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\nAdair Turner: The Consequences of Money-Manager Capitalism\n

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\n\nPublisher:\n\nInstitute for New Economic Thinking\n\n\n
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\nIn the wake of World War II, much of the western world, particularly the United States, adopted a new form of capitalism called “managerial welfare-state capitalism.” The system by design constrained financial institutions with...\nIn the wake of World War II, much of the western world, particularly the United States, adopted a new form of capitalism called “managerial welfare-state capitalism.”

The system by design constrained financial institutions with significant social welfare reforms and large oligopolistic corporations that financed investment primarily out of retained earnings. Private sector debt was small, but government debt left over from financing the War was large, providing safe assets for households, firms, and banks. The structure of this system was financially robust and unlikely to generate a deep recession. However, the constraints within the system didn’t hold.

The relative stability of the first few decades after WWII encouraged ever-greater risk-taking, and over time the financial system was transformed into our modern overly financialized economy. Today, the dominant financial players are “managed money”—lightly regulated “shadow banks” like pension funds, hedge funds, sovereign wealth funds, and university endowments—with huge pools of capital in search of the highest returns. In turn, innovations by financial engineers have encouraged the growth of private debt relative to income and the increased reliance on volatile short-term finance and massive uses of leverage.

What are the implications of this financialization on the modern global economy? According to Adair Lord Turner, a Senior Fellow at the Institute for New Economic Thinking and a former head of the United Kingdom’s Financial Services Authority, it means that finance has become central to the daily operations of the economic system. More precisely, the private nonfinancial sectors of the economy have become more dependent on the smooth functioning of the financial sector in order to maintain the liquidity and solvency of their balance sheets and to improve and maintain their economic welfare. For example, households have increased their use of debt to fund education, healthcare, housing, transportation, and leisure. And at the same time, they have become more dependent on interest, dividends, and capital gains as a means to maintain and improve their standard of living.

Another major consequence of financialized economies is that they typically generate repeated financial bubbles and major debt overhangs, the aftermath of which tends to exacerbate inequality and retard economic growth. Booms turn to busts, distressed sellers sell their assets to the beneficiaries of the previous bubble, and income inequality expands.

In the view of Lord Turner, we have yet to come up with a sufficiently robust policy response to deal with the consequences of our new “money manager capitalism.” The result likely will be years more of economic stagnation and deteriorating living standards for many people around the world.
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Media Length
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23:05
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Grade
Higher Ed
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Subjects
Social Studies & History
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Media Type
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Source:
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\nNew Economic Thinking\n\n
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Date
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2014
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Language
English
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For Teacher Use
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Fine Print: Educational Use
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america, real estate, interest rates, finance, economic growth, europe, england, credit
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adair turner baron turner of ecchinswell (organization leader), adair lord turner, pierpaolo barbieri, capitalism (political ideology), financial services (industry), economics (field of study), institute for new economic thinking (nonprofit organization), risk, institutions, united states, united kingdom, money (quotation subject), credit (industry), matthew kulvicki, lord turner, awful lot, modern macroeconomics, fully democratic, car factories, positional goods, arbitrary token, home ownership, highly leveraged, debt overhang, tail risk, low flation, minimum wage, finite supply, infinite supply, european union, income ratios, advanced economies, wonderful irony, low growth, borrow money, wealth resides, high levels, bring back, 18th century, extraordinary phenomenon, economic thinking, extraordinary
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