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

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

Original author: Scott M. Aquanno, Stephen Maher

Original translation:MicroMirror

4: Neoliberalism and financial hegemony

Neoliberal capitalism emerged from Volcker’s shock first characterized by a new form of financial hegemony. The rise of finance is not only reflected in the increasing power of the financial sector, but also in the increasing importance of the financial logic and operation of industrial enterprises themselves. The latter is increasingly like a financial institution, as top corporate executives allocate investment pools not only in internal enterprise operations, but also in external contractors that provide cheaper labor, especially in peripheral regions around the world. In this way, the continuous financialization of non-financial enterprises has promoted the globalization of production.

However, as capital controls and obstacles to the Bretton Woods New Deal order were reorganized and abandoned, the emergence of a seamless world of capital accumulation also relies on the integration of global finance. These financialization and globalization processes restored industrial profitability and ultimately ended the long-term crisis of the 1970s. This financing provided the necessary infrastructure for deepening globalization in the following decades, allowing the interests of financial and industrial capital to be more closely intertwined. Whether inside or outside industrial enterprises, the rise of finance has enhanced the liquidity and competitiveness of capital and made a new world of streamlining capital accumulation possible.

The emergence of a more authoritarian country, especially characterized by the concentration of power on the Federal Reserve, is an integral part of globalization and financialization. The Fed’s isolation (or “independence”) from democratic institutions is necessary to ensure that it has the ability to conduct rapid, flexible and internationally coordinated interventions to meet the requirements of a rigid global trade and monetary order. Meanwhile, the state is increasingly relying on debt rather than taxes to fund its spending, which limits fiscal policy and further strengthens the Federal Reserve's power. State institutions related to legalization, including representative democratic structures, political parties, welfare state plans and trade union rights, were revoked or emptied. The emergence of an authoritarian neoliberal state closely organized around its accumulated functions means a more naked form of compulsory state power.

During the neoliberal period, financial capital that became hegemony not only included banks, but also relatively dispersed integration of different institutions. Unlike the direct control of the firm by banks that define financial capital, what is now formed is a multi-centralized form of financial hegemony in which competing financial institutions establish brief alliances on the board of directors of the company to exert broad influence and discipline. Most important are commercial banks and investment banks, but this part also includes mutual fund companies, pension funds, insurance companies, hedge funds and brokerage dealers. As we will see, these companies are interconnected to form a unique market financial system developed in the neoliberal era, and non-bank financial institutions become more important in credit and currency creation. It was this system that became the center of the 2008 crisis.

Financialization of non-financial companies

The emergence of financial hegemony is reflected in the transfer of surplus value distribution between finance and industry. As we have seen, in the age of management, finance’s weakness relative to industry is manifested in its limited ability to withdraw surplus from industrial enterprises through interest and dividend payments. Therefore, industrial enterprises can hold a larger portion of the surplus value generated in production in the form of retained income. Subsequently, the continuous increase in financial power is reflected in its ability to obtain an increasing share of surplus. As shown in Figure 3.1, retained earnings account for a proportion of GDP over the entire management period. It is striking that this relationship reversed sharply in 1980, and since then dividend payments have always accounted for a higher proportion of GDP than retained earnings.

Similarly, in the management era, industrial enterprises dwarfed even the largest financial institutions in terms of income and profit, and this was reversed during the neoliberal era. In 1960, only one bank (Bank of the United States) was listed among the 20 most profitable companies in the United States; by 2000, two of the top five were banks, and five of the top twenty were financial institutions. However, even these figures often underestimate the importance of financial institutions. What is more telling than the number of profitable financial companies is the share of these companies' total profits. This relatively small financial firm's share of total corporate profits rose from 8% in the early post-war period to more than 40% in 2001 (Figure 4.1). Therefore, finance accounts for an increasingly larger proportion of the growing overall.

Figure 4.1: The proportion of financial profits to total profits from 1948 to 2021 (%)

Source: Bureau of Economic Analysis, Author Calculation. Note: The "Neoliberal Average" covers 1980-2008. Other financial profits account for the share of domestic industries.

In the 1980s, so-called corporate predators such as T. Boone Pickens and Carl Icahn made hostile acquisitions of industrial companies, one of the first signs of a profound shift in the power relations between shareholders and managers. Such “raids” involve using borrowed money to buy a controlling stake in a company, firing the CEO, and then selling the company’s assets to repay debts. The Raiders received financing through "junk bonds" arranged by once-reputable investment banks such as Drexel Burnham Lambert, an employer of junk bond king Michael Milken, known for his annual "Preater Ball," which is packed with these rude New Wall Street crowds. These investment banks are willing to underwrite high-risk, high-yield bonds, provided that once the target company is taken over, they will use the target company's assets to repay the bonds.

Leveraged acquisitions are particularly concerning for industrial enterprise managers, as they allow predators who lack credibility to purchase controlling stakes in target companies almost entirely with borrowed funds. This actually means that anyone can become a threat. The company managers responded by protecting their companies by establishing defenses such as "poison pills" and "golden parachutes". In the former, existing shareholders may choose to buy additional shares at a discount in the event of a hostile acquisition attempt. This helps prevent an opposing radical investor from consolidating a large enough stake, which will affect management changes. In the latter, executives ensure that they are overpaid if they are fired for the acquisition.

Keeping the stock price high can help prevent such acquisition attempts. In fact, companies whose stock prices are "undervalued" in the eyes of predators are the main target of potential acquisitions because they can be acquired relatively cheaply and easily. Keeping a high share price increases the cost of acquiring a company, reducing or even eliminating profits from splitting and reselling assets. Therefore, managers tried to prevent such threats by executing so-called stock buybacks, where companies raised their stocks by buying back their stocks, a practice that the SEC legalized in 1982. In addition to dividend payments, the increase in stock repurchases during this period is also reflected in the decline in retained income as a percentage of GDP, which is an important mechanism for finance to obtain a larger share of profits (Figure 4.1).

Therefore, repurchases and increased dividend payments are the strategic responses of industrial enterprises to emerging financial hegemony. They form the core part of the theory of "shareholder value", according to which corporate strategy should focus more on raising stock prices. Embrace of corporate plunderers, this ideology has become the business card of a new era of financial power, as the supposedly complacent industrial managers face new disciplines. General Electric CEO Jack Welch became the most important master of the new doctrine. Others adapt slowly. But as the increasingly confident board began to fire management that failed to improve stock prices, most prominently were IBM in 1992 and General Motors in 1993, it was clear that even the largest and most powerful companies had no choice but to succumb to the strength of investors.

The emergence of multi-centralized financial hegemony is supported by the concentration and concentration of equity in the hands of large financial institutions. This is driven by the monetary capital pool controlled by institutional asset owners, especially pension funds. Ironically, the surge in such funds reflects the strength of unions in collective bargaining in the 1960s. By the mid-1970s, pension funds had become the largest single holder of company stocks. While this led some to speculation about the arrival of “pension fund socialism,” these funds ultimately helped to shift the balance of class power to capital and exacerbate financial pressures to reorganize non-financial companies. The state encourages the growth of such funds, as tax incentives for companies and workers played an important role in expanding pension scheme coverage from one fifth in 1950 to nearly half in 1970.

Therefore, large financial institutions directly own or indirectly manage a large portion of available equity. In 1940, financial institutions' stock holdings and stock trading accounted for less than 5% of all U.S. stock market capitalization. By the mid-1970s, they accounted for about 25%, and by 2008 they jumped to 70%. 4 However, even these figures tend to underestimate the extent of ongoing concentration and centralization during this period. While the concentration of stock ownership by large institutional investors is obviously very significant, the large amount of equity accumulated by these institutions is subsequently merged by other investment firms that manage them, resulting in greater ownership.

The size of equity gathered by large institutional investors means it is difficult for them to constrain underperforming companies by simply selling their stocks, as this may lower the value of their remaining holdings. Therefore, investors seek other ways to exert influence, including establishing more direct links with management. They also promote the creation of a stronger and more independent board of directors, which are controlled primarily by insiders during their management. Similarly, shareholders can exercise voting rights to replace management, nominate external directors, or otherwise influence company strategy through a "agent dispute." By the 1990s, agency wars were more common than hostile acquisitions, which was a radical opposite of the 1980s model. By the early 21st century, they were almost the only means to exert investor pressure, reflecting the formalization and consolidation of the new hierarchy.

Those who were once the industry rulers and at the top of the corporate power pyramid are increasingly finding themselves responsible for investors, and they and their allies in the business media are often accused of focusing too much on short-term profitability and lacking the necessary knowledge for a particular industry or company. But if it is obvious that the rise of finance has little to do with the so-called "perfect efficiency" of the capital market in distributing social surplus, then finance is not just a benefit of profiteer. Instead, it is becoming a strong industrial production discipline force, ruthlessly pushing its investments to maximize profits. Increased profit margins and increased capital liquidity brought about by financialization are not problems of "hollowing down" or weakening industries; on the contrary, finance has intensified the pressure on corporate restructuring and operations to reduce costs and maximize efficiency, competitiveness and profitability.

At the same time, the transformation of the strategy, regulations and structure of the state machine supported the reorganization of power groups surrounding the rising status of financial capital, thus forming a new political hierarchy. The new policy regulatory structure is based on the actions taken by the Federal Reserve, the Currency Complaint, the Federal Deposit Insurance Company and the U.S. Securities and Exchange Commission to maintain fragmentation of the banking system and restrict their participation in corporate governance, that is, to prevent the reappearance of financial capital. However, strong institutional investors now find these practices “difficult, confusing, expensive and generally disappointing.” In the 1990s, the Securities and Exchange Commission issued a series of regulatory reforms that expanded "shareholder rights" and gave power to the board of directors. Particularly important, reforms made it easier for major shareholders to coordinate with each other about the companies they hold stakes, promoting the formation of an alliance of investors that could challenge insiders.

These regulatory shifts greatly reduce the cost of agency competition and directly lead to increasingly frequent agency competitions related to hostile acquisitions. Importantly, these changes were implemented in response to the defenses of investor discipline companies established in the 1980s. In addition to the use of poison pills and gold parachutes, industrial managers are also trying to gain protection from federal anti-acquisition laws. When a lack of compassionate Reagan administration rejected these efforts, industrial executives turned to the state level, where they tend to be the largest employers. Unsurprisingly, these efforts had achieved even greater success: by 1990, 42 states had incorporated such protections. With the regulatory restructuring in the 1990s, the SEC took action to offset these defenses and limit their impact, institutionalizing investors' power by providing investors with a more orderly means of exercising their influence.

Therefore, the SEC intervened in the conflict between finance and industry and contributed to the establishment of financial hegemony. But that doesn't mean it has been "captured" by finance. The restructuring of economic institutions not only reflects the impact of specific enterprises on the country, but also the importance of finance in the accumulation structure. Stabilizing fiscal power requires the establishment of "accountability" and "good governance" in industrial companies. This is also reflected in a series of other new rules introduced by the SEC: While the Sarbanes-Oxley Act increases the power and independence of the board, the FD regulations prevent the privilege of disclosing insider information to large institutional investors. The latter, in particular, appears to be designed to prevent client relationships between internal managers and shareholders.

But the financialization of non-financial companies is not just a problem that external financiers force industrial enterprises to reorganize. As we have seen, the roots of financialization can be traced back to the core of the post-war golden age, as businesses respond to the complexity of diversity and internationalization. Therefore, despite strengthening centralized control over investment, non-financial companies have already diversified their operations. This has led to an increasing authority in the organization of the company's finance department as it is responsible for designing and implementing quantitative indicators, laying the foundation for establishing equivalent relationships between qualitatively different production processes. As long as these quantities are measured in universal equivalents, monetary capital mediates the relationship between the company's different businesses.

This is equivalent to the gradual development of the integration of finance and industrial capital. In the 19th century, this fusion was established through the interconnection between investment banks and industrial enterprises, and now, a century later, it manifests itself as the fusion of the MCM' and MM' circuits of internal capital in industrial enterprises. Although the provisions of the New Deal aim to strictly distinguish between these two forms of capital, this situation still arises. In fact, the direct result of these regulations is that industrial enterprises internalize a range of financial practices that previously depend on investment banks. These regulatory barriers actually inspire industrial companies to provide financial services because they are able to evade the regulation faced by formally designated financial institutions. This emerging convergence between financial and industrial capital within the company, and the restructuring of the investment system, especially the rise of the Chief Financial Officer (CFO). Although no major companies had a CFO in 1963, companies in the business world began to set up such positions from the 1970s, and by the 1990s, such positions were almost everywhere. The rise of the chief financial officer reflects a fundamental change in the corporate management logic, which now highlights obvious "financial" considerations. The company's financial director has always been a relatively dull and ordinary position, mainly responsible for bookkeeping, taxation and other work; now, the chief financial officer is the second-in-command and the CEO's right-hand assistant in all aspects of formulating company strategy

The CFO's task is to evaluate the performance of the business unit, develop strategies to use financial leverage to support the company's overall competitiveness, manage acquisitions and divestitures, and resist hostile acquisition attempts. They are also a major link with investors and financial analysts, especially through them managing the “Investor Relations” function. In addition to providing data and making predictions that determine “investor expectations”, CFOs also push the discipline companies need to achieve these expectations. Just as the influence of the CFO reflects the expansion of financial operations after the company's decentralization, this power is also essential to promote further financial restructuring to meet the needs of external investors. Therefore, the CFO is the main pillar of shareholder value, reflecting the new power of internal and external investors in the company.

The integration of finance and industry within an industrial company means that it develops a series of financial functions that do not strictly obey the industrial capital circuit it controls. Industrial companies are not only increasingly organizing the circulation of interest-bearing capital within the company, but also profiting from circulation outside the company. Industrial companies initially lend on a large scale due to the accumulation of retained earnings during management, which would otherwise be idle or relatively unprofitable to the bank. In fact, by the end of the Golden Age, industrial companies had become the leading lenders in the commercial paper market, just as they had borrowed heavily from other companies in these markets.

During the neoliberal era, the integration of non-financial companies and financial markets accelerated sharply. Figure 4.2 shows that during the neoliberal era, the total number of bonds issued by non-financial companies circulating on the market increased dramatically. In 1984, restrictions on the external sale of such bonds were lifted, effectively globalizing the US corporate debt market and significantly expanding the financing scope of non-financial companies, thereby changing these markets. The greater reliance on bonds also means that they are bound by these markets in new ways: as companies begin to rely on bonds as an indispensable source of financing, they are also increasingly concerned about their credibility assessments, especially reflected in bond prices.

Figure 4.2: Total bonds of non-financial companies from 1946 to 2008 ($1 billion)

Source: FRED, author calculation. Note: Average annually, one billion US dollars.

The importance of derivatives to global capital flows is another factor that drives the integration of industrial and financial capital within a company. During the period of Bretton Woods capital controls and fixed exchange rates, the company invested abroad by "skipping" the tariff wall, established subsidiaries, and produced products to sell in specific economic zones. However, the abolition of tariff protection during the neoliberal period allowed global production to be streamlined. The excess facilities were demolished and the production phase was located at the lowest cost of labor, regulation and taxation. The result is the creation of a seamless, globally integrated production network. In fact, a large part of the world's "trade" is the flow of products and capital through the cross-border enterprise production chain.

The risk of cross-border liquid capital is that unexpected exchange rate and interest rate fluctuations may erase the finished product before it enters the market. The company manages these risks by signing derivative contracts: Daily trading volumes of derivatives grew 50 times from almost zero to nearly $2 trillion between the early 1980s and 2007. Derivatives ensure the right to purchase assets at a fixed price in the future, effectively "locking" a given price. Therefore, they transfer risks to speculators who are willing to take risks in exchange for the possibility of making substantial profits. By doing so, they establish some consistency in fixed exchange rates, albeit in a world of fluctuations in floating currency markets. Therefore, derivatives regulate the continuity of industrial capital in the production and realization of surplus value.

In derivatives contracts, one party pays a fee, called a premium, in exchange for protection against unstable events, such as sudden changes in exchange rates. If this happens, the agreed amount will be transferred to the contract holder to make up for some or all of the losses. To be trustworthy, derivative contracts must be managed by a reputable third party that can monitor the flow of funds between the parties to the contract. This role is played by large banks, which pass on fees and premiums and settle the final payment at the end of the contract. As a result, banks have created new revenues by transforming their centrality in the global financial system into a unique role in expanding the derivatives market. In addition to making profits by charging service fees, banks also sign derivative contracts to hedge their own risks.

As we have seen, competition is a function of capital flow. In terms of promoting investment in and outflow sectors, facilities and geographical regions, corporate financialization strengthens competitive discipline on industrial capital (to maximize profits) and workers (to put downward pressure on wages and working conditions). Unlike the norm during management periods, divestment from lower profitable businesses has become a routine practice for companies that adopt new “portfolio management” rather than endlessly scaling. Financial companies gain competitive advantage from this ability to divest from relatively unprofitable sectors while quickly evaluating and investing in more profitable sectors.

By the late 1990s, these trends were eventually replaced by the new multi-tiered subsidiary form of corporate organizations formed in the decades after World War II. More and more industrial companies are organizing production not only in their own business units, but also signing subcontracts with external companies that provide cheaper labor, which are often located on the periphery of the global market. Therefore, multinational corporations integrate external contractors and their internal departments into a global production and investment network. The flexibility of these subcontracts further exacerbates competitive pressures for workers and their countries in investment and employment, lowering wages, limiting troublesome environmental and labor regulations, while providing relatively easy relocation capabilities for multinational corporations.

Multi-layered form of attachment is the organizational structure in which capitalist globalization occurs. These multinational corporations are at the top of the global political economy because they have two unique financial assets: brands and intellectual property. Both forms are state-granted monopoly rights, as ownership of these assets gives exclusive control over the manufacturing of certain products or the use of a particular brand. The multinational company then ensures control of production by entering into a license agreement with the subcontractor. In this way, the power of the multi-layer subsidiary form over production is constructed based on the company's further restructuring around financial asset management.

Therefore, for the rise of finance, what is more important than the change in the allocation of surplus between finance and industrial capital is its ever-changing system function in the capital accumulation organization. The neoliberal globalization process that unfolded in the 1980s and 1990s led to deepening the entanglement between finance and industry. Financing is crucial to the liquidity of investments, both inside and outside the company, allowing industrial enterprises to create a new world of global integration accumulation. Far from a symptom of recession, financialization has brought about a new era of prosperity to industrial enterprises and financial institutions. The growing power of finance in the American social form reflects its position as a neural center of global capitalism.

Asset Accumulation and Market Finance

The financial restructuring of non-financial companies and the rise of large institutional investors are both prerequisite for the development of new forms of accumulation based on ownership and control of financial assets. This asset-based accumulation model is defined by the increasing importance of non-cash financial assets as the form of monetary capital for financial and non-financial companies. Asset accumulation is an important part of the market financial system formed in the neoliberal period, and the financial system and its credit generation function are reorganized around the ownership and exchange of assets. Market Finance integrates pension funds with investment banks, commercial banks and other financial institutions.

A basic premise of asset-based accumulation is to define, construct and regulate a wider range of tangible and intangible objects and processes as abstract financial assets. For example, as senior executives of non-financial companies become monetary capitalists, the company itself is also constructed around objectifying its various concrete business operations (industrial capital accumulation processes that exist across time) into abstract financial assets. This has promoted the integration of these industrial circuits in the logic of monetary capital, which is increasingly dominant in enterprises. At the same time, the financial system itself is increasingly operating on the premise of decomposing economic processes and reorganizing them into different types of tradable financial assets.

Financial assets are the specific form of monetary capital. Their main feature is the ability to secure property claims for future income through sales or other contractual arrangements (e.g., license agreements using intellectual property rights). From baseball cards to Da Vinci's masterpieces, from loans to intellectual property, as long as the MM cycle of monetary capital is integrated, everything can become a financial asset. As assets, the only useful value these things have is their ability to convert into large amounts of currency through exchange. In fact, as we see in Chapter 2, the monetary nature of financial assets depends on their ability to store value, thus transforming into a universal equivalent form (i.e. currency). It is through currency exchange that the returns of asset value are realized and the M-M' circuit is completed.

Assets of different categories and forms continue to compete for their valuation in general equivalent forms. As an asset (i.e., stock), a company is in a competitive relationship not only with all other companies, but with all other financial assets from art to houses. As a result, asset-based accumulation deepens the penetration of the currency form within industrial enterprises and throughout the economy. This imposes huge constraints on enterprises and has a profound impact on their strategies and even the structure of industrial capital itself. People cannot regard assets as just virtual capital, and exist in independent financial fields separated from the "real" economy. Instead, assetization has brought finance and its competitive pressures into production more deeply than ever before.

Asset accumulation supports the reappearance of financial hegemony through the concentration of equity within non-bank financial institutions. In Marx's financial accumulation model, banks prepay a monetary capital to the operating capitalist, who controls the capital until the loan repays interest from the surplus generated in production. The capital provided by the financier to the industrialist, and then flows back to its owner by virtue of its ownership of that capital, coupled with interest. However, because non-bank financial institutions that underpin financial hegemony during the neoliberal era did not issue bank loans, they could not withdraw surplus value from the company in this way in the form of interest payments. Therefore, they have to "get a share of the value created by industrial enterprises through other means.

One way they do this is by paying for dividends. In fact, as we have seen, the growth in dividend payments reflects an increase in financial power. However, dividends are determined by the board of directors year by year, rather than determined through contractual arrangements before the loan is received. Therefore, dividends tend to fluctuate in ways other interest payments do not. Therefore, for institutional investors, what is more important is asset valuation, that is, the stock price itself. While utilizing these valuations does not equal the direct transfer of surplus value, it does empower stockholders to gain a larger share of the total social product. Therefore, institutional investors accumulate wealth through installments and increasing stock value.

It is clear that the distribution of profits between finance and industry is not sufficient to understand the extent of financial power in the neoliberal period. In addition to the income earned by financial companies, their monetary power is also reflected in the value of assets they hold. Figure 4.3 illustrates the dynamics of asset accumulation by showing the relationship between stock price and company profit. As it shows, in the neoliberal era, the market price of stocks grew much faster than the company's profit per share. This divergence shows that stock prices themselves have become the basis for financial accumulation. Furthermore, it illustrates the extent to which neoliberalism breaks with the early stages of capitalist development, as this proportion exceeds any other period of the twentieth century, including classical financial capital.

Figure 4.3: P/E ratio of S&P 500 index companies from 1880 to 2008

Source: Global Financial Data, WRDS, Author Computing

It is crucial that the success of asset accumulation fundamentally depends on the company's ability to generate profits. Holding stocks of companies that cannot do so cannot serve as the basis for investors to accumulate monetary power over the long term. An inflated stock price, without a profitable basic company, is the definition of a classic stock "bubble". To be sure, even the stocks of profitable companies can fall into a bubble. Theoretically, in either case, the final result is a "correction" of the market, reducing the stock price to a "equilibrium" level. We often see this happening, for example in the "Internet" bubble of the 1990s. It is important that there must ultimately be some correspondence between investors' expectations for future accumulation (as reflected by the stock price) and the target company's actual ability to generate surplus value.

Therefore, while Chart 4.3 shows that during the neoliberal period, the P/E ratio generally increased, and therefore the difference between stock price and company profit also increased, this by no means means that the correspondence between the two is interrupted. Instead, this suggests that equity assets have become the basis for accumulating monetary power in a new way—that is, through stock price increases. But this can only happen with expectations that these companies remain profitable. Similarly, unprofitable companies may rise in share prices, as these companies are expected to be profitable sometime in the future.

Therefore, stock prices reflect speculation about the future prospects of some capital, which can only be measured by profit. Of course, there is no guarantee that these guesses are correct: some investors will always bet wrong, while others will get rewards. Regardless of the outcome, it cannot be assumed that investment in the stock market is just a transfer of "real" investment. The abstract nature of monetary capital means that stock market returns can be redistributed into any concrete capital loop, thus entering new physical investments and new products. In addition, stock market investment and fixed capital investment are by no means mutually exclusive: throughout the neoliberal period, corporate investment remained within the historical average (Figure 4.7), while corporate profits surged (Figure 4.8), and R&D expenditures increased (Figure 4.6).

Financial hegemony is rooted not only in the growth of the company's stock value, but also in the specific powers granted by equity. Equity is becoming increasingly important, resulting in a new form of separation of ownership and control. Of course, the capital flowing within the company is still controlled by its manager. However, unlike loans that do not exist after repayment, stocks give their owners the right to share their surplus permanently. They are not based on ownership claims for monetary capital in the hands of industrial capitalists, but establish ownership of the company itself. This also gives shareholders a certain degree of control over the company. Therefore, the concentration of equity and the long-termism brought about by insufficient liquidity in these large assets tend to make financiers more directly into production.

However, the concentration of asset ownership is accompanied by the fragmentation of the financial system. The dispersion of power among a series of financial institutions is achieved through the emergence of "market finance". Traditionally, loans are concentrated under the control of banks, who are "general managers of monetary capital." Therefore, Marx believed that monetary capitalists and bankers were basically interchangeable. Market-based finance is a brand new financial intermediary model, that is, the way funds flow from lenders to borrowers. In a market system, borrowers can obtain credit directly from the financial market without going through banks. Similarly, depositors can invest in a range of financial instruments, such as stocks and bonds, through non-bank financial institutions, as alternatives to bank deposits.

Therefore, with the development of market finance, more and more financial transactions bypass banks in a process called "de-mediation". In the 1970s and 1980s, the increase in de-mediation posed a major competitive challenge for banks. First, the emergence of money market mutual funds—the monetary capital pool managed by mutual fund companies and invested in secure, short-term debt securities—takes savings from checking accounts. Since the Q regulations limits on interest payments do not apply to these funds, they are able to provide investors with a higher rate of return than banks. This has driven growth for non-bank financial institutions, especially as inflation drove market interest rates in the 1970s. The Volker shock further exacerbated these pressures, making interest rates a full 10% higher than the Q-standard level.