Financialisation and its discontents

Amazon recently acquired a large office in the HITEC City office campus in Hyderabad. It is very likely that you have heard of Amazon, the world’s largest e-commerce company. HITEC City is a project developed by Larsen & Toubro (L&T). It is very likely that you know of L&T too, the business conglomerate that also develops commercial real estate. This transaction between Amazon and L&T was brokered by Colliers International. It is perhaps unlikely that you have ever heard of Colliers International, a real estate agent. 

Amazon and L&T are real businesses that contribute to the economy, create thousands of jobs and add immense value to the economy. Colliers is an intermediary that enabled a smooth transaction, which is a valuable service but perhaps not as vital to the economy. So, logically, companies like Amazon and L&T will be better known, attract better talent and its employees will typically earn more than those working in Colliers. 

Let’s now assume that Amazon also needed fresh capital to expand. Capital is available with investors such as mutual funds, pension funds or wealthy individuals. For Amazon to get access to the available capital, it typically hires an intermediary such as a JP Morgan to broker this transaction, similar to how Colliers brokered a property transaction for Amazon. But in this case, JP Morgan, the intermediary, is more powerful, more valuable, deemed more systemically important to the economy and attracts better talent with vastly higher pay than Amazon. 

What is it about the world of finance and capital, that the intermediary agent is more valuable and powerful than the principals? How have things come to such a pass where firms that add much lower value to the larger economy are valued higher? What does this mean for society at large? These are the kind of questions that the book Rise of Finance. Causes, Consequences and Cures  attempts to answer. When I received the request to review this book, my eyes lit up because the deleterious impact of “excessive financialisation” in modern economies is an issue on which I hold strong views. Further, one of the authors of the book is a fine scholar with extensive domain experience in financial services, which made it even more interesting for me to review. 

The book is expectedly erudite and scholarly. It even has an evocative start, quoting an ethicist as “a pill-dependent smoker who, on the way to his divorce lawyer, crashes his oversized car into a school bus because he is texting about an impending derivatives trade”.  Such a description beautifully captures everything that is wrong with the world of finance, albeit with some moral judgements. The debauchery and sins of rapacious finance professionals have been well documented and even portrayed through mainstream cinema. 

What is less understood is the larger social ramifications of how have we reached a stage where finance professionals that add so little value to larger society have appropriated so much wealth, wield enormous influence and perpetuate a vicious cycle of “tails they win, heads we lose”. The book’s Introduction chapter promises to shine the spotlight on these exact issues and recommend solutions in an “easy and accessible” read. 

The book is a masterful collection of charts, data, research references, important personalities, theoretical constructs and historical events. It delves deep into the causes of excessive financialisation in today’s economy and lays the blame primarily on loose monetary policy that fuelled the addiction to debt and the US dollar’s primacy as the global reserve currency. These points are argued cogently backed by copious empirical evidence. The authors also have strong words for former Federal Reserve Chairmen, Alan Greenspan and Ben Bernanke for their complicity in exacerbating financialisation. While three-quarters of the book is devoted to global events and trends, there is an entire chapter on “Finance in India”. The authors conclude that financialisation is not yet a big problem for India since Indian finance is dominated by banking and banking is dominated by public sector banking. In a somewhat contrarian way, the authors even highlight the benefits of the 1969 bank nationalisation programme, citing evidence from another book. 

Financialisation is a big social malaise, not just an economic one like the way the book treats it. The best brains in society are drifting to jobs that merely move money rather than solving real problems of health, education and livelihoods. The best brains are lured to these inane pursuits of predicting future stock prices due to the potential to earn vast sums of money by doing so. Betting on future stock price predictions pays a lot more money than say building satellites because of excessive financialisation of the economy. Such enormous wealth earned relatively easily is being used to shape a nation’s democracy through control of political funding. With control of politics, heads of hedge funds, investment banks and stock exchanges exercise clout and mould tax and other policies to suit their interests, which perpetuates this vicious cycle. This is the real social problem of financialisation. 

The book is a valuable addition to university libraries and students. But it will perhaps not add much to the issue of excessive financialisation, similar to the issue of income inequality.  

The Rise of Finance: Causes, Consequences and Cures  

Author: V Anantha Nageswaran & Gulzar Natarajan  

Publisher:Cambridge

Price: Rs 750

The reviewer is a political economist and a former scholar in a think tank