Yesterday I quoted Bezemer & Hudson from Finance is Not the Economy. Here again is that quote:
Growth in credit to the real sector paralleled growth in nominal U.S. GDP from the 1950s to the mid-1980s — that is, until financialization became pervasive. Allowing for technical problems of definitions and measurement, growth of bank credit to the real sector and nominal GDP growth moved almost one on one, until financial liberalization gathered steam in the early 1980s.
Credit growth paralleled GDP growth until financialization became pervasive.
What's the meaning of those four bold words?
Could it mean that the financialization was gradual, and gradually became pervasive? That's more or less what happened, as I see it. We had creeping financialization all along, visible in the data even in the early 1950s. But it didn't become pervasive, or problematic, say, until the 1980s. Or, until the 1970s. Or, until the 1960s. It depends who you ask.
Come to think of it, "problematic" is the better word for the view that I hold. But Bezemer and Hudson say "pervasive". So now I'm not so sure they are describing the view I hold. They seem to be describing a different view, one in which financialization suddenly emerged everywhere in the 1980s and was suddenly a problem everywhere. They say finance grew "almost one for one" with GDP until the early 1980s. And then it was suddenly a problem everywhere.
I'm not comfortable with that view. I don't think it is realistic. I think it is rather like telling a story of the bad witch who suddenly gains control of the village. It's a story for children. Financialization didn't happen overnight.
|Total Credit to the Real Sector as a Percent of GDP|
I think finance was always pervasive: It was always everywhere in our economy. But in the 1950s there was only a thin layer of finance, insignificant and beneficial. In the 1960s we still found it beneficial, though harmful effects arose as finance deepened. Then in the 1970s, though debt grew bigger and more problematic, the cost of it got lost in inflation. Finally, in the 1980s as inflation subsided and debt appeared to be burgeoning, we were suddenly able to see the harmful effects that had long been there.
As Bezemer and Hudson put it: "Credit was no longer 'good for growth,' as many had for so long believed".
Credit was no longer good for growth because we got too much of it and it was choking us. That much should be obvious. The more subtle point is that credit grew all thru the 1950s and 60s and 70s and 80s, and the nineties and the naughts. Credit grew because it was our policy to make credit grow, because we thought credit was 'good for growth'.
Financialization didn't happen by accident. We made it happen.