Decommodification of Financial Regulation and Public Action

This article seeks to analyze the institutional roots of the last decades' financial crises and in particular those of the 2007-2008 systemic failure. These instabilities seem to be mainly due to the liberalization of financial markets since the system-wide liberalization triggered the process of financialization of many sectors of the economy and gave the priority to the financial efficiency criteria within the decision process of market players. Mainly relying on speculative arbitrage, the economic engine is wheeled thanks to the attractiveness of financial innovations that have nurtured rent-seeking operations without supporting the financing of productive activities. I maintain that such an evolution is the great transformation of the New Millennium Capitalism that mainly rests on the institutional transformation of the regulatory structure that is the commodification of financial regulation. The latter has replaced public regulatory mechanisms by private self-regulation systems that rely on market price-directed contractual schemas. Such an institutional transformation has fueled the system-wide process of financialization and led market-based capitalist economies to a highly speculative and macro-economically perverse regime of accumulation. Despite recurrent downturns, speculative return-related wealth keeps increasing and widening the income inequality gap. For instance, even in the aftermath of the 2007-2008 financial turmoil and subsequent market failures, U.S. billionaire wealth almost doubled between 2010 and 2020, increasing 80.6 percent in 2020 dollars, while the median wealth of U.S. households only increased 15.1 percent between 2010 and 2016. From an institutionalist perspective, this article maintains that contrary to the usual doctrinal assertions, market-related liberal regulation prevents finance from contributing to economic development and restrains public action from supervising markets without generating social dilemmas. Without an appropriate organization and supervision, financial markets do not lead to a social optimum since they suffer several inconsistencies like the discrepancy between micro-rationality and macro-coherence, cognitive bias, and the publicness of financial stability. The viability of market economies depends on the sustainability of financial operations that requires specific public action aimed at systemic stability. In order to prevent the catastrophic consequences of financialization, financial regulation must be decommodified and financial stability must be handled as a common good.