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Presenter: Paul Mason
Producer: Helen Grady
Editor: Innes Bowen

White City
201 Wood Lane
W12 7TS

020 8752 7279

Broadcast Date: 07.02.11        2030-2100
Repeat Date:    13.02.11        2130-2200
CD Number:
Duration: 27.20

Taking part in order of appearance:

Costas Lapavitsas
Professor in Economics, School of Oriental and African
Studies, London

Paul Langley
Professor in Politics, York University

Paulo Dos Santos
Banking Expert, School of Oriental and African Studies,

Professor Susan Smith
Social Geographer, Cambridge University

Nick Pearce
Head of IPPR
Former Adviser to Gordon Brown

Greta Krippner

Eamonn Butler
Head of Adam Smith Institute

Mark Lyonette
British Association of Credit Unions

MASON: (Pub Atmos) I’m in a pub. At the bar. And all around me
people are doing something that, 30 years ago, would have seemed
extraordinary: paying for drinks with credit cards. Credit - instead of
being something we rely on sparingly, for the big things in life, has
become part of the fabric of life. And some economists think this
signals a major change in the way capitalism works.

I’m Paul Mason, the economics editor of BBC Newsnight, and in this
programme I’ll be exploring an idea that’s become central to the
left’s response to the banking crisis: it’s called Financialisation.

At its heart is the proposition that companies, workers, consumers
and even banks themselves have been sucked into a kind of credit
serfdom. So where did it all begin?

ARCHIVE: Well the important thing of course is to make sure that the
person who has a card is somebody who is credit-worthy.

MASON: That’s the boss of American Express, in 1963, trying to
explain a brand new thing called a credit card to a man from the

ARCHIVE: “Do you have to use this exclusively yourself or could
you, if you were unwise enough, give it to your wife?” “Oh, you have
to use … The original card, you use yourself, but you can certainly get
a card for your wife. We’d be very happy to supply her with one.”

MASON: Since then we’ve seen a total economic transformation:
mass access to credit and a banking system doing trillions of dollars
of business that, in the Sixties would have been illegal.

Costas Lapavitsas, professor in economics at London’s School of
Oriental and African Studies, says the wider transformation began
when businesses started to bypass the banking sector when raising

LAPAVITSAS: Industrial and commercial corporations, the basic units
that make the economy tick, that produce and circulate the things we
need - they have become far more amenable to going to open markets,
far less reliant on banks. They’ve got capacity, they’ve got techniques,
they’ve got the know-how.

MASON: So if big business became financialised, what was left for the

LAPAVITSAS: Banks had to find new lines of business, they had to
adapt. The view of banks as primarily you know what used to be called
financial intermediaries - the collectors of the spare cash of the nation
who then make it available to businesses to invest and so on - that is
dated. They are making a large part of their profits out of dealing in
financial markets, not out of lending for production and so on. Banks
have also turned towards individuals and make profits out of handling
individual financial activities. Third, individuals have become
financialised. They are increasingly dependent and implicated in the
financial system both in terms of their own borrowing but also in terms
of their own financial assets.

MASON: It’s this three-fold change - in companies, in banks and
among consumers - that the Financialisation School thinks led us
into the collapse of the global credit system in 2008. They’re a
network of political economists, sociologists and geographers, and the
phenomenon they study really gathers pace once you get mass
involvement in the finance system.

ARCHIVE: On 12th April 1984, the Telecommunications Act made it
possible for the people of the United Kingdom to share in the
ownership of British Telecom. A prospectus will be published in
November … (fades under)

LANGLEY: From the early 1980s, the privatisation campaigns of the
Thatcher government created many first-time investors - people that
came to hold stocks and shares for the first time.

MASON: Paul Langley is Professor of Politics at York University.
He’s studied the behavioural impact of the financial revolution and
the policies that have driven it.
LANGLEY: Those key moments act as drivers in financialisation on
the savings side. And alongside that, of course, you would need to place
changes in pensions - the way in which the state seeks to withdraw
from or at least to minimise a basic state pension to create a culture
where individuals are fully aware that the state is not going to provide
the kind of standard of living and standard of welfare that they’d like
see in their retirement. So in the mid-1980s, the Social Security Act was
an attempt to encourage those individuals to contract out from SERPS,
the state second pension, to move into a private pension, and two thirds
did that.

MASON: On top of that there was the sale of council houses, which
put millions of low-income people into the game of house price
inflation. For Paulo Dos Santos, a banking expert at the School of
Oriental and African studies, the shrinking state - which began under
Reagan in America and Thatcher in the UK - is the key to the
increased profitability of the banks.

DOS SANTOS: Over the past 25 or 30 years, social policy in the
Western world - notably in the Anglo Saxon countries - has boiled
down essentially to asking people to bear risks and to fend for
themselves as they try to gain access to things like housing, education,
health or retirement. This has forced individuals (in order to meet
needs) into transactions, into interactions with the financial sector.
Because of this character of these interactions where individuals are
forced into the relationship if they want their child to go to
university, if
they want health, if they want a halfway decent retirement, the
relationship between the ordinary household and the financial firm is
very unequal and very favourable to the latter. You have a profit
maximising specialist in handling money on the one hand; and a family
trying to get a home, a family trying to make sure that their kid can get
a job.

MASON: If this process started under the free market right, it was
under centre left governments that it really took off.
In America, it was Bill Clinton who insisted on expanding laws
forcing the banks to lend into poor and minority areas, pulling
millions of poor people into the credit system.

In Britain, financialisation solved a different problem: Labour didn’t
want to redistribute wealth via the personal tax system. So it was
rising house prices, and expanded personal credit that would
underpin the feel-good factor: economists call this asset based

LANGLEY: Asset-based welfare in many ways comes out of a
perennial problem that Social Democratic parties face, and that is how
to make markets work to create wealth and welfare for a majority and
not just for the few. And this was clearly very much at the heart of the
New Labour project and the so-called Third Way. As a consequence,
you have a range of policies broadly aimed at creating so-called asset
based welfare, and this is the idea that the state is not responsible
providing for your welfare; that welfare is something that as an
individual you are responsible for in a range of ways. And increasingly
that came to hinge on the idea that the individual would during their
course accumulate particular assets. Now that may be financial assets as
we usually understand them - stock market assets and investment assets
-but in another sense thinking about your home as an asset.

MASON: By the turn of the century - with TV networks awash with
programmes telling us how to do up these assets and sell them on,
homes had become like cash machines. Mortgages became a source
of ready money that people increasingly dipped into to finance
everyday spending. A glut of new products were designed to blur the
edges between mortgages and bank accounts. But when researchers
looked at what people were spending the cash on, they were surprised.
Professor Susan Smith of Cambridge University is a social
geographer who authored a major study on how people were using
their mortgages over a 17 year period:

SMITH: We expected people to be spending them on high days and
holidays, high street consumption, cars, all of these kinds of things. We
also expected people to be reinvesting it into their homes - getting
gutters repaired, their roofs repaired and so on. But actually what we
found is that all of those kinds of expenditures declined over the 17
year period that we were able to look at the data, and what was
increasing were other kinds of expenditure - all of which seemed to us
to be about propping up family welfare, about bridging short drops in
income, about meeting the financial shocks of unexpected life events
like divorce and separation or health problems or anticipated
unemployment and so on. So people were really using this money to
boost their subsistence spending, to manage from day to day and to
meet welfare needs.

MASON: So people were treating mortgages like their own, personal
mini welfare state. But if this new, close relationship with credit
suited consumers, it was also highly profitable for the banks. In
Britain - and above all in America - people have become used to
paying over a large part of their monthly income to mortgage
companies, credit card companies, student loans, car loans. It all adds

DOS SANTOS: In the United States where these processes are very
clear now, households hand over one and a half times the proportion of
their income in these various financial fees, interest payments and
whatnot than they do in food and clothing.

MASON: That’s pretty graphic.

DOS SANTOS: Yes. In 1980, it was the other way around.
MASON: In all your studies, it’s the American economy that’s exhibit
one. But if you look at Europe, even if you look at Japan, maybe we
don’t see these tendencies quite so advanced, so it’s not inevitable that
capitalism as a whole is moving towards this.

DOS SANTOS: Absolutely not. This is very much a policy choice. The
fact that we don’t see these processes as clearly in Europe as we do say
in the United States is to do with the fact that there are still elements
a welfare state in Western Europe. That said, these activities (very
common in the United States) are so profitable that they have been
adapted here extensively, and in fact in Britain household indebtedness
exceeded the levels of household indebtedness in the United States in
relation to disposable income. I mean this peaked in the United States at
around 135% of household income and here it peaked above 160%.

MASON: So American households borrowed about 135% of their
annual income …


MASON: … and British households were borrowing at the peak
something like 165?

DOS SANTOS: Yes. Percent.

MASON: This critique of asset based welfare is as much a challenge
to the centre left as to the right: it was centre left governments that
pushed for so called “financial inclusion”

Nick Pearce, a Downing Street adviser to Gordon Brown - now head
of the centre left think tank IPPR - rejects the idea that Labour either
planned or achieved a major shift from public to private welfare.

PEARCE: Well I think it’s difficult to see in the long sweep that
financial services have replaced public expenditures. I mean certainly in
Europe, since the late 60s and 70s, the proportion of the economy going
in public services and welfare transfers has increased substantially. And
in Labour’s period in office, there were big investments in things like
the NHS, which is a form of insurance against ill health, as well as in
education and in child poverty transfers, pensions and so on. So it’s
very difficult to see that you’ve had a big shift away from the state to
financial services. What there has been, I think, is in areas like
Obviously we stopped building council houses in the late 1980s. That
didn’t change. In some other areas, clearly people have been
encouraged to take on personal insurance. But in the big sweep of
things, you can’t argue that the state has sort of retreated and been
replaced by financial services since the 70s.

MASON: The fact remains, it was Labour who brought in student
tuition fees; watched the house price bubble inflate and continually
urged the “light touch regulation” of the banks.
But while we were all mesmerised by the boom, a bigger structural
change was taking place. Finance was becoming dominant in the
Anglo-Saxon economies - and nowhere is this clearer than when you
look at the mix of where profit comes from.

Greta Krippner is the US sociologist credited with starting the modern
debate on financialisation:

KRIPPNER: If you just think about the 50s and 60s, which we
generally think of as you know kind of the golden era of manufacturing,
in that era financial sector profits varied between about 10 to 15% of
total profits generated in the US economy. By the you know end of the
90s boom, you’re seeing financial sector profits comprising about 40%
of total profits in the US economy and you know have continued at that
level. That’s a really dramatic change.

MASON: If financial profits were replacing industrial profits that, in
turn, forced industrial companies to change as well. They began to
grow their own finance arms, and in some cases these became finance
giants in their own right.

KRIPPNER: If we think about General Motors - a company that
traditionally we thought of as making its profits from selling cars - in
recent years General Motors, Ford, Chrysler, the big auto companies,
all of which have important financial companies within them, they are
making often as much money from selling loans to people to buy the
cars rather than from selling cars themselves. It’s kind of like the tail
wagging the dog. I mean you’re now selling the loan and that’s the
source of profit, rather than just the loan being a means to sell the
which is then the source of profit.

MASON: And though that situation would have amazed a time
traveller from the 1960s, by the mid-2000s this whole system had
become the new normal. Industrialists dabbling in finance, banks
engaged in wholesale speculation, consumers switching from one
credit card to another, wheeling and dealing in buy-to-let homes,
some chucking money into amazing high interest bank accounts in a
place called Iceland. What could possibly go wrong?

NEWS: The collapse of one of America’s biggest investment banks has
sent shockwaves around the world. Share prices have plummeted and
thousands of jobs are in … (fades under)

MASON: Since Lehman Brothers collapsed, triggering a global
financial crisis, the debate in mainstream economics is between
Keynesians who want to stimulate the economy; and freemarketeers
who want to rein back public spending and shrink the state. But
economists like Costas Lapavitsas want a much more radical
solution: to roll back history altogether.

LAPAVITSAS: Just regulation is not enough. Regulation, we’ve had
aplenty, but it’s been market conducive regulation - in other words
regulation that financialised business is happy with. This regulation has
been incapable of stopping the bubbles. Market negating regulation is
what we need - regulation whereby the state intervenes and stops the
financial market from following its own often mad impulses. This
market negating regulation will have to be about prices - controlling
interest rates in other words - will have to be about quantities,
controlling the flows of credit, directing the flows of credit.

MASON: We’re talking about capital controls again really.

LAPAVITSAS: We’re talking about capital controls and about credit

MASON: So the pre-Thatcher era?

LAPAVITSAS: That’s it.

MASON: And you would impose that even if the price is that we
retreat back to national pools of capital, to an un-dynamic global
financial economy?

LAPAVITSAS: The benefits of the dynamic globalised financial
economy are very hard to pin down.

MASON: To Thatcherism, that is sacrilege: abolishing controls on
cross-border capital was the first major reform of the Thatcher era.
Before that, there were limits even on how much cash you could take
abroad on holiday. So the idea of going back makes the pioneers of
Thatcherism flabbergasted:

BUTLER: Well I always despair when I find such woolly thinking.

MASON: Eamonn Butler, head of the freemarket think-tank the
Adam Smith Institute, which laid the blueprint for much of the
Thatcher revolution:

BUTLER: This is really giving into a sort of public prejudice that
everything ought to be somehow collectively managed. Look, you
know we’ve tried that for most of our history, and just in the last two
three hundred years we found a better way to do that. And frankly
we’ve never looked back - we’re much more prosperous than we’ve
ever been at any time in our history. So no, the market is the way to go.
Where you see difficulties and where these critics see difficulties in
the financial services market is where government has actually done the
wrong thing, it’s regulated in the wrong way, it’s been too heavy-
handed, and therefore it’s stifled competition.

MASON: Actually, though the left and right differ on the
fundamentals they both agree the credit boom was unsustainable: the
right would solve it by ending state manipulation of the credit market;
these left wing economists want the state to expand, so that reliance
on credit is reduced. Meanwhile it seems like it’s the centre of politics
that doesn’t accept the need for fundamental change.
But maybe the scale of the financial craziness is overstated. While the
US mortgage market collapsed, in the rest of the world people did
seem to retain a sense of proportion.

SMITH: I think the evidence of our research is that people can manage
their mortgages and they do so really quite responsibly.

MASON: Susan Smith of Cambridge University, whose research
looked at the changing behaviour of mortgage buyers in Britain:

SMITH: We wanted to find a way to talk to people about complex
financial products, such as mortgages, in a way that they would
understand and they would engage with us and that we wouldn’t scare
them off by using technical terms. So we asked, “If your mortgage were
an animal, what would it be?” And I think it’s very interesting in the
UK case that most people picked domestic animals, which they felt that
they understood, that they had built a relationship with, which were
manageable, which often just kind of slept by the fire until they were
needed, which they had well trained. And although economists hate that
question, what I think it shows is that actually mortgage debt doesn’t
need to be frightening. It can be made frightening, but most people
handle it very competently most of the time.

MASON: It can be like your old dog in other words?

SMITH: It is just like your old dog with your slippers by the fire

MASON: It seems to me that two decades of financialisation have
rewired our brains: so that we no longer fear debt in the way our
parents generation did, still less our grandparents. Mine - after the
1930s - vowed never again and saw it as morally objectionable to be
in debt. And it’s this change in attitude, in psychology that would
make it hard to rollback the credit system radically. Mark Lyonette
runs the British Association of Credit Unions - local banks where, to
borrow you first have to put some money in.

LYONETTE: I think one of the things about credit cards which is very
dangerous is that they can lead to a lack of discipline in working out
what you can afford to repay.

MASON: I often wonder when people look at their credit card bills and
they see the top line of their borrowing limit, what do they think that

LYONETTE: I think it’s often seen as sort of this is a permission I
have to spend up to that amount. I’m sure I must be able to afford it
because they wouldn’t offer it me otherwise.

MASON: So typically how big’s the difference between the amount
somebody thinks they should be able to borrow and what you, looking
at their finances, know they should borrow?
LYONETTE: Well it’s often a shock for people when we say, “Well
actually we don’t think on your level of income you can afford to repay
that.” People are often asking for sort of five or ten times what we
might be able to offer them.

MASON: We may soon all be faced with that kind of shock. Because
while there’s little appetite for the left wing politics of the
financialisation school, global conditions are eating away at the
fundamental source of all the credit: the high saving, and low
spending, of people in the East, above all China.

So the political parties too are starting to think what life could be
if we didn’t rely so heavily on credit and on the banks. I asked Nick
Pearce, who worked at the heart of the Labour policy establishment,
whether with hindsight, Labour had become too enamoured of the

PEARCE: Well I don’t think Labour ministers or politicians were sort
of culturally enamoured of the banks. I don’t think you know
necessarily they liked spending lots of their time with them, but they
certainly believed that the city was a golden goose. It’s true that lots
the tax base came from financial services and from stamp duty on rising
house prices.

MASON: It was easy, wasn’t it, to tax the city because it meant you
could do what you wanted to in terms of welfare without taxing the
middle classes?

PEARCE: Well Labour did have one big Social Democratic moment
on tax and spend, which was to say to the British people we’ll ask you
to pay more national insurance to increase investment in the National
Health Service. Otherwise it’s true that the tax base on which Labour
relied you know came from the proceeds of growth - from things like
stamp duty and from tax revenues from the city - and of course that
meant that when the crash came, that tax base was much more
vulnerable. The really big and interesting challenge for people on the
centre left is they now have to think much harder about being Social
Democratic on the economy itself. How do you get higher wages from
higher productivity without then having to rely on redistribution
through tax and spend? All governments tax and spend, that’s their
business, but now people have to worry about the economy doing more
of the work to reduce inequality, pay better wages than was the case in
the past. And that’s the big, big intellectual challenge for mainstream
Social Democrats.

MASON: That, from the horse’s mouth, is an admission that the
growth in finance basically paid for most of what Labour now is
proud of. While the Blairite generation finds it hard to move on, the
Ed Miliband generation is already pushing for stricter bank
regulations, and even the mutualisation of state-owned banks like
Northern Rock. That would be a step forward for Costas Lapavitsas.
LAPAVITSAS: We need to rethink ownership - not just regulation.
The ownership of financial institutions is also of paramount importance.
And the state and society as a whole needs to intervene in that field
We need new, innovative ways of ownership over financial institutions,
which would be associational, communal and public.

MASON: Nobody in the Western world is seriously talking about that
though. In a way, it’s a non-starter, isn’t it?

LAPAVITSAS: A lot of people are talking about it, but not in the
circles of power - I grant you that. Yet if you tell people that what
you’re advocating is say not for profit provision of mortgages, they
would be far more in favour of that than if you just said public
provision. There could be communal provision, not for profit provision,
associational provision that would have a local dimension to it.

MASON: So like a local building society?

LAPAVITSAS: Yes, something resembling that. Or a recreation of
that for the modern period.

MASON: So, state run banks, low-profit businesses, the end of house
price frenzy and cheap credit. It sounds like a very hard sell - and
even some of those who want to reverse financialisation think it may
not be possible. Greta Krippner:

KRIPPNER: It is a very hard sell, and that’s because in these moments
when we’re in kind of the bubble phase of this model, it feels great to
everyone. I mean everyone thinks they’re doing well and the difficulty
is convincing policymakers in particular that this is not an appropriate
way to run an economy. Unfortunately the only way to do it is you
know the way we’re doing it right now, which is to have experienced a
down cycle that is severe enough that it gives policymakers and the
broader society as well pause about continuing down this path.

MASON: So you’re almost saying we would have to have a big enough
bust to cause almost a sort of 1930s style rethink about the whole
priority of capitalism?

KRIPPNER: I think that’s right. I mean I think the fundamental faith
in the system has to be shaken in a very profound way to generate the
kind of re-regulation that would be required to shift us onto a different
path. The latest crisis moved us somewhat in that direction, but it
wasn’t a … I hate to say unfortunately because I’m not looking for a
cataclysm, but it doesn’t appear to really have fundamentally changed I
think how people think about the economy and how it’s running.

MASON: The critics of financialisation do sometimes sound like dour
Presbyterians, railing against debt and waiting for the judgement day
when it all goes wrong and we all repent.

And as a metaphor, that’s apt. Capitalism has repeatedly switched
between periods of flamboyant finance and industrial parsimony.

And those who studied the rise and fall of economic superpowers
have noticed that the period where finance begins to overwhelm the
productive economy often comes towards the end. Paul Langley:

LANGLEY: The French historian Fernand Braudel, whose interest in
history was to think about history over long periods, described what we
know today as financialisation as a period of what he called “financial
autumn” in the power of the day. So if the power of the day was the
Dutch - then their financial autumn, whilst a symbol of their power, was
also a sign of autumn, a sign of decline. And you know we could say
that about the decline of the British Empire and the decline of London
as a financial centre in the early 20th century, and equally we could
argue that about New York today …

MASON: So in the excesses of the 2000s decade, we could have been
seeing the very last, almost the autumn - as Braudel describes it -
flowering of American capitalism?

LANGLEY: We could, but that then raises interesting questions about
well what replaces New York, right, what replaces American capitalism
to use your term? And therefore the relationship between China and
America and the massive flows of capital from East to West that
sustains consumption and borrowing in the United States becomes the
crucial question. The degree to which those capital flows from East to
West can be sustained becomes crucial to the process of financialisation
going forward.

MASON: The Financialisation School effectively reinvents the left:
they want an economy where wages rise, and people borrow less;
where public provision predominates over private. Where banks are
owned by the state.

The problem is this walks, quacks and looks like capitalism in the era
of Harold Wilson. The era when Keynesian economics ran the world.
When banks were subservient to companies that actually made things.

But this was also the era in which you saved and saved for years to
buy a badly made car from a state-run company. When the pubs
closed at 3 in the afternoon - and buying a round of drinks on plastic
was just a dream.

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