Banks and the Design of the Financial System: Underpinnings in Steuart, Smith and Hilferding

Banks in bank-based financial systems tend to engage in long-term lending that requires substantial own capital to guarantee solvency. In market-based systems, in contrast, they tend to undertake short-term lending that requires adequate reserves to guarantee liquidity. Theoretical support for these two approaches to banking can be found in,respectively, Steuart and Smith. The innovative Marxist analysis of banking by Hilferding combined elements of both. Banks in the early stages of development are Smith-like but, as the scale of fixed investment in industry grows, they lend long-term and become Steuart-like, also developing ‘commitment’ relations with enterprises. However, Hilferding also implied, erroneously, that financial systems historically evolve in a bank-based direction. Based on Hilferding but also drawing on Japanese Marxist analysis of finance, it is suggested instead that bank behaviour in bank-based systems results from institutional changes imposed by policy-makers in order to achieve ‘catching up.

Financialisation and Capitalist Accumulation : Structural Accounts of the Crisis of 2007-9

The crisis of 2007-9 resulted from a financial bubble marked by weak production, expanding bank assets, and growing household indebtedness. For these reasons the crisis casts light on the financialisation of capitalist economies. The literature on financialisation generally links weak production with booming finance; according to some, causation runs from weak production to booming finance, while for others it runs in the opposite direction. This article argues that there is no direct causation between booming finance and weak production. Rather, financialisation represents systemic transformation of capitalist production and finance, which ultimately accounts for the crisis of 2007-9, and has three main features. First, less reliance of large corporations on banks; second, banks shifting their activities toward mediating in open markets and transacting with individuals; third, increasing implication of individuals in the operations of finance.

Using ODA to Accumulate Foreign Reserves in Sub-Saharan Africa

.Poverty, ODA, Sub-Saharan Africa

Financialised Capitalism: Crisis and Financial Expropriation

The current crisis is an outcome of the financialisation of contemporary capitalism. It arose in the USA because of the enormous expansion of mortgage lending, including to the poorest layers of the working class. It became general because of the trading of debt by financial institutions. These phenomena are integral to financialisation. During the last three decades large enterprises have turned to open markets to obtain finance, forcing banks to seek alternative sources of profit. One avenue has been provision of financial services to individual workers. This trend has been facilitated by the retreat of public provision from housing, pensions, education, and so on. A further avenue has been to adopt investment banking practices in open financial markets. The extraction of financial profits directly out of personal income constitutes financial expropriation. Combined with investment banking, it has catalysed the current gigantic crisis. More broadly, financialisation has sustained the emergence of new layers of rentiers, defined primarily through their relation to the financial system rather than ownership of loanable capital. Finally, financialisation has posed important questions regarding finance capital and imperialism.

Financialisation, or the Search for Profits in the Sphere of Circulation

Financialisation of advanced capitalist economies during the last three decades represents expansion of the sphere of circulation, while the sphere of production has continued to face difficulties of profitability and productivity growth. In the course of financialisation, relations between industrial/commercial capital, banks and workers have been put on a different footing. The financial sector has become capable of extracting profit directly out of wages and salaries, a process called financial expropriation. Financial institutions have also become adept at profit-making through mediating transactions in open financial markets, that is, investment banking. The combination of financial expropriation and investment banking catalysed the crisis that began in 2007.

Systemic Failure of Private Banking: A Case for Public Banks

The current crisis represents systemic failure of private banking. The private nature of banks has created opacity, and exacerbated problems of liquidity, bad assets and capital shortage. Furthermore, private banks have failed in information gathering and risk management, as well as in mediating the acquisition of vital goods by households. It is paradoxical that, confronted with such systemic failure, post-Keynesian and other heterodox economists have generally made non-systemic reform proposals. This paper draws on Marxist theory to argue that systemic change is necessary, including conversion of failed private into public banks run transparently and with democratic accountability. Public banks could more easily confront the problems of liquidity and solvency; they could also play a long-term role by providing stable flows of social credit to households as well as to small and medium enterprises. Finally, public banks could provide long-term credit redirecting mature economies toward new economic activities.

The Urgent Need for Financial Reform to Mobilise Savings in Sub-Saharan Africa

The Urgent Need for Financial Reform to Mobilise Savings in Sub-Saharan Africa

Financial Profit: Profit from Production and Profit upon Alienation

Financial profit is prevalent in contemporary capitalist economies, yet its nature and sources remain unclear. In classical political economy, and for Marx, profit is conceptualised either as a fresh flow of value (profit from production) or as a share of existing flows of value (profit upon alienation or expropriation). This distinction is of critical importance in analysing financial profit, since the latter originates in both fresh and existing flows of value. The most complex form of financial profit relates to trading financial assets, and has a dual nature. In immediate terms, it arises from redistributing loanable capital; when mediated, it represents the accrual of future surplus value. If the mediation is incomplete, however, financial profit remains redistributed loanable capital, hence, a part of the existing flows of value. Thus, it is normally profit from production, but retains elements of profit upon alienation or expropriation.