Volume 44, Number 174,
July-September 2013
The Decline of the United States:
Global Historical Context
Alejandro Dabat and Paulo Leal
THE US FINANCIAL SYSTEM AND ITS ROLE IN THE CURRENT CRISIS

The ongoing global crisis was formed and began within the current US financial system, as a culmination of a process of bank disintermediation, the securitization and collateralization of credit, deregulation, opacity and massive leveraging of the system, as well as the international proliferation of speculative instruments. Consequently, although financial factors cannot be separated from the underlying productive elements, we will dedicate this first section to the study of the former.

The new US financial system arose during a period of financial crisis and stagflation (1972-1981), linked to the historical collapse of Fordist-Keynesian capitalism (regulated and specialized)8 and the passage to the new global-informational system of capitalism (Dabat, 2002). This began with the end of convertibility (1971) and the Bretton Woods fixed exchange currency regime (1973), enormous oscillations in interest rates and exchange rates9 and limits to the amount of liability interest paid by banks (Mishkin, 2008).

On the technology level, the Information Revolution produced real-time electronic transactions, widespread use of credit cards and cash machines and models of financial engineering operationally integrated with computer networks, to the detriment of traditional banking and stock market technologies. This provided investors with greater possibilities to obtain real-time information and operations, reducing costs and overall circulation times and granting enormous operational power to the new central intermediaries of financial speculation.

Together with the advent of neoliberalism and globalization,10 this led to a new speculative financial system, which was quite different than the regulated deposit and loan model or the “in-person” stock trading system. Neoliberalism strongly polarized income in favor of the upper and upper middle classes of society (including knowledge employees), sending their savings to private investment funds. It simultaneously privatized pension funds and favored tax evasion among the wealthy using tax havens, greater anonymity among investors, money laundering and global organized crime on a large scale.

In economic terms, the new system was different from the old in three basic ways: a) the instruments used; b) the financial entities and c) system deregulation.11 It is useful to define three types of financial instruments.

  1. The widespread securitization of debt obligations. This phenomenon began as an initial process to gradually replace traditional banking credit by the direct issuance of negotiable semi-liquid bonds, resulting in the securitization of all types of financial assets that were originally not liquid, backed by collateral (mortgage and automotive credit, credit cards, etc.), which were also turned into semi-liquid negotiable instruments through this method.
  2. Derivative instruments, which are no longer financial assets (credits) as such, but rather indirect value derived from other “underlying” assets, whether they are assets, bonds, commodities futures prices or currency (interest rates and exchange rates) or credit default swaps (cds), using speculative betting on the expected changes to referential values (Mexder, 2012). This category has multiplied exponentially since the 1980s, first as a form of protection for the contractor against the risks of uncertainty in times of high volatility, and later, as speculative bonds themselves, based on new hybrid instruments that were even more complex and dangerous.
  3. Comprehensive packages of different “structured” tools. These are multiple assets of different types and levels of solvency, like cdos, which completely dilute the nature of the original operations into a unique complex document whose levels of risk and profitability depend exclusively upon the rating agencies that back them, with the result that final buyers are absolutely unaware of their content (Criado and Van Rixtel, 2008).

Organizationally, the new system was constituted around different types of financial entities (see Diagram 1), such as investment banks, commercial bank investment departments, non-bank financial holdings and even subordinate financial entities or those associated with non-financial companies. These organizations issue and negotiate debt instruments (bonds, preferential stocks, certificates of all types and, especially, derivatives), creating a diversity of deregulated and speculative funds (Diagram 1) in search of expected speculative profitability (the notional value).


Diagram 1. The New Financial Systema

a According to Criado and Van Rixtel, the opacity of these instruments means that they cannot technically be called derivatives, securitization or some sort of “hybrid” in between. However, this work does not engage in this discussion, because the focus of this study is on the effects of the overall system on the global economy from the perspective of political economics.

Source: Prepared by the authors based on Criado and Van Rixtel, and Mishkin, op. cit.

8 For historical reasons (federalist tradition or survival of the New Deal), the older banking system in the US was rather regulated and disperse, with segmented markets, strong requirements for capital reserves and maximum interest rates (Mishkin, 2008), at levels that exceeded other developed countries.

9 According to the Federal Reserve, both the exchange rates for the dollar as well as internal interest rates have undergone severe oscillations. The former depreciated 15% from 1981 to 1973, had appreciation of 60% by 1986, but later fell again to 1981 levels in 1987 (Mishkin, 2008:7). In those years, something similar happened with interest rates: 4% in 1973, 16% in 1980, 8% in 1983, 11% in 1985 and 6% in 1987 (Mishkin; 2008:88). As a result, bank depositors fled to alternative savings methods and risk coverage (like derivatives), more lucrative forms of investment began to appear and the government and the Fed adopted the policies we know today.

10 Within the framework of financial globalization, national differences (taxes, interest rates, exchange rates) have also created conditions that did not exist before for speculative profits off of stock trading.

11 “Deregulation” in a broader sense includes calls for “3D” (deregulation, desupervision and de facto decriminalization), which include eliminating all public control and legalizing universally criminal behavior, such as those epitomized by fraud (Latimer, 2008).

Published in Mexico, 2012-2017 © D.R. Universidad Nacional Autónoma de México (UNAM).
PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 48, Number 191, October-December 2017 is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
CP 04510, México, D.F. Tel (52 55) 56 23 01 05 and (52 55) 56 24 23 39, fax (52 55) 56 23 00 97, www.probdes.iiec.unam.mx, revprode@unam.mx. Journal Editor: Alicia Girón González. Reservation of rights to exclusive use of the title: 04-2012-070613560300-203, ISSN: pending. Person responsible for the latest update of this issue: Minerva García, Circuito Maestro Mario de la Cueva s/n, Ciudad Universitaria, Coyoacán, CP 04510, México D.F., latest update: Nov 13th, 2017.
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