Abstract
Central banks’ role in financialization has received increasing attention in recent years. These debates have predominantly revolved around authorities’ ‘benign neglect’ of asset bubbles, their deregulatory policies, and the safety nets they provide for speculative exuberance. Most analyses refer to the dominance of pro-market interests and ideas to explain these actions. The present article moves beyond these accounts by showing how an alignment between techniques of monetary governance and ‘unfettered’ financial markets can explain central banks’ endorsement of increasingly fragile structures of liquidity and their strategic ignorance towards growing amounts of debt. We analyze the processes of abstraction and formalization by which the ‘programmes’ and ‘technologies’ of monetary governance have been made compatible with the texture of contemporary finance; and we show how central banks’ attempts to make markets more amenable to their methods of policy implementation shaped new conduits for financial growth. As empirical cases, we discuss the Federal Reserve’s experiments with di!erent policy frameworks in the 1980s and the Bank of England’s twisted path to inflation targeting from 1979 to 1997. These cases allow us to demonstrate that the infrastructural power of contemporary central banking is predicated on the same institutional
GERALD F. DAVIS
Ross School of Business The University of Michigan gfdavis@umich.edu
SUNTAE KIM
Ross School of Business The University of Michigan suntaek@umich.edu
January 13, 2015
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ABSTRACT
Financialization refers to the increasing importance of finance, financial markets, and financial institutions to the workings of the economy. This article reviews evidence on the causes and consequences of financialization in the US and around the world, with particular attention to the spread of financial markets. Researchers have focused on two broad themes at the level of corporations and broader societies. First, an orientation toward shareholder value has led to substantial changes in corporate strategies and structures that have encouraged outsourcing and corporate dis-aggregation while increasing compensation at the top. Second, financialization has shaped patterns of inequality, culture, and social change in the broader society. Underlying these changes is a broad shift in how capital is intermediated, from financial institutions to financial markets, through mechanisms such as securitization (turning debts into marketable securities). Enabled by a combination of theory, technology, and ideology, financialization is a potent force for changing social institutions.
Since the Great Recession, America’s wealthiest 1 percent have been demonized as fat cats who have grown ever richer while the middle class has stagnated. While protesters have called for the 1 percent to be taxed more heavily, economists have been digging into data to develop a better understanding of who the top earners are.
These economists have been seeking to measure income inequality and wealth inequality, and to understand the nature of the 1 percent’s income and assets. And views differ. Some say the 1 percent are predominantly entrepreneurs and the “working rich,” people who made their money by starting and running successful businesses. Other economists note that a significant proportion of the 1 percent are the heirs of wealth accumulated over time.
But the data also reveal disparities within the 1 percent. The 1 percent, it turns out, have their own 1 percent.
Profits Without Prosperity:
How Stock Buybacks Manipulate the Market, and Leave Most Americans Worse Off
William Lazonick, The Academic-Industry Research Network (www.theAIRnet.org), & University of Massachusetts Lowell
April 2014Download
Corporate resource allocation and shared prosperity
Five years after the end of the Great Recession, corporate profits are high and the stock market is booming. Yet most Americans are not sharing in the apparent prosperity. While the top 0.1% of income recipients, the highest-ranking corporate executives among them, reap almost all the income gains, good jobs keep disappearing, and new employment opportunities tend to be insecure and underpaid. Corporate profitability is not translating into shared prosperity. For this lack of shared prosperity, the allocation of corporate profits to stock buybacks bears considerable blame. From 2003 through 2012, 449 S&P 500 companies dispensed 54% of earnings, equal to $2.4 trillion, buying back their own stock, almost all through open-market repurchases. Dividends absorbed an additional 37% of earnings. Scant profits remained for investment in productive capabilities or higher incomes for hard-working, loyal employees. Large-scale open-market repurchases can give a manipulative boost to a company’s stock price. Prime beneficiaries of stock-price increases are the very executives who decide the timing and amount of buybacks to be done. In 2012 the 500 highest paid executives named on proxy statements averaged remuneration of $24.4 million, with 52% coming from stock options and another 26% from stock awards. With ample stock-based pay, top corporate executives can gain from boosts in stock prices even when for most of the population economic progress is hard to find. If the United States is to achieve economic growth with an equitable income distribution and stable employment opportunities, government rule-makers and business decision-makers must take steps to bring both executive pay and stock buybacks under control.
Monetary policy and the top one percent: Evidence from a century of modern economic history
Mehdi El Herradi Aur ́elien LeroyDownload
Abstract
While a growing line of research has assessed the distributional consequences of monetary pol- icy, most of these studies rely on survey-based estimates of inequality and feature a shorter time coverage. This paper examines the distributional implications of monetary policy on top income shares in 12 advanced economies between 1920 and 2015. We exploit the implications of the macroeconomic policy trilemma with an external instrument approach to identify ex- ogenous variations in monetary conditions. The obtained results indicate that contractionary monetary policy strongly decreases the share of national income held by the top one percent and vice versa, irrespective of the state of the economy. Our findings also suggest that the effect of monetary tightening on top income shares is likely to be channeled via lower asset prices.
Keywords: Monetary policy, Top income shares, Macroeconomic Policy Trilemma, External Instrument.
Abstract
This paper surveys the recent literature on CEO compensation. The rapid rise in CEO pay over the last 30 years has sparked an intense debate about the nature of the pay‐setting process. Many view the high level of CEO compensation as the result of powerful managers setting their own pay. Others interpret high pay as the result of optimal contracting in a competitive market for managerial talent. We describe and discuss the empirical evidence on the evolution of CEO pay and on the relationship between pay and firm performance since the 1930s. Our review suggests that both managerial power and competitive market forces are important determinants of CEO pay, but that neither approach is fully consistent with the available evidence. We briefly discuss promising directions for future research.
Keywords: Executive compensation, managerial incentives, incentive compensation, equity compensation, option compensation, corporate governance
Abstract:
This paper presents summary statistics on the occupations of taxpayers in the top percentile of the national income distribution and fractiles thereof, as well as the patterns of real income growth between 1979 and 2005 for top earners in each occupation, based on information reported on U.S. individual income tax returns. The data demonstrate that executives, managers, supervisors, and financial professionals account for about 60 percent of the top 0.1 percent of income earners in recent years, and can account for 70 percent of the increase in the share of national income going to the top 0.1 percent of the income distribution between 1979 and 2005. During 1979-2005 there was substantial heterogeneity in growth rates of income for top earners across occupations, and significant divergence in incomes within occupations among people in the top 1 percent. We consider the implications for various competing explanations for the substantial changes in income inequality that have occurred in the U.S. in recent times.
The Implications of Banking Industry Consolidation
Consolidation in the U.S. banking industry is a multi-decade trend that reduced the number of federally insured banks from 17,901 in 1984 to 7,357 in 2011. Over this period, the number of banks with assets less than $25 million declined by 96 percent. The decline in the number of banks with assets less than $100 million was large enough to account for all of the net decline in total bank- ing charters over this period. Meanwhile, the largest banks—those with assets greater than $10 billion—grew elevenfold in size over this period, raising their share of industry assets from 27 percent in 1984 to 80 percent in 2011.
What Drove Five Decades of Big Changes in Banking?
Suppose a banker zombie appeared at your doorstep—someone who had died about 50 years ago—asking for an update on what had happened in the industry since his or her passing. Perhaps he or she is considering setting up a bank branch nearby. As background, the zombie asks you to summarize the most important changes that have happened during the last 50 years. What would you say? This blog helps you answer that zombie’s questions by identifying the most important changes in U.S. banking over the past 50 years, explaining their significance, and pointing you to a handful of readings that will help your new zombie friend understand these important changes. A new post authored by Alex J. Pollock, Hashim Hamandi, and Ruth Leung (2021) on the Office of Financial Research (OFR) website helps answer that question, and it focuses specifically on the changes in U.S. banking that occurred from 1970 to 2020. The analysis includes chartered state and national banks, other depository institutions, and some specialized banking intermediaries, such as the 12 Federal Reserve Banks, and what the authors label the government mortgage complex, which consists of Fannie Mae, Freddie Mac, and Ginnie Mae. It also considers subgroups of banks—in particular, the ten largest commercial banking enterprises.The OFR post shows that the structure of banking has undergone remarkable change alongside substantial growth in the importance of banking activities. The main fact of note is the consolidation that has occurred, and the concentration of assets in the hands of a very few intermediaries. Adjusting for inflation, gross domestic product (GDP) has tripled over the past 50 years, while the assets of deposit-taking institutions have quadrupled. But the assets of the top 10 commercial banks grew 13-fold in inflation-adjusted terms over this period, while the assets of other depository institutions roughly doubled in real terms and fell dramatically relative to GDP. That top-heavy growth is mirrored in the consolidation that took place in the number of banks, which fell by 75 percent from about 20,000 banks to about 5,000 today.