There are many stories here. They are interlaced, but they are not the same.
The common thread that weaves through them all is the excesses of excessive financialization.
Financialization is an architecture for aggregating savings to form capital and then directing the investment of that capital into enterprises for the creation of wealth through commercial competition. Its paradigm is the public corporation. In that paradigm, savings are aggregated from large numbers of individuals by breaking large-scale enterprise down into bite-sized shares that can be bought, held or sold between individuals, as investors, without the participation, consent or even necessarily the knowledge of the corporation that issued those shares.
There are two reasons financialization has become excessive. One we have seen before. The other we never have.
The first is participation not by individuals investing their own savings, for their own proper purposes, idiosyncratically and episodically, but by stewards of perpetually entrusted funds, investing other people's money under a governing charter of trust to accomplish the purposes of that charter.
In the hands of perpetual trusts, financialization becomes speculation. When this happens, we get miscreant market manipulation, misalignment of interests, concentrations of wealth that stifle the innovation that drives the competition that is the engine of capitalist prosperity, and a recurring pattern of financialized asset pricing booms that always eventually go bust, growing in size until the bust is catastrophic.
We have seen this before, in the late 19th Century, at the dawn of financialization, with the Panic of 1897, and again in the the early 20th Century, with the Crash of 1929. We are living through it now, again, in the early 21st Century. The first time, it was life insurance companies speculating with life insurance premiums. The second time, it was banks speculating with customer deposits. This time, it is pensions speculating with employee retirement savings.
Truly it is said, those who do not learn the lessons of history are destined to relive them.
The second reason financialization is becoming excessive today is that Manifest Destiny has been achieved.
Do you remember Manifest Destiny? The philosophy in America in the 19th Century, that it was our destiny to expand into a Western Frontier that was so large and open as to be, for all practical purposes, unlimited. Powered by steam, electricity and the internal combustion engine, all fueled by the combustion of fossilized carbon, 19th Century American industry expanded relentlessly into this seemingly infinite horizon.
Inspired by the relentless regularity of motorized machinery, perpetual growth along an historical trend line became the common paradigm for economic prosperity. Enterprise became the corporation. Investing became corporate shareholding. Everyone could participate, because the price of shares would always go up.
This is the romanticized version of corporate shareholding that has become the entrenched orthodoxy of our day. The reality is, and always has been, a little more complicated. First, share prices do not always and only go up. Underneath the surface measures that seem to support our expectations for perpetual growth lies the deeper reality of change, and adaptation to change that is the real story of human history, and the true engine of our prosperity. When belief in perpetual growth along an historical trend line collides with the realities of change, and adaptation to change, we get a bumpy ride. There is the ebb and flow of the business cycle in the commercial markets. This gets exaggerated by pricing booms in the financialized asset trading markets that always, eventually go bust. Corporations fail, and go bankrupt. Investment is lost, and so are jobs. Earnings are the most authentic engine for the circulation of wealth within a capitalist economy. When people cannot earn, wealth cannot circulate. The economy seizes up. Like an engine that has run out of oil. The consequences can be catastrophic.
These booms can only get so large when individuals are driving the financial markets. They get much larger when the markets come to be dominated by perpetual trusts. Then, the bubbles can get so large, that almost everybody feels the impact when they pop. Isolated disasters become widespread catastrophe. The entire market grinds to a halt. Scarcity replaces surplus. Prosperity becomes a memory.
In the 19th Century, when the markets went bust, people went West.
In the 20th Century, when the markets went bust, people went to war.
The frontiers were filled up. There was no place to go. People were already everywhere. We had already spread to the ends of the Earth, and found that it is a sphere. It closes back in upon itself. There is no endless frontier. For a time, we thought we could just keep going, on out into Space. But we did that. We left the Earth, and ventured into Space. When we got there, all we found was rocks. No food. No water. No life. For us, Space is not a Paradise, like the New World was. It is a harsh and inhospitable place. We cannot live there. Not unless we take everything we need with us when go. In which case, why go?
War is not an invention of the 20th Century, but war on an industrial scale is. It is not the Sport of Kings. It is a horror beyond imagining. If we do it again, it will be Armageddon.
So, in the 21st Century, when the markets fail again, what will we do? We can't just pick up and move. There is no place to go. We can't go to war. That will kill us all. What else can we do?
Already we have tried to socialize the cost of the market bust of 2008. That is straining the limits of society, but maybe we can make it work. We tried before. In the 1930's. We couldn't make a socialization solution work then. Maybe we can now. Maybe we can find a way to sustain a prosperity of boom-and-bust. But why do we want to?
Rex Tillerson, CEO of Exxon, says that climate change is an engineering problem. He is right, and we have a choice. We can choose to act now, and engineer a new energy economy that will avoid a climate catastrophe. Or, we can choose to do nothing, and leave it to those who come after us to engineer a way out of the mess we have bequeathed to them.
The same is true with the economy. We can engineer a new paradigm that will bring an end to the cycle of boom-and-bust. Or we can just keep on booming and busting. Maybe.
If we do choose to make a change, the heroes of our new paradigm will be the stewards of our perpetual trusts. Insurance and banks, yes, but mostly pensions, endowments, foundations even sovereign wealth and family wealth. These are aggregations of savings held for investment that are large, purposeful, powerful and perpetual. They do not have to speculate. They can negotiate.
Of course, they have to have someone to negotiate with. So, we need values-driven enterprise leaders who also choose to negotiate, rather than feed the fires of speculation.
To catalyze this change, we need the passion of social and financial market reform advocates, to power us past our inertial resistance and carry us through the bumps and bruises of starting up within a brand new paradigm.
Depositary lenders will be important incidental beneficiaries, because if we can get the equity right, the debt will be right, too.
Then there are government and policy that can be radically transformed by the new possibilities for engineering sustainability in a negotiated prosperity.
Many different actors. Many different achievements. One enabling change. A change in the standards of prudence for investing by stewards of perpetually entrusted funds. Don't speculate. Negotiate.