The Truth About Finance

Hillary Clinton’s finance reforms wouldn’t rein in Wall Street. Finance and global capitalism are inseparable.

The New York Stock Exchange before the use of computers. Thomas J. O'Halloran / Library of Congress

The New York Stock Exchange before the use of computers. Thomas J. O'Halloran / Library of Congress

Hillary Clinton says she’s cracking down on Wall Street. She argues that her new financial reform plan will curb speculation and push back against “the tyranny of short-termism.” It’s a move designed to establish her progressive bona fides and assuage a public increasingly angry at the free ride finance enjoys.

Yet far from reducing the power of the financial sector, Clinton’s proposal — which includes a tax on high-frequency trading, promises prosecution for the most egregious Wall Street lawbreakers, and seeks to enhance the independence of key regulatory bodies — seems deliberately crafted to consolidate the hegemony of the financial institutions that dominate the world economy.

Fellow Democratic presidential contenders Bernie Sanders and Martin O’Malley both criticize her plan as inadequate, but neither candidate has tackled the flawed assumptions on which the proposal rests.

In presenting the plan as an attack on the power of finance, Clinton portrays the problem as one of discouraging the speculative and short-term profits that supposedly come at the expense of longer-term sustainable growth and prosperity.

Clinton is not alone in framing the issue this way; indeed, the idea that “short-termism” is the main problem with financialization has become almost axiomatic on the Left (as well as in academia and the business press).

Perhaps the most prominent progressive academic to voice such objections is William Lazonick, who in a widely read article recently called for devising regulatory and policy tools to counteract financial short-termism and return to the “prosperous economy” of the post–World War II era, in which a flourishing middle class was underwritten by high levels of domestic investment and good wages.

Yet are these axioms true? Have giant corporations actually become more short term in their outlook? And perhaps most importantly, how should the Left understand and politically confront the issue of financial power?

Protecting Markets

By ensuring that existing structures function in a more stable and predictable fashion, Clinton’s program is designed to protect the major financial institutions while supposedly restraining the roguish, unsavory activities that place the financial sector — and thus capitalism as a whole — at unnecessary risk.

One of the main features of Clinton’s plan is a call for enhanced regulatory “independence” — a standard feature of neoliberal restructuring. Such measures exemplify what Nicos Poulantzas called “authoritarian statism” — concentrating power in key state institutions necessary to establish functioning markets, while simultaneously isolating those bodies from elected legislatures (and democratic accountability).

Take the proposal in Clinton’s plan to make the Commodity Futures Trading Commission more autonomous from Congress. While this may shield the agency from industry lobbying, the primary purpose is to ensure markets function as unimpeded as possible.

Similarly, while Clinton’s plan to impose a “risk fee” on the largest banks is certainly welcome, it also reinforces the independence of banks by using market incentives rather than public policy to prevent banks from growing beyond a certain size. This is emphatically not a call to break up the banks, despite Clinton’s assertion that the federal government should have the tools to do so.

Clinton’s reforms are rooted in the 2010 Dodd-Frank financial reform law — which gave the Federal Reserve wide discretion in deciding how (and whether) to apply many of the bill’s key provisions. Clinton’s plan to give this profoundly undemocratic body even more latitude in guaranteeing the smooth operation of financial markets dominated by a few huge financial institutions is hardly a radical step.

Further empowering such regulatory bodies will only consolidate and protect concentrated financial power, all under the watchful eye of an increasingly undemocratic state.

Clinton’s tax on high-frequency trading purports to be an attack on the short-termism of Wall Street speculators — whose obsession with a quick buck, many argue, is to blame for offshoring and the growing precariousness of jobs in the US, and who have hollowed out domestic manufacturing capacity with little regard for the long-term health of American businesses.

But her plan to attack short-termism rests on problematic assumptions — assumptions that are widely shared by observers of Wall Street. In fact, the rise of finance has been accompanied by precisely the opposite of high frequency trading — share turnover declined markedly beginning in the 1970s.

Declining share turnover is partly a result of the concentration of corporate ownership in the hands of huge financial institutions — a defining trend of financialization. The growth of mutual funds, financialized pension funds, and similar products has meant that financial institutions indirectly manage a large proportion of the shares they don’t directly own. The difficulty of finding buyers for such large numbers of shares has made following the hallowed “Wall Street rule” — simply dumping the stocks of troubled companies — impossible.

Consequently, big institutional investors had to find other ways of pressuring managers to enhance profits. First came the wave of hostile takeover attempts in the early 1980s — with corporate raiders mobilizing investors to fire allegedly ineffective managers and force neoliberal restructuring — and then the wave of proxy fights, as investors sought to coordinate action to pressure management in the 1990s.

Thus, limiting “high-frequency trading” is unlikely to have much impact on the power of the giant financial institutions, which hold or manage the vast bulk of the available stocks. Indeed, framing the problem as one of short-termism actually protects concentrated ownership power.

Finance and Globalization

Many of the problematic assumptions on which Clinton’s proposal rests are widely shared by ostensibly progressive observers of Wall Street. Lazonick, for instance, sees the increasing remuneration of executives in the form of stock options as one of the primary causes of alleged financial short-termism.

Executive compensation through stock options, Lazonick argues, has led managers to effectively loot their companies by using corporate funds to finance stock repurchases (whereby corporations buy some of their own stock, ostensibly to increase the short-term price and allow executives to reap windfall gains by exercising the options), rather than invest in Research and Development (R&D) or create the quality middle-class jobs in the US that he believes are an essential part of a prosperous economy.

Lazonick contends that good middle-class jobs are sustained through investment in high-tech and knowledge-based sectors, which he sees as having suffered from the misallocation of funds toward stock buybacks instead of research by excessively greedy corporate executives who have taken advantage of regulatory changes to enrich themselves at the expense of national prosperity.

But he neglects to mention that compensation in stock options was implemented — alongside and as a consequence of financialization — precisely as a way of tethering the interests of managers to long-run company performance.

Compared to annual bonuses — which necessarily reward executives based on short-term metrics — payment in stock options was designed to tie managers’ interests to long-term profitability. Corporate stock repurchasing may elevate share prices over the short run, but destroying the real value of the assets in which one is paid doesn’t seem like a wise economic decision.

The same holds true of corporations themselves, which have a clear economic interest in maintaining the long-term value of the assets they possess. High-tech companies, for instance, may accept relatively low short-term profits in order to enter and dominate markets, while continued emphasis on R&D is geared toward preserving value over the long run.

Moreover, at a time when corporations are sitting on piles of surplus cash and interest rates are at historic lows, managers don’t face a zero-sum choice between engaging in buybacks to reward investors with boosted stock prices, or investing in production and R&D — especially since investors often reward announcements of new R&D expenditures with increased share values. With so much money around, corporations can essentially pay owners and invest in production.

Buybacks are better understood as a tool of corporate executives seeking to manage investors in service of their medium- and longer-term strategic plans.

The case of General Electric is illustrative. Far from encouraging GE managers to focus on the short term, enriching themselves through the sale and exercise of stock options while disregarding the company’s long-term profitability and growth, buybacks have been a core part of a long-term strategy for restructuring and investment.

In April 2015, after being designated a “Systemically Important Financial Institution” — which would impose vast new regulatory costs — GE announced it would attempt to reduce financial services from nearly 50 percent of revenue to 20 percent or less within two years, preserving only those financial operations which are “vertically integrated” with GE’s core industrial operations.

CEO Jeff Immelt has said that “deals, dividends, and buybacks” are “the trilogy” that is the backbone of GE’s restructuring plan to expand its high-tech, infrastructure, health, energy, and aviation operations, while divesting GE’s financial holdings.

This plan is already well underway, with the spinoff of the Synchrony consumer credit business in the largest IPO of 2014; the sale of Antares, a mid-market private equity lender, to the Canada Pension Plan Investment Board; and the sale of GE’s massive real-estate portfolio to Wells Fargo and Blackstone.

The withdrawal of GE from financial services markets does not change the centrality of finance for either the structure of global capitalism or the neoliberal reorganization of industrial corporations. The point, rather, is that buybacks are being used to carry out a massive, long-term strategic restructuring of one of the world’s largest and most important corporations.

GE is using buybacks to literally buy time, encouraging Wall Street to be patient as it executes its plan to break up and divest GE Capital while investing in sectors management believes show long-term growth potential.

And although Lazonick suggests that corporations have not been adequately investing, it’s worth pointing out that the past thirty years have seen some of the most significant restructuring in capitalism’s history — and it’s only been possible because of investment.

This restructuring has included relocating production and organizing globally integrated value chains, as well as the emergence of new economic sectors and intensified competitive pressures for new technologies and organizational forms (each of which entails long-term planning).

Lazonick suggests that the solution to the problems caused by this restructuring — high unemployment, the decline of the white-collar worker, and the diminishment of American manufacturing capacity vis-à-vis international competitors — is to ban stock buybacks and most executive payment in stock options.

Moreover, since he sees (correctly) that the majority of R&D innovations are subsidized by the state (and thus the taxpayer), Lazonick argues that we need a tax on innovation to recapture the profits that should rightfully accrue to the public sector, since it subsidized the investment and assumed much of the risk in developing new technologies.

But these demands won’t diminish the power or significance of finance. The postwar Keynesian regime of fixed exchange rates, capital controls, and full employment is over, replaced by the free movement of capital, financial integration, and globalized production.

Lazonick’s proposal essentially amounts to what Greg Albo has called a strategy of “progressive competitiveness” — that is, offering subsidies to capital, including up-skilling the workforce, in the hopes that capitalists will choose to invest stateside.

But trying to entice capital won’t rein in its excesses or expand economic democracy, and it most certainly won’t move us closer to decommodifying public services and workers’ labor — once the core values of social democracy.

Strategies like Clinton’s and Lazonick’s take for granted capital’s unprecedented global power to construct and destroy economies at will, and — at best — merely attempt to make this state of affairs compatible with the reproduction of a privileged strata of workers in high-value-added sectors. Far from contributing to the construction of a more just, democratic, and ecologically sustainable future, the most likely result of these programs is continued social polarization.

As Albo argues, the logic of “progressive competitiveness” — which forces countries with high-value-added export sectors to compete over expanded subsidies, specialized labor skills, and advanced technologies — is mirrored in “competitive austerity” whereby states compete to provide companies with extremely precarious low-wage labor, low taxes, and expanded rights for foreign owners.

Class Power and Political Reform

More than ever, finance is central to the organization of corporations and the global economy more broadly.

But financialization has entailed much more than just the increasing power of the financial sector. The global integration of production has also required the financial reorganization of “non-financial” corporations, many of which have also increasingly marketed financial services — calling into question the very distinction between “financial” and “non-financial” firms.

The globalization of production means corporations have to manage exchange rate fluctuations and an array of other risks, an imperative that has driven the huge growth of financial derivatives instruments. Moreover, corporate planning structures have been reorganized as internal capital markets, with top executives allocating investment among a portfolio of competing business divisions.

At the same time lower-level managers have been “responsibilized” (in Wendy Brown’s term) — encouraged to act like owners and make autonomous decisions based on the need to secure investment for their individual business units. Increased competitive discipline has incentivized cost cutting and enhanced margins, encouraging outsourcing and offshoring and the elimination of both manufacturing and white-collar jobs.

In short, far from being a harmful parasitic growth that can easily be separated from the “productive” capitalist economy, the expansion of finance has been an essential part of the global expansion of production and trade in the neoliberal era.

While people like Clinton, Lazonick, and even many further to the left may favor policies to entice capital to invest at home, the structural imperatives of capitalism mean firms will not voluntarily incur higher costs for the same products and technologies, nor will the state implement more nationally oriented economic policies as long as, in Adolph Reed’s words, we have “capitalism without working class opposition.”

Ultimately, the problems of finance are the problems of capitalism, not particular policies and practices. Placing limits on things like high-frequency trading, corporate stock buybacks, and executive compensation in stock options do little to address the problem of financial power or get us closer to genuine democracy.

The measures necessary to reverse these trends and reduce the power of finance over the global economy go far beyond mere regulatory tweaks to stop a few crooks from gaining an unfair advantage over respectable financiers.

Overcoming the current global regime of subservience to capital — and growing inequality and precarity — will require a class-based movement that can impose an alternative agenda based on democracy and human dignity.

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