Over the past eight years or so, the so-called “masters of the universe” in the financial sector seem to have swallowed their own hype. Arguing that money equals wealth and the freer the market the better, they have led the charge to offshore our manufacturing base while hopping on the biggest bubble in history, the real estate market of the ’00s.
This philosophy of “finance first” (never mind country) has its origins in the Reagan revolution, which we now see coming full circle as its current descendant, George W. Bush, effectively tells the financial industry that “I’m from the government and I’m here to help,” heretofore Reagan’s punchline about the most dangerous words in the English language. It’s time to make the case, as forcefully as possible, that production and ecosystems are at the center of a well-functioning economy, not finance.
Since 1960, finance and insurance as a percentage of the economy has grown from 3.6 to 8 percent in 2007, while real estate has moved from 10.5 to 12.2 percent, and manufacturing has come down from 25.3 to 11.7 percent. (These numbers are in value-added percentages). At the same time, we’ve thrown enough CO2 into the atmosphere to threaten global warming. What’s more important, the financial industry or the climate? Wall Street or the production of goods and services?
We can look at the economy as a system composed of two subsystems. One subsystem produces manufactured goods, agricultural goods, construction of buildings and infrastructure, and services that use these various goods and assets. The other system distributes those goods and services, some in the retail and wholesale industry, but most importantly for our purposes, the financial sector recycles — or is supposed to recycle — the surplus from the production subsystem of the economy.
The financial sector, seen from this perspective, actually does not generate wealth for the society as a whole. Ideally, it enables the creation of more wealth by targeting worthwhile expansion of production. But therein lies the rub — the financial sector has control over this surplus, without actually creating the surplus. And so it has grown large and mighty, able to influence the conventional wisdom of how economies work, and able to throw off the shackles of regulation, until as the theorists Polanyi and Schumpeter argued decades ago, it self-destructs.
So what is to be done? First of all, we must understand that the economy is centered in production, and in order for production to take place, the ecosystems and climate that underpin the economy are the top priority. Manufacturing and ecosystems must be bailed out, not finance.
As for finance, it seems to me that what we need is a system that will help us transform our economy into one that is sustainable — that is, one that does not use fossil fuels, one that does not heat up the atmosphere, one that encourages a manufacturing sector that is based on recycling and not resource exploitation, one that preserves the soil while growing food. Those are very different goals than the ones we have been pursuing.
The best way for the financial sector to be reoriented towards these goals would be for governments to nationalize, or “municipalize” those financial institutions that are failing, and use them mainly as banks to rebuild a sustainable infrastructure (they would also have to take over the business of providing short-term and medium-term credit so that businesses can keep their operations functioning). As for real estate, how about returning to the old savings-and-loan model, where the institution that lends the money keeps the mortgage, and is strictly regulated in how it invests the money?
Returning to a very conservative financial structure is the order of the day, and reorienting finance so that it helps with our huge economic and ecological problems is paramount. The king is dead. Long live democracy and the biosphere.