The collapse and reconstruction of the US financial system: from JPMorgan Chase to BlackRock (I)

Original title: "The Fall and Rise of American Finance"

Original author: Scott M. Aquanno, Stephen Maher

Original translation:MicroMirror

Preface

1: The latest stage of American capitalism development

The rise and fall of American finance

A new picture of financialization

Rethinking Finance and Corporate

2: Classical financial capital and modern country

Financial capital and industrial capital

From bank capital to financial capital

Financial capital and competition

State power, class power and crisis

3: Managementism and the New Deals Country

Reshape capitalist finance

New industrial order

Class Struggle and Management Crisis

4: Neoliberalism and financial hegemony

Financialization of non-financial companies

Asset Accumulation and Market Finance

Financialization and authoritarian states

Crisis and Decline in 2008

5: New financial capital and risk status

Crisis Management and Risk Status

The rise of the three giants

New financial capital

Private equity, hedge funds and financial capital

6: Crisis, contradictions and possibilities

Nationalization of market finance

Macroeconomic policies of financial capital

False promise of universal ownership

Financial democratization

1: The latest stage of American capitalism development

The 2008 financial crisis marked a fundamental change in American capitalism. As the Fed and Treasury crisis management efforts bring state power deeper into the heart of the financial system, several consecutive rounds of quantitative easing have promoted unprecedented concentration and concentration of corporate ownership in a small group of large asset management companies. After the crisis, these companies—BlackRock, Pioneer, and State Street—replaced banks as the most powerful institutions in the contemporary financial field, accumulating ownership of scale and scope that had never been seen in capitalist history. These asset management companies become the central node of a vast network that encompasses almost all major companies in every economic sector.

This is equivalent to a historic change in corporate power. Since the New Deal, the separation of ownership and control has been a core feature of the organizational form of a company: the person who owns the company (shareholders) is in form different from the person who controls the company. In the decades before the crisis, the market regulated the relationship between shareholders and managers: Shareholders could “exit” by selling stocks from underperforming companies. But with the rise of the three giants after the financial crisis, the boundary between ownership and control was broken. As a "passive investor", asset managers can only trade to reflect their changing positions on companies like the S&P 500 or the Nasdaq. As they could not sell stocks at will, they turned to more direct means of controlling industrial companies.

This financial impact on industrial enterprises has never been seen since the Gilded Age, when giants such as JPMorgan dominated American capitalism. For more than a century, the concentration of ownership has been limited by a fundamental trade-off: Investors can own a relatively small portion of a large number of companies, or a large portion of a few. In other words, as the degree of diversification increases, many companies' stock holdings are diluted, limiting investors' control over any particular company. Therefore, investors can accumulate enough shares to exert substantial power on relatively few companies. Since 2008, the rise of large asset management companies has reversed this situation: the Big Three has become nearly the largest shareholders of all the largest and most important companies.

Today, the three giants have become the largest or second largest shareholders of a company that accounts for nearly 90% of the total market value of the U.S. economy. This includes 98% of the companies in the S&P 500, which tracks the largest companies in the United States, with the Big Three holdings on average more than 20% of each company. Also striking is the speed at which this concentration occurred after the 2008 crisis. From 2004 to 2009, State Street's assets under management (AUM) grew by 41%, while Pioneer Group's assets increased by 78%. However, BlackRock’s unique significance in this power structure is reflected in the explosion of its asset management scale over the years, an almost unreliable 879% and becoming the largest global asset management company to date by 2009.

The speed and scale of this transformation heralds a new stage in American capitalism, characterized by unprecedented concentration of ownership and the concentration of corporate control around a few financial companies. Large asset management companies now play a highly active, direct and powerful role in corporate management, which is true for almost every listed company in the U.S. economy. They have become "universal owners" and manage all of the American social capital.

The rise and fall of American finance

The close connection between financial institutions and non-financial companies established after 2008 constitutes a new form of financial and industrial capital integration, which Marxist political economist Rudolf Shivdin called "financial capital" in 1910. Despite the widespread abuse of the term, financial capital does not refer to financial capital, let alone bank capital. Instead, financial capital emerges through the combination of financial capital and industrial capital, a new form of capital established through their combination - a synthesis of the original industrial and financial forms (Hegel's term). Through this process, financial institutions play an active and direct role in the management of industrial enterprises. By shaping the strategic direction and organizational structure of the companies it controls, financiers aim to maximize the returns on their monetary capital in the form of stock prices, dividends and other interest payments.

Financial capital is a special form of financialized capitalism. Generally speaking, financialization refers to the process of monetary capital—or a cycle of currency advancement and then interest-back—attaining a greater dominance in social life and economy. As one often observes, the expansion of monetary capital was a major feature of the neoliberal period. This is reflected in the principle of “shareholder value”, where a company gives investors greater returns through dividends and stock buybacks. The current form of financial capital represents a more concentrated form of financialization, and the connection between financial capital and industrial capital is closer. A central argument in this book is that neither the broader trend of financialization nor the emergence of financial capital have shown the decline of capitalism or the hollowing out of industry as often claimed. Instead, financialization is to improve competitiveness, maximize profits, increase productivity and exploit labor.

Furthermore, contrary to many claims that financialization is described as a sudden break with pre-neoliberal, non-financialized capitalism, we believe that financialization is rooted in the post-war period, when it was the result of a series of state efforts to achieve a "watertight" separation between finance and industry. Tracing the rise of financial power in the last two-thirds of the 20th century to the first twenty-first years, from the collapse of the JPMorgan Chase Empire to the rise of BlackRock, we present a history of American finance that challenges the public account. In the arc we outline, the history of financialization has four different stages: classical financial capital, management, neoliberalism and new financial capital. These phases form a cycle, including the decline of financial power, followed by the reconstruction of gradual, imbalance and contradictions. Each stage is characterized by a specific organizational form of state, enterprise and class power, and the transition is not marked by sharp "breaks" but rather by continuity and change.

Shivdin's theory of financial capital originated from his study of the development of capitalism in Germany at the end of the 19th century; however, his analysis was also widely used in the United States. During this classic financial capital period (1880-1929), investment banks formed large companies by merging small businesses. The power of these banks depends on their ownership of the company's stock and their ability to issue credit. As investment banks issue large loans to industrial enterprises, the interests of the two become tightly intertwined: industrial enterprises rely on credit, while investment banks seek to ensure loans are repaid, so they monitor business operations to protect their investments. The bank’s position as the largest shareholder ensures their authority over the company, allowing them to gain seats on the board and establish a “chain board” for companies they control.

With the increasingly diversified equity in the first half of the twentieth century, these financial capital networks became even looser. A new class of professional managers exercises increasingly autonomous control over industrial companies, and banks become a purely supportive part. The regulations promulgated after the stock market crash in 1929 sanctified the management period (1930-1979), which formally separated the governance of banks and industrial companies and made "internal" corporate managers the dominant force in the economy. During this period, without the holdings of large groups, these managers can control industrial enterprises without facing consistent challenges from investors. At the same time, however, the separation of banks and industrial companies led to the latter internalizing a series of “financial” functions, developing a broad capacity to independently raise and issue funds. Therefore, the financialization of non-financial companies originated at the core of the post-war "golden age".

During this period, the hegemony of industrial enterprises was supported by the new policy countries, which had three key attributes. First is its focus on legitimacy. New policy reforms, such as trade union rights and social security, aim to eliminate the fierce class struggle of the 1930s. These measures strengthen the legitimacy of capitalism and incorporate workers into the structure of management hegemony. Second, these reforms have led to a huge expansion of state fiscal expenditure, which is largely funded by taxation. Therefore, the New Deal state is a tax state whose redistribution plan leads to lower levels of income inequality. This is also due to the success of the union, which is largely unwilling to care about politics, in collective bargaining. Finally, industrial hegemony was supported by the family industrial complex, which combined the most dynamic companies with state power, leading to the enormous growth and diversification of so-called multinational corporations ( MNCs ) and promoted the development of corporate organizations in the form of multi-sector enterprise groups.

As post-war prosperity slowed down in the late 1960s, union wage struggles increasingly squeezed corporate profits, leading to an increasingly serious contradiction between legitimacy and accumulation: union rights and the new policy plan now pose a barrier to accumulation. This problem is resolved through the formation of a neoliberal authoritarian state, which restrains labor through unprecedented interest rate surges and a new round of globalization. As state power is concentrated on institutions that are not affected by democratic pressures, especially the Federal Reserve, elections and political parties become even more insignificant. This authoritarian structure is strengthened by the neoliberal state being a flawed state. With tax cuts to restore corporate profits, national projects increasingly use debt financing, strengthening fiscal constraints on the national budget. This also exacerbates inequality. The rich now no longer pay taxes for the redistribution plan, but lend them state funds to repay interest.

During the Neoliberal Period (1980-2008), industrial hegemony was replaced by a new financial force. To some extent, this is due to the integration of global financial markets, which provides the necessary infrastructure for enterprises to circulate value in international production networks. Financial hegemony was also supported by a surge in workers’ pension funds that began to be managed by professional fund managers in the 1960s and 1970s. There has been a wave of concentration and concentration of corporate stocks among these new "institutional investors" who have significant power over industrial companies. However, this form of financial power is very different from classic financial capital. Rather than saying that a single bank directly controls the corporate network, a cluster of competitive financial institutions imposes extensive structural discipline.

However, financial hegemony was not imposed by pressure from outside investors, but initially emerged within industrial enterprises, an adaptive response to diversity and internationalization in the decades after the war. In fact, this is an inherent aspect of the organizational form of multi-department enterprise groups. Large companies no longer revolve around a business, but are composed of many different businesses that often have little direct relationship with each other. Furthermore, the scope of these actions is increasingly international. The challenges this brings to the conglomerate to diversify the operational management of the business unit, even if the investment rights are concentrated in the hands of senior management. These so-called "general managers" do not manage the specific production process, but the monetary capital itself; by the neoliberal period, they had become financial capitalists, sitting on the ties between finance and industry.

With the development of the internal capital market of industrial enterprises, their financial departments and functions are increasingly dominant. This is most evident in the transformation of a company’s treasurer into a CFO, who, as the right-hand man to the CEO, is responsible for establishing “investor expectations” and carrying out the necessary internal restructuring to meet these expectations. Industrial companies are also expanding their financial capabilities as they try to manage the risks of globalization by engaging in derivatives trading. All of this ultimately led to the emergence of corporate organizations in the form of multi-tiered subsidiary companies, where multinationals organize production by integrating their internal departments with the second layer of external contractors, forming a highly flexible and competitive global network. Apple's reliance on Foxconn is just one prominent example.

New financial capital was formed after the 2008 crisis because the decentralized financial power of neoliberal shareholder capitalism is concentrated in large asset management companies. During the financial crisis, regulators attempted to enhance system stability by carefully planning bank mergers. After the dust settled, only four large banks—JP Morgan, Bank of America, Wells Fargo and Citigroup—dominate the industry. Ironically, however, state intervention has led to a shift from banks to a group of asset management companies, namely BlackRock, State Street and Pioneer. As the risk state develops greatly reduces the risk of stocks, asset management companies facilitate a large amount of funds to flow into these assets. The introduction of savings into stocks further reduced the risk, resulting in continued stock price increase and the ownership of asset management companies continues to be concentrated.

An important basis for centralized ownership of asset management companies is pension funds and other institutional investors who increasingly delegate management of their portfolios to these companies. By bringing together the large amount of capital already accumulated in these funds, asset managers further concentrated their financial powers and gained an economic dominance that had never been seen since the JPMorgan era. This is due to a historic shift to passive management. Unlike active management, in active management, high-paying fund managers seek to maximize returns by “beating the market”, passive funds hold stocks indefinitely, trading is just to track the trend of a specific index, which allows them to provide significantly reduced management fees, especially in the case of rising stock prices, to get high returns. But these passive investors are very active owners. Since they cannot constrain industrial enterprises through simple stock trading, they pursue a more direct impact method unique to financial capital.

If the rise of asset management companies is part of the historic transformation of American capitalist organizations, this is especially centered around BlackRock's excellence. By 2022, BlackRock has managed $10 trillion in assets. If assets it manages indirectly through the Aladdin software platform are included, that number is close to $25 trillion. BlackRock is now one of the main owners of nearly all major publicly traded companies in the United States. The concentration of capital has never reached such an astonishing level. Its power is reflected not only in the scale of assets it manages, but also in its special connection with the state. George W. Bush chose Goldman Sachs’ Hank Paulson as Treasury Secretary during his term, while Hillary Clinton and Joe Biden both considered BlackRock CEO Larry Fink for the position. Biden's chief economic adviser Brian Dees is also an executive at BlackRock. All of this shows that the power of a portion of new financial capitalists is growing.

A new picture of financialization

This book’s analysis of the role of finance in the development of contemporary capitalism is significantly different from that of progressive policy platforms and critical academics. In fact, almost everyone agrees today, especially in the years since the 2008 crisis, finance is a corrosive and parasitic force of the “real” industrial economy. The same is true of many of the disadvantages of neoliberalism, from economic crises to social inequality, which are often attributed to "financialization." While progressives fear that America’s prosperity and competitiveness would weaken without regulation to control financial power, Marxists often view financialization as a symptom of “late capitalism” and a harbinger of the decline of the American empire. These ideas inspired political debates between socialists and progressives, and the platform for political figures from Hillary Clinton to Jeremy Corbin.

Many observers follow Giovanni Arrighi's view that financialization is an inevitable stage in the growth and recession cycle of capitalist world system. In this view, the decline of hegemonic countries is closely related to financial growth. However, Arrighi downplays the central role of finance in early growth and vitality of capitalism. Investment banks are key players in modern corporate organizations in the 19th century, just as finance remains an integral part of the current multi-layered subsidiary form of corporate organizations. Finance is the neural center of contemporary global capitalism and constitutes the infrastructure to realize the circulation of value through an international production system. The growing prominence of finance does not refer to the decline of the American empire, but rather emphasizes the United States' central position in the global economy.

Progressives such as William Lazonick and Greta Krippner believe that the rise of finance has led to the “empty” of production, which echoes the story of recession. They believe that the financial industry is not concerned with investing in long-term growth and prosperity, but rather "making money quickly." Therefore, the rise of the financial industry has brought "short-termism" to industrial enterprises, leading them to abandon investment in "good jobs" that support the living standards of the "middle class" after the war, and the research and development necessary for American companies to maintain global leadership. Instead, companies transfer funds to "non-productive" financial services and feed their pockets. The compensation for stock options by executives only strengthens their motivation to engage in this dysfunctional strategy, leading them to raise the stock price through stock buybacks for a windfall.

However, the reason for the low post-war inequality is not the kindness or vision of the company manager, but the balance of class power, especially the ability of the union to win wage growth. As we will argue, these distribution transactions are supported by the unique environment of post-war prosperity and the structure of world trade before the advent of free capital flows. What led to the inequality and the regression of social programs associated with neoliberalism was not the rise of finance, but the inability of capitalism to support these compromises. As the post-war boom ended, the wage struggle of unions squeezed profits and created a decade-long crisis that could only be resolved if labor failure and a large number of low-wage labor were exploited through globalization. Financialization is therefore the key to restoring profitability and resolving the crisis of the 1970s, which led to the second golden age of capitalism, although this golden age is not as good as the first "golden age."

Furthermore, viewing finance fundamentally as a short-termist ignores the fact that some of the big stars of contemporary capitalism, despite not making profits in the short term, attract a lot of investment. Uber, for example, has been at a loss, but investors have been looking forward to the development of self-driving car technology, which is expected to make the company profitable at some point. Tesla has also been focusing on the long-term development of the brand-new electric vehicle infrastructure, even if it loses on car sales. Despite its low or no profit at all, investors have invested heavily in Amazon for more than a decade, which The Economist describes as “the biggest bet on the long-term prospects of the company in history.” Similarly, industrial companies in many industries are willing to bear the enormous short-term costs of neoliberal restructuring over decades to ensure their long-term competitiveness and profitability.

All of this is not surprising. After all, why do financiers or company executives intentionally destroy the long-term value of their assets? Furthermore, the assumption that the payment of dividends or the conduct of a stock buyback must be at the expense of a new investment is unfounded. In the context of low interest rates, there is no inevitable contradiction between investing in production and R&D and conducting repurchases and paying dividends, because companies can borrow almost for free. In fact, over the past four decades, corporate investment and R&D expenditure have increased as a percentage of GDP, as are dividend payments, and profits have also risen sharply. Despite returning large amounts of remaining cash to investors through buybacks, the continued investment in R&D by tech giants such as Apple, Microsoft and Google is clearly enough to maintain their position as a global leader.

In addition to expressing regret for Wall Street’s short-term privileges, many Marxists believe that “financialization” is rooted in deeper-or even fundamental-crisis in the capitalist mode of production. For Robert Brenner, Cédric Durand and David Harvey, falling profit margins in the industrial sector have caused corporate investment to shift from manufacturing to relatively profitable and rapidly growing financial services. They believe this creates the illusion of economic growth by creating a series of speculative bubbles that simply mask the potential shortcomings of industrial profitability. French economist François Chesnais links the political and economic center of finance to its role in international economic integration, but he also believes that financialization is an aspect of a long-term economic crisis characterized by overproduction and a decline in profit margins. For Chesner, this forty-year "global recession" shows the decline of the capitalist world system.

These views are based on some explanation of Marx's theory of "virtual capital", according to which many forms of financial capital are "virtual" and separate from "real" industrial capital. In this view, finance is largely seen as a passive recipient of part of the surplus value generated by the industry through the payment of various forms of interest, including interest on loans, as well as dividends and service fees. Thinking everything from corporate stocks to derivatives as virtual capital can at best downplay the role of these financial instruments in the integrity of industrial capital; at worst, it sees finance as the cancer of the “real” economy, so the real economy would be better without it. This opens the door to the theory of social democracy that explains “hollowing” – although these theorists often aim to prove that capitalism is doomed, rather than saving it by suppressing finance.

Finance and industry are not opposite. As we will show in the following chapters, it has historically been deeply connected to capitalist production. Finance – both inside and outside non-financial companies – regulates the extraction of surplus value, promotes competitiveness, and promotes the international circulation and value of capital. Finance and industry are not opposite. As we will show in the following chapters, it has historically been deeply connected to capitalist production. Finance – both inside and outside non-financial companies – regulates the extraction of surplus value, promotes competitiveness, and promotes the international circulation and value of capital. Multinational corporations are able to freely transfer investments around the world in the blink of an eye, which is a key condition for their construction and restructuring of flexible, dynamic and global production networks. Derivatives are far from being just a speculative "casino", especially when it is crucial to the risk of corporate management of global production. Finance is also crucial for corporate mergers and acquisitions and for maintaining consumption amid stagnation of wages in recent decades.

Radical economist Costas Lapavitsas avoids defining finance as independent of or against industry, emphasizing its structural role in capitalism. However, in his view that finance “exploits us all”, he tends to minimize the important and very positive role of finance in value production. Finance is not only a profiteer and extractive force in the economy, but is also crucial to improving the competitiveness and vitality of productive capital. In addition, he mainly understands the financialization of non-financial companies from the perspective of changing asset portfolios, that is, industrial companies invest more in financial services. The deeper transformation of a company, that is, monetary capital becomes more prominent in its organizational structure and has not been explored. Rapavica also did not fully question the ever-changing relationship between companies and financial institutions, missing out on the decisive characteristics of neoliberal shareholder capitalism: stocks are concentrated in the hands of strong institutional investors, investors' discipline for non-financial companies is strengthened, and the restructuring of corporate governance reflects financial empowerment.

Perhaps most critically, Lapavica, like many Marxist and non-Marxist economists, largely overlooks the central role of American imperialist countries in organizational economic structure and financial political hegemony. The omission paves the way for explanations such as Robert Brenner, Dylan Riley and Cedric Durand, who believe the country has now been instrumentalized or “captured” by the corrosive financial sector. A key argument proposed in this book is that, on the contrary, the role of the state in managing and building a financial system reflects what Nicos Planx calls “relative autonomy” of the state relative to specific capitalist corporations and small portions in terms of overseeing the overall, long-term system interests of capitalism. As we emphasize, capitalism is not only an economic system, but also a political system that requires trade-offs and power conflicts between different parts of capital within the power group in the state to manage – albeit always in the context of deeper economic contradictions and pressures.

As Leo Panitch and Sam Gindin have long believed, finance is neither a challenge to production nor a challenge to American hegemony. Instead, it is a fundamental component of the American imperial order, making globalization possible. For them, global financial integration represents the climax of the U.S. government’s “Building Global Capitalism” project since World War II. The unique imperial responsibility of the U.S. state to regulate the world system is first and foremost a commitment to ensuring free flow of capital across borders, regardless of its nationality, to create a true global capitalism rather than a unique regional or national capitalism. As they show, the key basis for this is the integration of global finance. While this means finance will become stronger in the global economy, industrial enterprises are able to accept this precisely because they also benefit from it.

Panic and Jinding point to the interconnectedness between the unique imperial role of the United States, the development of national institutions and the rise of finance. By doing so, they show that globalization is not an automatic result of economic “laws” but rather requires the development of specific national capabilities. This has led to the centralization of state power in the Federal Reserve and the Treasury Department and kept it safe from democratic pressures. This independence allows these institutions to flexibly intervene in managing the contradictions of globalized capitalism without being arbitrary of democratic accountability or the direct "capture" of capitalists. Therefore, relatively autonomous countries can act on behalf of capital, if not in accordance with capital's requirements. Financialization, globalization and the development of more authoritarian countries are all part of "making global capitalism."

Finance has always been closely related to the state, forming what David Harvey calls "national fiscal relations", that is, "direct integration" between finance and part of state institutions. Finance cannot be understood without considering the core role of state power in supporting and protecting finance; if the integration of state power and economy is not considered, the structure of state power cannot be understood. However, to date, few have tried seriously to track the historical development of the U.S. national economic institutions. As we will show, the evolution of the financial system in the twentieth century depends on the continuous expansion of state economic functions, leading to the emergence of authoritarian power structures in democratic capitalist countries, which is the basic foundation of today's new financial capital.

Sociologists and political scientists also cited some of the major changes in corporate capitalism in the 20th century, including financialization. However, they often fail to associate institutional change with capitalism as a system, and thus cannot understand how such transformations achieve a competitive reorganization of accumulation, nor how such reorganization arises—even believed that economic concentration would lead to a suppression of competitiveness rather than intensification. Furthermore, the focus on institutions in these accounts, rather than on the production and circulation of value, supports the view that financialization emerged suddenly with the rise of neoliberal shareholder capitalism, thus neglecting the deeper and more complex interconnections that always exist between finance and production in a case of essentially a monetary economy. The same is true of the dynamics of class struggle, which is crucial to understanding history, but has largely disappeared from people's perspectives.

Sociologist John Scott shows how the concentration of institutional investors has produced a historic shift since the 1970s from management companies dominated by largely insiders to neoliberal corporations, which are bound by greater investor discipline in the form of “diversified financial hegemony.” Unlike individual investment banks in traditional financial capital that directly control corporate networks, competing financial institutions have established brief alliances on company boards to exert broad influence and discipline on company “insiders”. Gerald Davis went further, claiming that the asset concentration of mutual funds (especially Fidelity) has constituted a "new financial capital." However, he believes that this centralized ownership has not been translated into control due to the short-term nature of regulatory restrictions, conflicts of interest, and active mutual assistance. Funding, and the fact that simple stock trading is easier than direct activity.

Davis therefore defines new financial capital as a “historically unique combination of concentration and liquidity”, equivalent to “ownership without control.” However, Davis didn’t expect how truly amazing equity concentrations in passive investment funds, such as those managed by BlackRock, Pioneer Group and State Street, would change these dynamics. Davis believes that the $1 trillion Fidelity Fund "has difficulty maintaining flexibility in investments", causing it to switch to other business areas. However, BlackRock alone currently manages $10 trillion in assets. Furthermore, as Davis observed, Fidelity is a relatively short-term investor, and these passive funds are extremely long-term. Therefore, they exercise their power not through transactions but through direct control. New financial capital, like the old, is based on centralization and long-termism, and is therefore first defined by the fusion of ownership and control.