Global Journal of Human Social Science, E: Economics, Volume 21 Issue 4

Volume XXI Issue IV Version I 7 ( E ) Global Journal of Human Social Science - Year 2021 © 2021 Global Journals Transforming Financialization and Inequality in a Post-Covid World borrowed against the rising value of their homes, given little or no growth in their income, and this decision increased financial fragility. 9 c) Non-Financial Corporate Sector And in the real world, the terms of the loans (no income, no assets no job or NINJA, etc.) were far more egregious than in the example directly above. As Paul Mason states: “If a declining share of income flows go to workers and yet a growing part of profits is generated out of their mortgages and credit cards, you are eventually going to hit a wall. At some point, the expansion of financial profit through providing loans to stressed consumers will break, and snap back. That is exactly what happened when the subprime bubble collapsed.” Financialization has also dramatically reshaped corporate governance at non-financial corporations (NFCs). The principle of shareholder value maximization was originally introduced by Milton Friedman in a 1970 article he published in the New York Times Magazine , in which he argued that maximizing shareholder value should be the only objective or corporations. 10 The above stock buyback contributed to the compensation provided to Smith and to shareholders of XYZ stock. However, the transaction has not resulted in the creation of value. In fact, the net effect, as documented by William Lazonick (2014, 2016), has been to hollow out corporations, which are incentivized to cut investments, employment, and R&D spending to meet short-term share price or earnings-per-share (EPS) In November 1982, the SEC implemented Rule 10b-18 permitting corporations to buy back their own stock. To illustrate how this might work, assume that Rachel Smith is the CEO at XYZ Corporation. She is being pressured by stock analysts at various investment banks to increase shareholder value. During the previous two years since accepting the post as CEO, Smith has cut employment by XYZ by 5,000 in a move to “improve efficiency.” This has boosted the stock price from $40 to $50 per share. Smith now wants to engineer a buyback of XYZ shares. She proposes to the board that the company borrow $1 billion (which can be done at record low interest rates, given Fed largess) from ABC Bank to buy back 20 million shares of stock. The board grants its approval, and the CFO engineers the transaction. Stock analysts give the transaction a “thumbs-up” and issue a “buy” order on the stock. The share price rockets to $60 a share and annual compensation for Smith increases from $20 million to $25 million. 9 The economist, Hyman Minsky, suggested that purchasing a leveraged asset while depending on that asset to appreciate was what he called Ponzi finance. And this is how the U.S. economy financed itself throughout the early years of the 2000s. 10 Friedman stated: “There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits….”. targets. Financial engineering has become increasingly commonplace over the past forty years. These activities have made already wealthy U.S. households even more so but have not promoted job or value creation. d) Debt Creation and Net Worth The explosive growth in private sector debt from the early 1980s until 2007 (orange line in left hand c hart below) resulted in significant increases in net worth to GDP (blue line in both charts), with two major downshifts, first during the tech bubble and once again in the global financial crisis. Since the onset of the global financial crisis, private debt growth has slowed relative to GDP, especially within the household sector. However, as the right-hand chart illustrates, the Federal Reserve balance sheet has increased significantly, given Quantitative Easing (QE). The Fed’s balance sheet has increased from under $1 trillion in 2008 to $8 trillion and as it has increased, asset prices have ballooned as well.