WI: No 1980s Financialization

[CountDVB]

The 1980s saw the big boom of financialization, which was a massive part in the shift in manfacturing in America, the rise of corporate raiders and the various decisions that led to the decline of various major chains along with aligning with the trends of Wall Street and so on.

What would've happened if the financialization boom didn't happen and or how could it have been averted or blunted?

 

[GeographyDude]

Ronnie Reagan had his quirks and his unexpected streaks.

Maybe if he had been a good government type regarding banks, and took the view, No, no, no, we’re not going to de-regulate banks. We’ll de-regulate other industries and let people take some real chances. But banks are kind of a baseline utility.

And Reagan — born in 1911 — certainly could have had memories and strong beliefs about the Great Depression. Most likely, he did. He just wasn’t insistent within his administration of playing it safe regarding banks.

 

[CountDVB]

Ronnie Reagan had his quirks and his unexpected streaks.

Maybe if he had been a good government type regarding banks, and took the view, No, no, no, we’re not going to de-regulate banks. We’ll de-regulate other industries and let people take some real chances. But banks are kind of a baseline utility.

And Reagan — born in 1911 — certainly could have had memories and strong beliefs about the Great Depression. Most likely, he did. He just wasn’t insistent within his administration of playing it safe regarding banks.

Admittingly, the financial sector isn't my strong suit and don't get much, but you think finances might be one of the places he wouldn't touch upon. What could be some other ways it wouldn't happen besides just nto deeregulating them? Any public sentiment?

Also, what do you think some consequences would be? The financialization of the 80s is one of the big reasons for the economy we have now

 

[GeographyDude]

. . . What could be some other ways . . .

Maybe three lines cross:

1) The concept of “system accident” is developed earlier. The high point of this theory so far might be an article entitled “The Lessons of ValuJet 592: As a reconstruction of this terrible crash suggests, in complex systems some accidents may be ‘normal’ . . . , ”— about the May 11, 1996, ValuJet crash in the Florida Everglades. Obvious, there were earlier tragedies about which this theory could have taken a really close look at.

2) Let’s add a major early-warning quake to the crash of Savings & Loans which started about 1989, and that way it’s perceived as a one-two punch and the feeling is, By God, we need to solve this once and for all.

3) When Democrats regain control of the Senate on Jan. 3, 1987, which is OTL — but they just focus more on financial matters.

 

[PNWKing]

What is financialization? Do you mean things like the rise of firms like Berkshire Hathaway, Stratton Oakmont, etc.

 

[CountDVB]

What is financialization? Do you mean things like the rise of firms like Berkshire Hathaway, Stratton Oakmont, etc.

It refers to the rise of the dominance of the financial sector in the 1980s. I think this article explains it best: https://www.forbes.com/sites/mikeco...ancialization-of-the-economy/?sh=68363e065783

 

[RY1985]

The 1980s saw the big boom of financialization, which was a massive part in the shift in manfacturing in America, the rise of corporate raiders and the various decisions that led to the decline of various major chains along with aligning with the trends of Wall Street and so on.

What would've happened if the financialization boom didn't happen and or how could it have been averted or blunted?

Despite reading up a lot of finance and economics, embarrassingly, i realized that I had very little idea of what it would be like if the financial boom had not occur.

But as a native of Southeast Asia, I remember reading that a huge part of the rapid industrialization in the 1980s of Southeast Asian tigers (Thailand, Malaysia, Singapore) and South Korea depended on cheap credit; they borrowed in US dollars. The ease of borrowing in huge sums eventually lead to the 1997 Asian Financial crisis, but it also lead to the availability of funding for industrialization.

So rapid financialization in the 1980s lead to excess liquidity flowing around in the US financial system and some of it found its way overseas. The excess US dollars also had a somewhat favorable exchange rate compared to East Asian economies as the fixed exchange rate of the Bretton Woods had been defunct for some time then.

In the case of Thailand, if I am not wrong, powerful industrial conglomerates used the cheap credit to upscale and upgrade their manufacturing operations, moving into auto-parts manufacturing, electronics manufacturing and HDD manufacturing. For South Korea, if I am not wrong, the country already have heavy industrial manufacturing by the start of the 1980s but the cheap credit allowed them to purchase, import and invest in electronics and semiconductor manufacturing.

Of course, it is my personal speculation that without the ease of credit, the AFC 1997 wouldn't have happened, but neither would the rapid industrialization.

 

[CountDVB]

Despite reading up a lot of finance and economics, embarrassingly, i realized that I had very little idea of what it would be like if the financial boom had not occur.

But as a native of Southeast Asia, I remember reading that a huge part of the rapid industrialization in the 1980s of Southeast Asian tigers (Thailand, Malaysia, Singapore) and South Korea depended on cheap credit; they borrowed in US dollars. The ease of borrowing in huge sums eventually lead to the 1997 Asian Financial crisis, but it also lead to the availability of funding for industrialization.

So rapid financialization in the 1980s lead to excess liquidity flowing around in the US financial system and some of it found its way overseas. The excess US dollars also had a somewhat favorable exchange rate compared to East Asian economies as the fixed exchange rate of the Bretton Woods had been defunct for some time then.

In the case of Thailand, if I am not wrong, powerful industrial conglomerates used the cheap credit to upscale and upgrade their manufacturing operations, moving into auto-parts manufacturing, electronics manufacturing and HDD manufacturing. For South Korea, if I am not wrong, the country already have heavy industrial manufacturing by the start of the 1980s but the cheap credit allowed them to purchase, import and invest in electronics and semiconductor manufacturing.

Of course, it is my personal speculation that without the ease of credit, the AFC 1997 wouldn't have happened, but neither would the rapid industrialization.

Admittingly, I don't know much myself, but I do suspect that the industrialization would decelerated, but still happen. I cannot say because of my lack of experience here, but maybe Japan invests in them rather than China? This is something I don't have much grasp on, but it is something very influential.

 

[PNWKing]

So might this save chains like Sears, Montgomery Ward, and Circuit City.

 

[Electric Monk]

I would have to think for a while about the right POD—1970s too late really—but it wouldn’t be that hard for the USA to look a lot like the postwar Japan keiretsu system and even the same kind of public works / postal banking / massive farmer + rural areas subsidy program from the government. Basically the 1950s but cranked and Big Business dividing Wall St before they assemble.

Corporate unions instead of sector ones might do the trick for an off hand POD, to bring the USA that much closer to Japan.

 

[CountDVB]

So might this save chains like Sears, Montgomery Ward, and Circuit City.

It's very likely that this would save it since alot of those companies did get screwed by the bigwigs looking for short term profit to squeeze them dry.

 

[Lord Malikai]

The 1980s saw the big boom of financialization, which was a massive part in the shift in manfacturing in America, the rise of corporate raiders and the various decisions that led to the decline of various major chains along with aligning with the trends of Wall Street and so on.

What would've happened if the financialization boom didn't happen and or how could it have been averted or blunted?

I know it's popular around some circles to argue that the financialization of the U.S. was a terrible thing and if only we had more regulation/unions/left-wing economic policies etc. everything would be ok, but looking at underlying factors, the trends that became financialization were inevitable. For example:

U.S. manufacturing was doomed to decline. The post war boom was unsustainable as other major industrial powers regained their footing. and once the U.S. lost its comparative advantage in things like steel production or textile manufacturing there wasn't a lot that could be done to save those industries.

Furthermore even if the U.S. did try to save those industries, automation would start wiping out the jobs in those industries.

Big chains were also doomed to failure, unless Sears becomes Amazon it will always be wrecked by Amazon. Sure you can put off the decline of big box stores by maybe 5 or 10 years, but the technology to make them obsolete comes into existence with the internet, which is inevitable in some form or another.

Regulating banks sounds great in theory, but you need to actually have someone to do the regulating. The actual regulation is incredibly hard, intensive in both brain power and manpower because the financial system keeps evolving. Look at the specifics of Dodd-Frank: even after everything we learned from 2008, it makes no attempt to directly regulate the financial instruments that did cause the recession or cause a similar one. In my opinion, the law - while certainly necessary - is almost crude in its construction.

Which brings us to a crucial point: Glass Steagall (as mentioned in the article cited further down by the OP) wasn't repealed because of corruption or foolishness, it was repealed because it was obsolete and completely ineffective, like relying on laws made in the 20s to regulate modern vaccine production.

You'll notice that what these all have in common is that basically old systems stop working properly when put into competition with new systems. Fundamentally, finance and economics, like physics, agriculture and every other field is innovative. You *can* find ways to make those innovations more fair and more useful to larger segments of society, but asking for them to be prevented entirely is like asking how we can prevent the creation of steam engines or the transition from hunter-gatherer societies to agriculture based ones.

 

[CountDVB]

I know it's popular around some circles to argue that the financialization of the U.S. was a terrible thing and if only we had more regulation/unions/left-wing economic policies etc. everything would be ok, but looking at underlying factors, the trends that became financialization were inevitable. For example:

U.S. manufacturing was doomed to decline. The post war boom was unsustainable as other major industrial powers regained their footing. and once the U.S. lost its comparative advantage in things like steel production or textile manufacturing there wasn't a lot that could be done to save those industries.

Furthermore even if the U.S. did try to save those industries, automation would start wiping out the jobs in those industries.

Big chains were also doomed to failure, unless Sears becomes Amazon it will always be wrecked by Amazon. Sure you can put off the decline of big box stores by maybe 5 or 10 years, but the technology to make them obsolete comes into existence with the internet, which is inevitable in some form or another.

Regulating banks sounds great in theory, but you need to actually have someone to do the regulating. The actual regulation is incredibly hard, intensive in both brain power and manpower because the financial system keeps evolving. Look at the specifics of Dodd-Frank: even after everything we learned from 2008, it makes no attempt to directly regulate the financial instruments that did cause the recession or cause a similar one. In my opinion, the law - while certainly necessary - is almost crude in its construction.

Which brings us to a crucial point: Glass Steagall (as mentioned in the article cited further down by the OP) wasn't repealed because of corruption or foolishness, it was repealed because it was obsolete and completely ineffective, like relying on laws made in the 20s to regulate modern vaccine production.

You'll notice that what these all have in common is that basically old systems stop working properly when put into competition with new systems. Fundamentally, finance and economics, like physics, agriculture and every other field is innovative. You *can* find ways to make those innovations more fair and more useful to larger segments of society, but asking for them to be prevented entirely is like asking how we can prevent the creation of steam engines or the transition from hunter-gatherer societies to agriculture based ones.

Financialization was a growing trend that happened and claiming it was inevitable is not what I wanted to hear since that in it of itself is pretty fatalistic. Additionally, claiming it was innovative when it was just basically a race to make the most short-term profits and led to the rise of another deregularatory issues, corporaide raiders, hedge funds and so on. And the financial crisises going on doesn't make me think this was innovative or anything new.

After all, a good chunk of this go off because of the deregulatory practices of the Reagan administration.

I do agree US manufacturing was going to decline, but the rate and how are different questions entirely and automation would wipe out the jobs, but not entirely. And assuming that the guy in charge of Sears didn't play a part is in it of itself to consider, especially given the accusations thrown at Lampert. I heard similar stuff lobbied over at Toys R Us. Stories regarding private equity and on the companies getting liquidated.

Additionally, Glass-Steagall may have had its problems, but thinkign corruption wasn't a factor, especially when this was where deregulation grew... that doesn't make sense.

 

[CountDVB]

Say Reagan didn't win in 1980 or maybe he wins in 1976. His dregulatory attempts and tax cuts would be met with resistance (Dems control both house and senate) and combine that with the Iran crisis, it would likely bring a large blow in support of those practices. As the 1980s would roll on and which ever Democrat would become president would not do the same sort of stuff Reagan would do nor would the economy eb the same. I doubt financialization would occur at that point and there would still be seen need for regulation, if just updated to handle stuff. That's not taking into account various other changes or factors that could result.

By 1992 or 1996 when the GOP would be able to be in a prominent fighting position, they wouldn't be the Reaganites nor the Nixonites (some sort of Neo-Rockefellar Republican) so while they would be more leninent, it wouldn't be to the same degree.

History is a trend, but trends are formed and maintained through a series of events that could lead to a differing thing, especially with the reactions of various individuals.

Hence why I'm wondering sort of stuff could have affected this and the consequences without financialization occuring and the subsequent dominance of it

 

[RY1985]

Admittingly, I don't know much myself, but I do suspect that the industrialization would decelerated, but still happen. I cannot say because of my lack of experience here, but maybe Japan invests in them rather than China? This is something I don't have much grasp on, but it is something very influential.

Thanks!

If we are actually talking about Japan as a source if industrial investment, I have a bit of experience. My own country had been a recipient of Japanese industrial investment and I have family members whom worked in Japanese-operated factories.

While the Japanese did set up factories overseas in Southeast Asia starting from the early 1970s , it was only in response to requirements of the domestic markets like tariffs and taxes. And it was slow and only if necessary. For example, Seiko actually took 3 years to decide and study before deciding to open a watch factory in Singapore in the early 1970s. Throughout Southeast Asia, it was all low-end manufacturing.

It was only till the Plaza Accords of 1985 that the Yen rose sharply and the Japanese MNCs move considerable amount of operations to East Asia, especially Korea, Taiwan, Singapore, Thailand, Malaysia and Indonesia. Even then, based on personal anecdotes from my relatives, they were very reluctant to transfer and import the high-end of their technology, especially in semiconductors and electronics manufacturing. In OTL, it was mostly US MNCs that had relaxed rules.

But with less de-regulation in the US financial markets, its hard to tell, given the butterfly effect and all.

If the 'shareholder doctrine' did not become over-dominant, perhaps US manufacturers may not have shifted so much factories to East Asia in pursuit of profits. Or maybe they still would have anyway.

 

[Arnold d.c]

Having written a dissertation on the relationship between economic growth and financial systems, I am embarrassed to admit to that I never bothered to take a deep look into it. It was too American-centric when I was working with an international database so research into financial crisis and economic volatility seemed more useful. Fortunately one of my peers had a look at it and I'll borrow some of his work on financialization.

Now it should be understood that financialization was the result of both ideology and theory. During the "Golden Age of Modern Capitalism" in the 1950s-60s, there was a belief that strong social regulations were necessary for a functioning market economy. During this period, the financial sector's role was to be the support system, the lubricant in the economic wheel. Strong financial regulation ensured that financial markets provided low-cost funds for business investment and for home building as well as a secure haven for household savings. From my own research, I would say that regulation was very successful in minimizing the likelihood of speculative financial booms and crises – while about 9000 banks failed in the 1930s, there were virtually no bank failures or financial crises in these decades.

However, this financial regime came to an end after a string of events: the breakdown of the Bretton Woods fixed exchange rate system in the early 70s, two bursts of inflation triggered by oil shocks that wreaked havoc on a regulatory system unprepared to deal with high inflation, and the Latin American debt crisis that threatened the solvency of large US money center banks in the 1980s. The stress these events placed on the regulatory system, combined with an incessant demand for regulatory relief by increasingly politically influential corporate and financial interests, and an erosion of belief in the efficacy of regulation by those charged with enforcing the rules, eventually led to its dismantling. The new approach to regulation was based on the belief that free financial markets with only the lightest touch of regulatory restraint will produce optimal outcomes.

For financialization not to occur, you would need to put on hold the tumultuous events that shook the nation's economy and inspired a movement of business and financial interests to urge for less regulations. This is to perhaps move the economy away from this sort of capitalism to a different variant of capitalism.

Before discussing the impact of financialization, let's define financialization:

1. At the general level, financialization refers to an increase in the size and significance of financial markets, transactions and institutions.
2. At a narrower level, financialization describes changes in the relationship between the non-financial corporate sector and financial markets. These latter changes include, first, an increase in financial investments and hence financial incomes, of the NFCs; and second, an increase in financial market pressure on the management of NFCs and an associated rise in transfers made to financial markets in the forms of interest payments, dividend payments and stock buybacks.

From an aggregate perspective, the result was neutral: there was no effect on the firm's investment because half the firms in the sample react positively and while the other half responds negatively. Each effect cancels the other. However, a deeper look into industry/firm-specific details shows that financialization has a negative and statistically significant coefficients for large and small firms across all sectors. So, hypothetically, if financialization never occurred, the reduced strain of financial payouts would have, on average, allowed companies to have more capital for investment than OTL. Maintaining the social regulations would have also likely prevented several financial crises and speculative bubbles.

Now as a side note, I will say that, from my personal research, even without financialization, the financial system will still play a role in the decline of manufacturing industries and that financial deregulation is not 100% bad. The former comes from my reading of Wurgler (2000). Simply put, by design, financial systems are supposed to be shifting investment away from declining industries to growing ones. Even without financialization, they are still going to shift investment away from the declining manufacturing sector.

The latter conclusion comes from Doidge et al. (2018). Without deregulation of private equity, U.S. firms in growing industries would have been hard pressed to finance their innovations. Simply put, more and more companies are becoming reliant on intangible assets and R&D projects in their respective industries. The financial systems before the 1990s would not have been able to finance these R&D projects. The US GAAP Accounting Rules are quite biased against intangible assets and R&D projects. Since these rules are quite conservative, accounting data on intangible assets tend to be uninformative and R&D Projects do not show as assets but are treated as expenses that decrease profitability. Thus, industries like the tech industry would suffer quite seriously compared to OTL for finding finance.

 

[Aisha Clan-Clan]

Given the negative side effects from the internet being dominated by big tech giants this is a plus. The ATL would have a net of hundreds of small sites and no big censorship-happy tech giants.

Sure, it'd mean a delay in streaming video compared to OTL but oh well, I'll live with having to torrent stuff instead of going to russian streaming sites if it means no fucking twitter/reddit/facebook.

 

[CountDVB]

Having written a dissertation on the relationship between economic growth and financial systems, I am embarrassed to admit to that I never bothered to take a deep look into it. It was too American-centric when I was working with an international database so research into financial crisis and economic volatility seemed more useful. Fortunately one of my peers had a look at it and I'll borrow some of his work on financialization...

I thank you you first for your large input on this.

I do think that manufacturing will still decline, but that's namely because less people will be buying physical stuff if it is going to be lasting longer. While I would think alot of these situations would still occur and the calls for deregulation would still be there, that doesn't mean they will be listened to. After all, the 1970s was still run by Nixon and if someone like Reagan won in 1976, even moreso. Hence why this doesn't gurantee that calls for deregulation would still happen.

I do imagine the finance sector still growing regardless, but I mean no thing slike corporate raiders, the hostile takeovers by hedge funds and so on. Plus, they could still update the rules. There is still the service industry to be considered here. The US seems to be reluctant to accept it is a service-based economy now so maybe the decline of manufacturing being slower could help with that for more time for solutions?

 

[CountDVB]

I would have to think for a while about the right POD—1970s too late really—but it wouldn’t be that hard for the USA to look a lot like the postwar Japan keiretsu system and even the same kind of public works / postal banking / massive farmer + rural areas subsidy program from the government. Basically the 1950s but cranked and Big Business dividing Wall St before they assemble.

Corporate unions instead of sector ones might do the trick for an off hand POD, to bring the USA that much closer to Japan.

I think there was something on this site that mentioned how German unions have unions have a seat of the table. I think this is what it's about: https://en.wikipedia.org/wiki/Codetermination_in_Germany

I don't if we could see something like that happen in the United State, at least during this time, though I am wondering if it may be possible given how it could be instituted if the heads piss off enough people and the president figured it could probably work.

 

[Fenrisúlfr]

I'm not an economist and nor will I ever be. However, I do have a masters in Public Policy and have spent the past 5 years working in the British and Scottish governments so...here are my thoughts,

I think that sometimes we think about the period between 1945 and 1979 as being the 'norm'. When actually if you look at the history of modern capitalism, since financial markets in London and Amsterdam in the 17th C onwards, the trend is towards extreme inequality and a state controlled by the interests of financiers, industrialists, and landowners. 1945 to 1979 was an aberration brought about first to deal with the most destructive economic crash that the world had ever seen and secondly the aftermath of the world's worst-ever war. Both of these necessitated centralized control of the economy to prevent a collapse into fascism.

FDR is often held up as a hero of the American left but let's be honest about the man. He was a turncoat member of the ruling classes and embarked upon his economic programme to prevent the rise of American fascism. The New Deal era social contract was upheld in Britain and the United States because the ruling classes in both nations thought that if they didn't relinquish some power both nations would fall, either from within or without.

Post 1979 the damage done from WW2 had largely been recovered from and, as a result of MAD, there was no power that could seriously disrupt the internal workings of either state. This was even more true with the collapse of Communism in the 1990s. So what we see with 'financialisation is a return to the pre-1930s norm. 2008 was our 1929. Only instead of adopting wide-scale Keynsism to avoid a collapse into fascism, our ruling class seem to be riding the neoliberal wave all the way into totalitarianism.

Anyway, as for how to how it may be avoided - I don't think it can be. My only thought is that perhaps you can make WW2 even more hellish than it already was, resulting in the ruling classes handing over more power to protect their interests. Or perhaps one can strengthen global communism to the point whereby it can prove a realistic threat to Western ideology. Have Germany, France and Italy flip etc. It wouldn't necessarily be a pleasant world to live in but it would fit your criteria.