Mason, Rabinovich, Financialization

Joel Rabinovich. The financialisation of the nonfinancial corporation. A critique to the financial rentieralization hypothesis. 2018.  hal-01691435

https://hal.archives-ouvertes.fr/hal-01691435/document

As usual, I end my analysis at 2019 so as to exclude the massive covid shock.

JW Mason's “Has Finance Capitalism Destroyed Industrial Capitalism?” links to the Rabinovich paper. Mason says

As Joel Rabinovich convincingly shows, the increased financial holdings of nonfinancial corporations mostly represent goodwill from mergers and stakes in subsidiaries, not financial assets in the usual sense, while the apparent rise in their financial income of in the 1980s is explained by the higher interest on their cash holdings.

 I had to look:

Abstract: One aspect in which nonfinancial corporations are said to be financialised is that they emulate the asset and income structure of financial corporations. This is what we call the financial rentieralization hypothesis. In this article we show that the evidence used to sustain it, in the US setting, has to be reconsidered. Our findings show that, contrary to the financial rentieralization hypothesis, financial income averages 2.5% of total income since the ‘80s while net financial profit gets more negative as percentage of total profit for nonfinancial corporations. In terms of assets, some of the alleged financial assets actually reflect other activities in which nonfinancial corporations have been increasingly engaging: internationalization of production, activities refocusing and M&As.

I always look at cost. Want to measure financialization? What does it cost? And then: Who gets the income? Put the answers on a graph and you're good. I don't put much stock in "asset and income structure" and the like. But then, I'm just a hobbyist. What do I know.

In my recent glance at corporate profit, lacking both the data and the will to search endlessly to find it, I assumed that the return on financial assets is equal to the return on nonfinancial assets. I think that's a reasonable assumption. Financial assets are growing as a share of the total assets of nonfinancial corporations; this suggests that the financial return is better than the nonfinancial return; the better return would explain the growth of those assets.

On the other hand, it could be that financial assets (like the stocks and bonds in your safe) require less attention than nonfinancial assets (which require maintenance and the services of labor) so that a lower return on financial assets might be considered of equal value to a higher return on nonfinancial assets. Could go either way.

So I guessed that the rates of return are the same. This graph shows the financial-asset share of the profits of nonfinancial corporate business (NCB) as a percent of GDP:

Graph #1: Financial Asset Share of NFC Profits, as Percent of GDP

Rabinovich (2018) says "financial income averages 2.5% of total income since the ‘80s". I don't know what he means by "total income", specifically. But just by eye, I'd say my graph also averages about 2.5% since the 1980s. Pure coincidence, probably.

But maybe the rates of return are equal for financial and nonfinancial assets.

I read the Rabinovich PDF until my head was spinning, and all I learned was:

Our results show that mimicking finance was not a strategy verified in aggregate terms.

Well, fine. I'm interested in cost, not mimicry. But that was the least of my concerns. Considering the question "what type of assets should be considered as financial?" Rabinovich brings up another problem:

practically the entire increase in financial assets [relative to] total assets is due to a residual variable, ‘Unidentified Miscellaneous Assets’, which is considered as financial by the Financial Accounts of the USA.

As Mason has it:

the increased financial holdings of nonfinancial corporations mostly represent goodwill from mergers and stakes in subsidiaries, not financial assets in the usual sense

Assuming this is significant, it shoots my glance at corporate profit in the ass. No matter that "the ratio of financial assets to non-financial assets has gone from 40% in 1950 to 120% in 2001". No matter.

What else could I look at, I wondered, if not assets.

The cost of interest. The cost of interest paid by nonfinancial business corporations. And the interest received by nonfinancial business corporations, which is a cost to the rest of the economy.

Graph #2: NCB Interest Paid (blue) and Received (red) as Percent of GDP

Red: Monetary Interest Received by nonfinancial corporate business
Blue: Monetary Interest Paid by nonfinancial corporate business

Interest paid is significantly higher than interest received, as a percent of GDP: The blue line is higher.

The two follow a similar path: gradual increase to the 1970s; then rapid increase, especially in the last half of the 1970s; no increase in the 1980s; gradual decline thereafter. Reminds me of the path of interest rates.

 

Next graph, same data, "normalized" I think you'd call it. To remove the effects of the rise and fall of interest rates, I divided both red and blue by the Prime Rate:

Graph #3: NCB Interest as % of GDP: "Normalized" for the Prime Rate

Red is received. Blue is paid. The lines appear close but are on different axes, so they may not be close at all.

Red runs below blue until after the 1974 recession, then runs above blue until the Great Recession, then below blue again. But again, the red-to-blue comparison is an illusion because the lines are on different axes. We can say only that the lines are similar.

Notice the sharp rise after 1981 on Graph #3. On Graph #2 the sharp rise occurs before 1981. The difference is due to interest rates, which peaked in 1981. Where Graph #2 shows almost no increase in the 1980s, on Graph #3 the same data -- divided by the interest rate -- shows sharp increase because interest rates fell sharply after 1981. The increase on Graph #3 is a denominator effect.

However, both lines show a trend of increase before the sharp increase. Both lines show a trend of increase after the sharp increase. And of course both lines show increase during the sharp increase. Both lines are low early and high late. That's rising financialization.

 

Next graph, again for nonfinancial corporate business: Interest received as a percent of interest paid:

Graph #4: Interest Received as a Percent of Interest Paid, Nonfinancial Corporate Business

The line runs low until 1970, then shoots up until 1981, then runs high until the financial crisis.

"Low" is mostly between 25 and 30 percent. "High" is almost mostly between 50 and 60 percent. The "high" is twice the level of the "low". After the 1970s, interest received is twice as much as it was before the 1970s, relative to interest paid. That's rising financialization. 

Note also that both before and after the increase of the 1970s, a trend of increase is visible. That's rising financialization. And it's not because of changes in interest rates. Interest rates in the numerator and in the denominator for the most part cancel each other out on this graph.

In Mason's article, the one that links to Rabinovich (2018), JW says

the apparent rise in [the] financial income of [nonfinancial corporations] in the 1980s is explained by the higher interest on their cash holdings.

I believe Graph #4 shows that "the higher interest on their cash holdings" *is* financialization, and not just a happy accident.

Mason's article is still in the "proofread" stage. I don't see on my Graph #2 much of a "rise" in interest received "in the 1980s". I have to go with what I see, and I figure Mason will say something I can live with in final draft.

My graphs #3 and #4 do show increase in interest received "in the 1980s". But they show increase from the 1950s to the Financial Crisis. Far as I'm concerned, that's rising financialization. All of it.

Mason also points out that

[household debt] rose as a result of the high interest rates after 1980, not any increase in household borrowing.

I remember him pointing that out some years back:

... changes in borrowing behavior has played a smaller role in the growth of household leverage than is widely believed. Rather, most of the increase can be explained in terms of “Fisher dynamics” — the mechanical result of higher interest rates and lower inflation after 1980.

In other words, household debt rose as a result of high real interest rates after 1980, not any increase in household borrowing. High interest rates, relative to the rate of inflation.

Yeah. I think he was right about that. But in the recent post he omits the word "real". It makes a difference. We didn't have "high interest rates after 1980". We had falling rates. 

After 1981, actually.

Also in the recent post, Mason goes on to say this:

With the more recent decline in interest rates, much of this supposed financialization has reversed.

He stops me cold. He's talking about a decline of financialization since the time of the Financial Crisis. Do you see that on my graphs? I don't. Mason posits that what looked like financialization (until the crisis) was really just the result of high interest rates, and that "the more recent decline in interest rates" is evidence of it.

Mason's view seems far less plausible when the disruption of 2007-2010 is offered as an alternative explanation: Of course financial income went into decline: Finance was in crisis. It's not like we had the crisis because interest rates fell. It was the other way round. 

The "recent decline in interest rates" happened because of the crisis. Six decades of increasing financialization created a financial crisis which brought a response that pushed interest rates and costs to low levels. This is in no way the same as financialization going into reverse.

Anyway, graphs #2, #3, and #4 all show renewed increase in the most recent years. They show the rise in financialization resuming. Of course this has something to do with rising interest rates --  and with inflation. But it also has something to do with the increase in borrowing and the increase in financial activity generally. 

The interest rate is the price of credit. Credit is the product of finance. An increase in the cost of finance -- not only in the rate of interest, but in the whole cost of finance -- is the same as rising financialization.

I find Joel Rabinovich's paper useful for my purposes. It shows that financialization is not due to nonfinancial business "mimicking finance". It warns that financial assets are only allegedly financial (though I will wait for second-source confirmation before adopting that view). And it leaves open the method of measuring financialization in terms of cost.