The Great Reversal

This chapter discusses the definition of finance and the meaning of financialization, a concept introduced long before the 2008 financial crisis that has since gained popularity in both academic and public discussion. It argues that finance, while having served an important function in many societies, has become too much of a good thing in the United States, and cites evidence demonstrating its extraordinary growth in and beyond the last quarter of the 20th century. The chapter also provides a brief historical account that identifies the political and institutional roots of financialization, from the Bretton Woods Agreement to the political reorientation in the 1980s, underscoring that the shift was not a natural result of capitalist economy but a historical product contingent on a wide variety of developments.

Introduction

The introduction to this book asks a number of questions that will be considered in the rest of the book: How did finance become an essential fabric of contemporary American life? What are the consequences for inequality in American society? How did finance become the most lucrative of all businesses? How has it transformed US corporations? When did every household decision become an investment decision? Most importantly, how has finance shaped the distribution of resources among Americans? The introduction describes the book’s attempts to answer these questions. It ends with an outline of the chapters that follow.

Conclusion

This concluding chapter uses the example of a 1965 study by social psychologist Melvin Lerner and another later study he conducted with Carolyn Simmons to introduce the thesis of this book. These experiments lead to the Just World Hypothesis. In this, Lerner argued that, to gain a basic sense of control, people needed to believe that the world (or at least the environment relevant to themselves) is fundamentally just. The central thesis of this book is not quite as clear-cut as that, rather it has been that the rise of finance is a fundamental cause of the growing economic inequality in the United States. This concluding chapter goes on to expand on that thesis. Finally, it looks beyond the United States and to the future.

A People’s Portfolio of the United States

This chapter focuses on how finance has transformed household wealth—a trend with long-term implications for how social-class inequality becomes entrenched. It first reviews the uneven distribution of wealth in the United States. Wealth inequality has risen since the last quarter of the 20th century. Today, fewer American families have sufficient means to accumulate wealth over time, and the concentration of capital in the hands of a select few has widened the fault line between the richest and the rest. The chapter also examines how the distribution of wealth has changed across generations—more precisely, what social scientists call “cohorts.” That is, wealth for the baby boomer generation differs greatly from wealth among the millennials. Since wealth accumulation develops over the course of a person’s life, families in young adulthood and near retirement are considered.

The Financial Turn of Corporate America

This chapter examines financialization in the supposedly “nonfinancial” sector and how it results in greater inequality. The last 40 years have seen a turn in which many nonfinancial firms have increased their participation in financial markets. The chapter describes why nonfinancial firms took a financial turn in the late 1960s and early 1970s. It focuses on two aspects of financialization: the advent of nonfinancial firms actively lending and trading in financial markets and the rise of the shareholder-value model in corporate governance. It concludes by identifying the “winners and losers” created by these developments and how financialization has devastated most working Americans.

The Aftermath

The 2008 financial crisis and its aftermath exacerbated both income and wealth inequality. Incomes remained steady for top earners but dropped for the bottom 60 percent of earners. The mortgage crisis signaled a collapse in wealth for middle- and working-class families. Chapter 7 traces the major developments since the financial crisis, showing how most regulatory and legal responses were designed to boost liquidity, reduce systematic risk, and penalize fraudulent activities in financial markets. While working toward these goals, these policies simultaneously facilitated the increased concentration of financial market power and intensified the intertwinement of Wall Street and Pennsylvania Avenue, the private intermediation of public services, and the dominance of finance in corporate governance. In the end, these policies have done more to restore than reform the financial order.

American Life in Debt

This chapter examines how financialization exacerbates inequality through the expansion of household debt. It identifies three primary avenues through which household debt has become a primary driver of inequality among families. First, families have unequal access to credit. Those who need it the most are the least likely to have access to credit; when they do, these families face the heaviest financial burden for taking out credit. Second, those who are well-off have abundant access to cheap credit and use that credit as a part of a household investment strategy that bolsters their wealth. Third, though policymakers have long championed credit as a solution to inequalities in wages and in labor markets, the expansion of credit is inadequate for addressing economic hardship. Credit can provide relief to a family in the short term, but it deepens economic divisions over time.

Finance Ascends

This chapter considers how the financial sector has evolved through tremendous changes since the 1980s. It argues that the expanding profits and ballooning compensation in finance are not driven by this sector’s contribution to the economy, but by the concentration of market power, political entanglement, and the private intermediation of public policies. It also shows that most of the income absorbed by finance has been captured by a limited set of elite workers, particularly white men. Their women and minority colleagues, on the other hand, have gained relatively less. Even within the ranks of finance, the industry’s success has led to wider class, gender, and racial divides.

The Social Question

This chapter considers the issue of inequality. It provides a synopsis of the existing explanations for rising inequality and identifies some of their shortcomings before outlining the contours of the investigation into the connection between financialization and inequality. It argues that the rising inequality in the United States is not a “natural” result of apolitical technological advancement and globalization. Instead, the widening economic divide reflects a deeper transformation of how the economy is organized and how resources are distributed. Financialization has motivated or complemented many inequality-inducing developments through three interwoven processes: the extraction of economic rents from the nonfinancial economy to the financial sector, the demise of the capital-labor accord, and the dispersion of economic risks from the state and organizations to families.