It is done by the process of financialization which works to the benefits of banks and the financial industry while killing the economic recovery and growth.
What is Financialization?
Tough question. But here is an example.
You purchase a new lawnmower or expensive clothinig in a large store. The store tells you they will give you a 10% discount if you sign up for their credit card. You agree to the new credit card.
The store believes that you will use their credit card for future purchases, but you will not pay off the full balance every month. Therefore, they will make money off you through the 18% to 28% interest rates on that card. Your 10% savings disappears rapidly as you pay these high interest rates.
Smile! You were just financialized. This is now common throughout many business models.
In simple terms, the store is no longer operating on a capitalist model as it tries to sell you services and products which are better than its competitors. Instead, it is using a financialist model whereby they take your money over a longer period of time by driving you into debt . You are now working for them through the interest payments. It is a legalized form of debt slavery.
Financialization as a Business Model – Why is this a Bad Thing?
This model hurts the overall economy. By putting more and more money into the hands of the banks and financial industry, less money goes into productive industries that create real employment and growth for everyone. In economic terms, it can be said that financialization is distorting the economy through the misallocation of capital into non-productive sectors.
Bankers formerly served the economy by assisting the flow and allocation of capital. Now, the banking and financial industry has become so powerful that the economy and polity are serving it. And it hurts everyone.
What can be Done?
Most politicians and regulators are unwilling to challenge the financial industry as the banks are so powerful that elected officials fear them. (See http://tinyurl.com/cdrnm7f )
As a consumer, you can choose to simply avoid using these systems. Don’t get that new credit card from the hardware store or clothing store. Pay cash or walk away. Buy from a locally owned store rather than a large franchise chain. You will likely get better products and service and enjoy better value over the long term. With food products, you are also safer and will remain healthier if you buy local. (See http://tinyurl.com/a5dz86b )
If you cannot afford to pay off the credit card each month, then do not buy more stuff. Wait until you can pay cash. Look at your credit card statements and see how much you are paying in interest. Then figure out how much that is per year. You will be shocked at how much it costs you to have been financialized. When you do buy something from a local store, use cash if you can. The credit card companies are charging three percent or more on every sale –so that is money leaving your community.
The next major financial crisis may cause a reset in the way we do business. When this happens is not clear, but the next crisis will be worse than the events of 2007 and 2008. When the crisis does occur, there may be a new model put in place that removes the banks and financial institutes from their place at the top of the power hierarchy.
Capitalism 2.0 anyone? This is economics for the rest of us.
(To see fanancialization as described by the US Federal Reserve: http://ideas.repec.org/p/uma/periwp/wp153.html )
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 the financial sector; and (3) increase income inequality and contribute to wage stagnation. 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.