Has Financial Globalization Peaked? A Leading Economics Journalist Offers a Look Behind the Curtain

By Gross, Daniel | The International Economy, Summer 2011 | Go to article overview

Has Financial Globalization Peaked? A Leading Economics Journalist Offers a Look Behind the Curtain


Gross, Daniel, The International Economy


Wall Street is once again paying large bonuses, as hedge fund titans are hoovering up trophy assets. About 40 percent of recently minted Harvard MBAs rushed to the finance sector. In Europe, private-sector bondholders are bringing once-proud nations to their knees. Well-paid lobbyists in Washington are brazenly trying to weaken new financial regulations. Yes, at times it seems as if the Panic of 2008 never happened and that debt-fueled global finance is in the ascendance.

Or maybe not.

A look at the continuing public- and private-sector reaction to the chain of debacles of 2008-09, changing attitudes toward debt, and the current dynamics driving growth in the global economy yields a counter-narrative. Today, the global economy is growing at a decent clip (4.3 percent, according to the International Monetary Fund's most recent projection.) But it is far less reliant on banks, private-sector finance, and a cross-border willingness to extend credit recklessly than before.

There comes a time in every trend when the system and culture become so saturated that it has reached the height of its influence, utility, and relevance. Analysts have been talking about Peak Oil for nearly a generation. In the United States, muted consumer spending and the rise of e-commerce point to Peak Mall. With Facebook beginning to lose members in North America, wags are suggesting (hoping?) that we may soon encounter Peak Social Media. And while finance matters a great deal, there are hints that we may have reached Peak Global Financialization. Yes, global levels of credit, debt, and monetary interconnection are likely to continue to grow in absolute terms. But the assumption that the only way to get economic growth is for creditors to finance debt-ridden governments and consumers with unrelenting internal and cross-border capital flows is being put to the test.

Leverage is the force that lets you lift more than you could under your owl strength. And leverage has been--and is being driven out of big chunks of the global private financial system. In the United States, the species of unregulated investment bank, leveraged at 30-I and capable of amassing hundreds of billions of dollars in debt, has become extinct. Lehman and Bear Steams are gone, and the rest of the big five (Merrill Lynch, Goldman, and Morgan Stanley) have evolved into staid commercial banks via acquisition or regulatory shift. The publicly held debt vehicles launched on an unsuspecting public by private-equity outfits like KKR and the Carlyle Group, which borrowed $30 for every dollar in capital in order to buy debt assets, are likewise a bad memory. Citi, the bank formerly known as Citigroup, once sported a trillion-dollar balance sheet with a phyllo-thin equity layer. In its most recent report, Citi reported a Tier 1 capital ratio of 13.6 percent. According to the Federal Reserve, financial sector debt stood at $14.1 trillion in the first quarter of 2011, down 17 percent from $17.123 trillion in 2008.

In the United States, the epicenter of global financialization, finance today occupies a significantly smaller footprint in the culture, in the economy, and in the markets. As a percentage of the total value of the S&P 500, the financials are about half what they were at their peak. The Keefe, Bruyette & Woods bank index (BKX) trades at its August 1996 price.

The story is similar in Iceland, Ireland, and the United Kingdom, where banking sectors used international capital to swell to dangerously obese proportions. And there's much more to come. It's unclear what the end game will be in Europe, where public fiscal crises have translated into private banking crises in the afflicted countries, as well as in Germany and France. But all signs point to a European banking system that is (proportionally) smaller, less-leveraged and better capitalized, and less inclined to embark upon foreign adventures. Next, the new round of global banking regulatory standards will push banks in the United States, Europe, and all over the world to run with lower levels of leverage. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Has Financial Globalization Peaked? A Leading Economics Journalist Offers a Look Behind the Curtain
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.