In broad strokes my argument concerning the decline of the American political economy runs as follows (these are selections from an essay I wrote for Bill’s journal last year):
“Beginning in the late 1970s, a revolution was made in the securities trade, which transformed it from a staid and even stuffy business of asset management and client service, led by closed partnerships fundamentally conservative in character, into a riot of high-tech gambling, abetted by an infusion of talent from the highest orders of mathematical expertise. The innovations came rapidly, and were rarely considered with any philosophical care. The old private partnerships went public, selling shares like industrial corporations. Computing power, growing more sophisticated by the year, facilitated an abstraction of capital and property into ever more exotic financial ‘products.’ PhD mathematicians from Harvard and MIT brought their subtleties to the trade, and in time had constructed a vast infrastructure of speculative debt so sophisticated as to beggar the imagination. Industrial corporations, getting wind of the riches available in the trade in financial products, entered the business in force; eventually such titans of American industry as General Electric Co. and American International Group had so altered the structure of their enterprises that it is not too much to say that they had become enormous unregulated banks with auxiliary industrial arms.
“The opacity of these securities markets acquired an almost hierophantic character. Initiates into the rapidly proliferating engineered abstractions appeared as wizards or gurus, encircled by a powerful mystique, communicating in a peculiar argot, and attended by a host of lesser acolytes. The prestige attached to finance capitalism grew enormously. It was obscured for a time by the dotcom enthusiasm of the late 1990s (which of course had its own prestigious financial arm: namely the floating of IPO stock for start-up technology companies at grossly inflated values); but the collapse of that technology bubble accelerated the trend toward ever more exotic, and ever more exalted finance.
“Globalization proved integral to the ascendance of finance capitalism. From all around the world, wherever surplus capital sat, quiescent, in bank accounts, investors and asset managers began to perceive the returns available in Western securities markets. Pension funds, university endowments, private hedge funds, boutique investment firms—all set to work lending their capital, at high rates of interest, to the funding of American and European consumers: their homes above all, but also their credit cards, their cars, their renovations, their children’s education. Globalization may be understood as simply the integration of world capital markets. One actor in China or Japan or Australia has a surplus of capital, with a desire to lend at interest (perhaps he is a retiree with a pension, or a frugal worker with a pool of savings, or a construction bank turning big profits) and another actor, across the globe, has a desire to borrow (perhaps an American family looking to upgrade their residence, or a small businessman looking to expand): who will bring these two actors together? This business of credit intermediation is the essence of high finance.
“It is also the basic business model of any bank: to bring borrowers and lenders together. But commercial banking—the familiar business where a firm borrows from depositors, paying out a small interest, and lends out long-term, in mortgages, car loans, and small business loans, at a higher rate of interest, taking its profit in the difference or “spread” between the two rates—is a heavily regulated business, at both the state and federal levels. Globalization required freer actors, institutions emancipated from such onerous restrictions. Thus was born “shadow banking.” AIG, for instance, became a colossal shadow bank. It wrote massive insurance contracts on securities confected out of thousands of mortgages, many of them subprime mortgages. [. . .]
“Inside this stupendous architecture of debt finance, this intricate web of counterparty obligations, engineered abstraction, and computerized abbreviation, the opportunities for chicanery were almost limitless. The differences in interest rates, on Wall Street, are usually calculated in ‘basis points’—hundredths of a percentage point. On a wild trading day, the yield on a particular bond might be said to move 40 basis points, less than half a percent. [. . .] Such tiny fractional differences may seem inconsequential to the non-financial mind, but the wagers of the financiers are measured in hundreds of millions when they are not measured in billions of dollars. Hundredths of a percentage point on such sums still comprises a fortune.
“An amalgam of supererogatory mathematical sophistication, infinitesimal variation, and massive capital, all shifting around the world moment to moment on supercomputers, presented the speculators with irresistible opportunities. [. . .]
“What if the financiers, intoxicated with their own cleverness, alienated from the true sources of property and prosperity, commence to erect vast conduits of financial infrastructure by which capital from all around the world, all chasing fractionally higher yield, might come pouring into various American debt markets? What if this adventure in abstractions ultimately disrupts the equipoise of the US economy so severely that the natural market correction cannot be endured, because for policymakers to approach it according to a principle of laissez faire would be to risk total ruin? What if, faced with so awful a choice—ruin or socialism—policymakers were obliged to replace the private capital that long had fueled this riot of speculation, which by late 2008 lay in smoldering ruins—what if, I say, they were obliged by prudence to substitute for this private capital the public capital of the commonwealth?
“We have at least the outline of an answer to these hard questions, and it ain’t pretty. Free enterprise has been dealt a series of savage blows, many of them self-inflicted. A broader swath of the American economy was absorbed into the machinations of the state over the course of the grueling days of fall 2008 than perhaps in all of prior US history. Taxpayer capital was staked to support a dizzying array of markets. Ruined firms were saved, and then, after the panic, turned loose to carry on with their speculations. Finance capitalism was further concentrated; few actors among it felt the bite of market discipline. Risk was socialized at the highest levels of sophistication by instruments and maneuvers so arcane that to describe them requires almost another language. Meanwhile, small enterprise was left to wither and perish. [. . .]
“In a word, the answer to the hard questions may be that we have had the misfortune to witness the degradation … of a commercial republic characterized by liberty, into a much baser form of political arrangement: plutocracy, an aristocracy of alienated wealth, characterized by insolent speculative gain. Instead of patriotic statesmanship grounding prosperity in the security of property, we shall have idle elitism, grounding narrow interest in sophistication and the abstraction of property. I leave it to the reader to judge whether such an environment is conducive to liberty.”
This argument, in turns out, can be pretty effectively render graphically:
(Note: I believe that first graph originates with a James Kwak and Simon Johnson paper, but I have been unable to track in down conclusively.)