The Daily Planet: Everybody’s Money

September 17, 2008

N.B. Another new column where I report on news relevant to the global economy, which in practice means just about anything in the news!

What do a high school teacher, a stock broker and a computer analyst have in common?  They all lost money today when the American stock market closed another 450 points down after Lehman Brothers filed for bankruptcy and AIG needed the government to give them $85 billion to avoid the same fate.  Several decades ago, none but the wealthiest Americans would be affected by a change in the value of the stock market.  But as the process that political economists including Robert Wadeof the LSE call “financialisation of the economy” progresses, more and more “average” people have their retirement funds and other investments tied up in the stock market.  Which means that more and more people are subject to the wild ride of what one of the founders of the discipline of international political economy, Susan Strange, called “Casino Capitalism.”

The Wall Street Journal comments today that “…Market turmoil translates into emotional turmoil for many people.  Some are experiencing sleepless nights and random bouts of crying, while others hope for a miraculous windfall.”  But all of this is new.  A careful study by a political sociologist at UCLA argues that along with the transition to a post-industrial economy where the service industry dominates, financialisation (defined “as a pattern of accumulation where profit-making occurs increasingly through financial channels”) is the most important change in the American economy since the 1980s.  American firms increasingly generate profit through their financial portfolio rather than through productive activity.   Additionally, financial firms make up an increasingly large segment of total profits in the American economy. 

Finacialisation of personal income and investments has followed these broader trends in the political economy with the conversion of retirement income and other investments to the stock market rather than more risk-free or traditional investments (like bonds).   This has a broader implication for the political economy: in times of global downturn, citizens will put pressure on politicians to bailout firms and regulate the markets.  However, the counter-veiling strength of corporations, whose business models are increasingly reliant on the financialised economy and where financial firms make up a larger part of the economy than ever, will resist such regulation.   Thus bailouts will be more common, but regulation no more so.  All of which implies a greater cost to taxpayers, who finance the bailouts in question, with no more responsibility on the part of firms.

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3 Responses to “The Daily Planet: Everybody’s Money”

  1. sal said

    I have a question (which a lot of people will think is stupid). What is a bond? Why are they less risky than shares?

  2. LMP said

    So the other day I was sitting in a pub with a very famous international relations scholar who had just served as the examiner for my friend’s PhD. He asked what my research was, I explained it (thinking maybe I had simplified too much), and when I finished, he asked me what a bond was. So not a dumb question at all. :)

    Bonds are the way that companies or countries borrow money. Say the UK government needs to build a new train line and they don’t have enough money to do so, they borrow money by issuing a bond. Parts of the total value of the debt is bought by people or corporations. Say you have 100 pounds. Instead of buying stocks worth 100 pounds, you can buy 100 pounds worth of the government’s debt. Then in for example 10 years (depends on how long the bond is), the government pays you back your 100 pounds, plus interest (e.g. 5%).

    It’s less risky because the UK government is unlikely to go bankrupt and so you know that in 10 years time you’re going to get back 100 plus the interest. Whereas a stock’s value could go up and down in the time it takes you to sell and buy it.

  3. […] the financial crisis, so I’ve decided to cover something a bit different in today’s Daily Planet: pirates.  Yes, really, pirates.  Though not those of the Caribbean, those of the Horn of […]

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