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Financialization: What it is and Why it Matters

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  • Thomas I. Palley

    ()
    (Economics for Democratic & Open Societies, Washington DC, and Visiting Scholar at the Macroeconomic Policy Institute (IMK), Germany)

Abstract

Financialization is a process whereby financial markets, financial institutions and financial elites gain greater influence over economic policy and economic outcomes. Financialization transforms the functioning of economic system at both the macro and micro levels. Its principal impacts are to (1) elevate the significance of the financial sector relative to the real sector; (2) transfer income from the real sector to he financial sector; and (3) increase income inequality and contribute to wage stagnation. Additionally, there are reasons to believe that financialization may render the economy prone to risk of debt-deflation and prolonged recession. Financialization operates through three different conduits: changes in the structure and operation of financial markets; changes in the behavior of non-financial corporations, and changes in economic policy. Countering financialization calls for a multi-faceted agenda that (1) restores policy control over financial markets, (2) challenges the neo-liberal economic policy paradigm encouraged by financialization, (3) makes corporations responsive to interests of stakeholders other than just financial markets, and (4) reforms the political process so as to diminish the influence of corporations and wealthy elites.

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Bibliographic Info

Paper provided by IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute in its series IMK Working Paper with number 04-2008.

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Length: 28 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:imk:wpaper:04-2008

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Keywords: Financialization; neo-liberal policy; deregulation; debt; financial fragility.;

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