Been pondering this question a while, and now I see that something related has been touched on in the Late Stage Capitalism thread.
Since around 1980, the financial sector has accounted for an ever-larger share of the US economy.
If we could radically de-financialize the economy, what would the concrete effects be? What advantages/disadvantages might result?
All I can think of is the commodities/farm-based economy of the late 1800’s and early 1900’s. The average Joe didn’t invest in the stock market, municipal bonds, or t-bills. They instead saved their money in a local bank for a rainy day. Most people worked to put food on the table and a roof over their head, and if they happen to have a windfall they might splurge and buy an automobile.
That is such an expansive question that it is difficult to even know how to frame a response. What do you men by “de-financialize the economy”? Are you eliminating investment banking and stock/bond markets? Moving to localized monetary systems? A transition back to barter, community ‘trust-based’ trade, and sustenance farming? These would certainly mean an end to industrialization and a dependence upon local production for all common goods and commodities, which developed nations are currently completely unprepared for despite the individual efforts at self-sufficiency and the even more rarely functional commune.
Which is not to say that we shouldn’t take efforts to regulate and reign in what has become an out-of-control system of ‘wealth creation’ via speculation and hype. So much of the financial sector is really just casino bets on what are essentially complicated puts and shorts, and leverage off of debt that will never be paid back that the stock market is completely disconnected from actual value of products and services that companies produce, and so much real estate is vastly inflated that it cannot effectively be sold or practically used other than between 1%-ers who are tossing Monopoly® at each other. This has continued to function with only the occasional market crash and government bailout but I cannot believe that it will go on forever, and that is a house of cards with an elephant standing on top, balancing a crate of nitroglycerine on its back. Unfortunately, nobody involved in that system—which is most Americans as they have been compelled to buy into the stock market through 401(k) and pension plans deeply invested in stocks—wants to admit how fragile it is or pivot away from it in a controlled fashion if that were even possible.
So…I have no idea how to answer that question.
Stranger
Good question. By de-financializing, I don’t mean eliminating the financial sector 100 percent. This would not be a Khmer Rouge economy. I mean a regulatory framework that would radically favor “productive” sectors of the economy above the financial sector. So the stock market etc. could still exist, but it would be highly regulated. The aim would be to reduce the financial sector’s share in the US economy to something even less than it was in 1980.
As far as I know, the stock market (which of course is only a small part of the financial sector) is already highly regulated. And how does regulation reduce its share of the economy?
OK, but it’s all relative. Imagine it were far more regulated!
If it becomes too costly or complicated to do business, the financial sector would start to shrink.
You would end up with a black-market economy.
So would every other sector. Businesses would flee to other countries.
So I am not the OP, but noting his link to the Wiki article, and knowing this spun out from (I think) a comment about the ever increasing share of the economy going to finance and some actual economists and Very Wealthy Investors calling that parasitic:
I think we’re not talking about there being no finance and no markets. I think we are talking about eliminating many of the more exotic things, like CDOs (and maybe even less exotic things like asset management fees? We had a big “Rip off or no?” thread on that recently). What if we pared that back? I am not an expert, but it sure looks like there’s a whole crowd of people making tons of money off of bundling things up and passing them around.
@Chad_Sudan am I close?
I’m guessing that the OP is imagining a world where companies make profit by producing stuff, not by manipulating stock.
It’s a nice fantasy. Maybe it could be done by changing the tax laws. Make every company’s balance sheet declare profits separately for the two categories. Just like individuals on the 1040 form report their earnings separately for earned and unearned income. You earn your salary by making something useful. and paying a smallish tax; you earn interest and capital gains by playing financial games with the stock market. and pay higher tax.
So suppose General Motors had to report its earnings separately. Making cars is earned income; but the vast majority of GM’s profits come from financial games, which would be considered unearned income. Tax the unearned part at 90%, and force companies to concentrate on making things, paying their workers, and keeping the economy productive. Financial games wouldn’t be worth it.
It’s a nice fantasy, huh?I think the OP is asking what would happen…and my guess is that it would cause the collapse of the US economy and with it the end of western civilization.
But, hey, it’s fun to think about. 
The regulation of stock- and bond-issuing public companies and mutual funds as well as the brokers and managers is ‘highly regulated’, albeit primarily by the Securities and Exchange Commission (SEC) which is a mostly toothless organization which only has the power to impose fines or in the extreme order the delisting of unethical stocks and funds. However, the regulation of ‘derivative’ investments and debt-based leverage is laughable to non-existent, and so much of the wealth build on speculative investment is outside of the nominal money supply (even using a generous definition of that term) that it is basically made out of thin air.
How is a company like Tesla valued by the market at many times its plausible gross revenue across decades? It is complete nonsense, and there is certainly an argument for tightly regulating or even eliminating hedge funds, collateralized debt obligations, et cetera. But virtually nobody—Democrat or Republican—wants to even talk about that because what it would mean in terms of deflating the gross domestic product and the ‘money’ in ‘circulation’. It would certainly take the piss out of how super-healthy our economy is, though, and illustrate that people living at marginal wages have a real point when they are bitching about inflation and insufficient cost-or-living increases in wages.
Stranger
Bundling things up and passing them around can serve to reduce risk and add convenience for investors.
For example, mutual funds.
Financial services firms buy large numbers of stocks of individual companies and then sell shares of these bundles to individual investors and institutions like pension funds, for a small added fee. This allows the investors to avoid the risk and effort that go with picking individual stocks while still earning returns. Are we proposing to ban mutual funds?
@OldOlds – Yes! You understand correctly. It would involve curbing or eliminating the financial innovations and trends of the last few decades – setting the clock back, as it were.
I think that’s a bit reductionist. Most anything can be good OR bad. As we saw, bundling things up and passing them around can also be abused. Also, I was not taking a position but trying to frame the question since the thread is off to a bit of a disorganized start.
At a past job there was a joke that I was the best English to English translator at the company. I’ve always been good at sitting in a meeting with Supply Chain, R&D, Finance, etc. and understanding what each was trying to say even when they didn’t understand each other.
Let me rephrase. If it becomes too costly or complicated for companies in the financial sector to do business, the financial sector would shrink.
What regulations are you proposing?
All stock brokers have to wear red hats at all times? No trading on Sundays? No trading stock on the basis of insider information? No Jewish stockbrokers?
Just casting Regulations out of a 6th level arcane spell slot isn’t going to work.
Throwing out a bunch of hyperbole isn’t contributing to the discussion.
Stranger
Bundling things and passing them around is a way to mitigate risk and thus encourage investments that are less likely to pay off - including (although not limited to) taking a chance on a first time home buyer or small business founder.
That’s not to say we haven’t taken the concept further than is healthy at times; in 2008 we gave loans to people who probably weren’t in a position to be homeowners.
But the concept, in and of itself, is not inherently bad.
I see that I was ninja’d.