Financialization

Definition

Financialization refers to the increasing dominance of financial motives, financial markets, financial actors, and financial institutions in the operation of domestic and international economies. It encompasses the growing importance of financial activities relative to the production of goods and services, often leading to shifts in corporate behavior, investment strategies, and regulatory frameworks.

5 Must Know Facts For Your Next Test

1. Financialization has led to a significant shift in corporate governance, prioritizing shareholder value over employee welfare or long-term growth.
2. The expansion of financial markets has enabled greater access to capital but has also increased economic volatility due to speculative practices.
3. Financial institutions have gained unprecedented influence over economic policy-making, often shaping regulations to favor their interests.
4. During periods of financialization, there is often a rise in household debt as consumers are encouraged to engage with financial products like mortgages and credit cards.
5. The 2008 financial crisis was a direct consequence of excessive financialization, exposing vulnerabilities in the system and leading to widespread economic consequences.

Review Questions

• How does financialization affect corporate governance and decision-making?
  • Financialization profoundly impacts corporate governance by shifting priorities towards maximizing shareholder value. Companies increasingly focus on short-term profits and stock prices, often at the expense of long-term investments in employee welfare or sustainable practices. This can lead to practices like stock buybacks, which inflate stock prices temporarily but may undermine the overall health of the business.
• Discuss the role of financial institutions in shaping economic policies during periods of financialization.
  • Financial institutions play a crucial role in shaping economic policies during times of financialization by exerting influence over regulatory frameworks and advocating for favorable conditions. Their involvement often leads to deregulation and policies that prioritize the interests of the financial sector over broader economic stability. This can result in a focus on rapid capital accumulation rather than sustainable growth, contributing to economic disparities.
• Evaluate the impacts of financialization on household economics and social structures.
  • The impacts of financialization on household economics are significant as it encourages increased reliance on debt, leading families to take on mortgages, credit cards, and other loans. This shift alters social structures by creating more economically vulnerable households that may struggle with debt repayment. Additionally, as financial products become central to everyday life, wealth inequality can worsen as those with less access to financial literacy or resources find it challenging to navigate this complex landscape.

Related terms

Neoliberalism: An economic and political approach that emphasizes free markets, deregulation, and reduction in government spending, advocating for minimal intervention in the economy.

Stock Market: A platform for buying and selling shares of publicly traded companies, where financialization often leads to an emphasis on short-term profits over long-term stability.

Derivatives: Financial contracts whose value is derived from the performance of an underlying asset, which are often used in financialization to hedge risk or speculate on price movements.