Relationship Between Finance And The Real Economy

The fact that banks control 97% of the world's money supply makes them a vital institution. Banks are the engine of our modern financial system and a source for economic growth. The bank's ability to create credit can have destructive effects; the Great Depression of 1929 and the Great Recession of 2008. In both cases, banks spurred on an asset bubble through overextending credit to aid the purchase of assets. The result was an economic collapse that wiped out wealth and reduced credit creation which stalled productive investments. The lessons of the two great economic collapse support the notion proposed by the author, that bank credit for transactions that do not contribute to the economy should be restricted.

The financial crisis of 2007-2009 resulted from a variety of external factors and market incentives, in combination with the housing price bubble in the United States. When high levels of bank and consumer leverage appeared, rising consumption caused increasingly risky lending, shown in the laxity in the standard of securities ' screening and riskier mortgages. As a consequence, the high default rate of these risky subprime mortgages incurred the burst of the housing bubble and increased defaults. Finally, liquidity rapidly shrank in the United States, giving rise to the financial crisis which later spread worldwide (Thakor, 2015). However, in the beginning of the era in which this chain of events took place, deregulation was widely practiced, as the regulations and restrictions of the economic and business markets were regarded as barriers to further development (Orhangazi, 2014). Expanded deregulation primarily influenced the factors leading to the crisis. The aim of this paper is to discuss whether or not deregulation was the main underlying reason for the 2007/08 financial crisis. I will argue that deregulation was the underlying cause due to the fact that the most important origins of the crisis — the explosion of financial innovation, leverage, securitisation, shadow banking and human greed — were based on deregulation. My argument is presented in three stages. The first section examines deregulation policies which resulted in the expansion of financial innovation and

One of the primary factors that can be attributed as to have led the recent financial crisis is the financial deregulation allowing financial institutions a lot of freedom in the way they operated. The manifestation of this was seen in the form of:

The years 2008 shined a light on a group of people who were considered high society. When the stock market crashed in September 2008, the world shines a spotlight on the financial corporation. Words such as hedge fund manager and financial instrument such as credit default swaps are not words not known to everyday citizens. The economic downturn forced society to ask question not normally asked.

Another ethnography of Wall Street was carried out by the anthropologist Karen Ho, who, like Gillian Tett, gives us a true perspective about the nature of the financial industry and helps suggest important factors about a liberal democracy in contemporary times. In her book, Ho raises certain issues with regards to the culture of finance. The banks high employee liquidity created a culture of job insecurity, often using practices and assumptions in effort to create and increase shareholder value. However, the attempt to appreciate the value was through the means of the derivative market, which became an obvious indicator that their assumptions would lead to an economic crisis. Capitalism is run by Wall Street personalities who have strong,

The 1930s, the period of the Great Depression is perhaps the most unstable financial time in United States history. The decade where more than 40 percent of nation’s banks disappeared crippled the economy for years and caused the Senate to pass the Glass-Steagall Act (part of the U.S. Banking Act of 1933). The main purpose of the legislation was to separate commercial and investment banking, limiting commercial banks’ securities and activities within commercial banks and securities firms and to restore confidence in the U.S. banking system. For the next 30 or so years, there was a substantial government safety net and government played a huge role regulating the economy and maintaining the aggregate demand through fiscal and monetary policies. (Arthur MacEwan. “Inequality, Power, and Ideology: Understanding the Causes of the Current Economic Crisis.” Real World Macro, Economic Affairs Bureau, Inc. November 2012.)

Financialization refers to the shift in the US economy, when we became no longer dependent on the real economy (the buying and selling of consumer goods) but dependent upon instances of purely financial transactions (borrowing, lending and interest). By the beginning of the twenty first century, the individuals working in the financial sector (government regulated) were obtaining salaries twice larger than those working in the private sector (not under government control). This, in return, created a shift in how income would be generated, and most of all, regulated.

Q: Why would most investments in the economy fail to take place if there were no financial

In the wake of the recent financial crisis, many commentators attempted to analyze the roots of the conflict from a political or economic perspective. Anthropologist Karen Ho, a veteran of Wall Street as well as an academic, attempted to understand the reason that Wall Street behaves the way it does in her 2009 anthropological study of American finance entitled Liquidated: An ethnography of Wall Street from a cultural perspective. The central paradox with which Ho begins her book is: " the economy experienced not only record corporate profits and the longest rising stock market ever, but also record downsizings," further concentrating the wealth in America (Ho 2009: 1-2). But how can corporations grow richer as the American public as a whole grows poorer? Corporations no longer view themselves as responsible for taking care of their employees, creating good products, or serving their original mission. Instead, the focus is on generating shareholder wealth (Ho 2009:3). Shareholders, not the larger public, have become the symbolic and real focus of firm strategy. The shareholder "symbolized and 'stood in' for the whole of the corporation and became the sole locus of concern and analysis" during the time Ho conducted her study in the late 1990s and continues to this day (Ho 2009:175)

By Hayek’s standards, the type of financial economy portrayed in the article, The Hand on the Lever, by Nickolas Lemann, I contend is still capitalism. This paper will examine how and why I believe it does so. Perhaps some may not interpret our current day financial economy as the purest form of capitalism, yet in essence it is capitalism nonetheless and Hayek’s standards holds true today.

The removal of any regulatory restraint on the operations of the banks and finance houses over the past three decades is itself an expression of the crisis and decay of American capitalism. The hallmark of this process is the growth of financial parasitism. It is the other side of the coin of the systematic dismantling of large sections of industry and the relentless attack on the jobs and wages of the working class. This assault, in tandem with the unfolding economic crisis, is entering a new and even more brutal stage.

Financialization can be shown in three perspectives. Firstly, financialization implicates finance regains dominant power in capitalism. Secondly, autonomy of financial institutions increases because of the increase in financial interests. Thirdly, wide range of economic actors is integrated into financial markets due to financial innovation and expansion of financial sector (Palley, 2007).

Q: Why would most investments in the economy fail to take place if there were no financial

Beginning in the 1990’s Financial sectors were consolidated into a few gigantic firms that were so large, their failure threatened the whole system. On the contrary, Clinton Administration helped them grow even larger. Deregulation and advances in technology led to an explosion of complex financial products called “derivatives”. Economists and bankers claimed that they'd make markets safer, but in reality, they caused more instability. The Cold War ended, high tech turned to financial markets to work with investment firms (weapons of mass financial destruction).

Finance is probably one of the most significant part of our life, it is involved in all kind of activities. No matter where you are and what you are doing, we all face difficulties in making decisions in how and when to use money. Talking about finance, most of people would link it with monetary terms, material possessions and investment to increase personal assets. For me through finance is more about budgeting. However, I consider it not only as a money management tool to balance my expenses and follow my business’s financial performances but also as an instrument that gives me an opportunity to expand my comfort zone. There are a few vital aspects of finances in my life that I am going to explore in this essay, including personal