vietnam war and social programs), and legitimacy crisis. The second chapter sought to establish the phenomenon of financialization. It offered a sophisticated discussion of the concept of financialization and its operationalization. The extent of nuances considered when drawing conclusions (e.g., alternative explanations, data validity) is incredible. I admired Krippner's effort in coming up with a linear storyline that put the deregulation of credit market (especially for households) at the center stage. However, the historical narrative seems to suggest that banks, thrifts, and market mutual funds all have come up with some type of financial innovations to alleviate the scarcity of capital prior to deregulation. Commercial banks had a secondary market for the certificate of deposits. Some even took advantage of a loophole in the law and created bank holding companies to avoid interest rate ceiling imposed by Regulation Q. Thrifts, initially with the competitive edge of higher interest rate, later capitalized on the mortgage securities market. Eventually, only consumer savers, who could not afford to invest in treasury bills (min $10K), were left out. And they pushed for deregulation on the ground of eliminating discrimination. What follows seems a bit odd to me. Krippner implied that the financialization and inflation set off by deregulation was primarily due to the fact that consumer borrowers borrow regardless of price. It was essentially the speculation argument (Shiller 2000). It was even odder when compared with what happened after Volcker's imposition of high interest rates. The inflow of foreign capital offset Volcker's intent to battle inflation. But Krippner argued that the "inflows also placed a limit on how high-interest rates would climb" (p. 103) because market participants were speculating, just as they did right after the deregulation, only that this time they speculated on financial assets, rather than houses. This seems to be a critical point that needs some elaboration. That being said, this is probably the best book I have ever read about the topic.

  9. 4 out of 5

    Leah

    learned a lot. clear writing. appreciated chapters 1, 2, and 5 the most.

  10. 5 out of 5

    A.

    A lot of quotations

  11. 5 out of 5

    Manuel Bautista

  12. 4 out of 5

    Jessica Johnson

  13. 4 out of 5

    Phil

  14. 5 out of 5

    Madison

  15. 5 out of 5

    Maryanne Salm

  16. 4 out of 5

    Monte Pearson

  17. 5 out of 5

    Matěj Schneider

  18. 4 out of 5

    Will Holub-Moorman

  19. 5 out of 5

    Katherine Rogers

  20. 5 out of 5

    Nikola Bakic

  21. 4 out of 5

    Stefani

  22. 4 out of 5

    Eric Thrond

  23. 4 out of 5

    Kim

  24. 5 out of 5

    Meg

  25. 5 out of 5

    Katie

  26. 4 out of 5

    Elliot Hasdan

  27. 5 out of 5

    Chrystin

  28. 5 out of 5

    Stanisław

  29. 4 out of 5

    Garrett Strain

  30. 4 out of 5

    Omar Al-Halawani

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