Financialization of modern economies as permitted by structural changes in the financial sector

What is it about?

This paper tries to shed some light on the nature and functioning of shadow banking, with a special focus on its role in the evolution of financialization as well as in sharpening income and wealth inequality. On the one hand, it discusses how securitization has allowed traditional banks to expand their business, providing the financial system with the “raw materials” for the manufacturing of complex structured financial products. On the other hand, it questions the view of traditional and shadow banks as two parallel and alternative systems, claiming that financialization did not alter the role of commercial banks as money creators, but rather diverted endogenously created money to the financial sphere, feeding its expansion. Finally, our work discusses some policy options for the de-financialization of the economy through more progressive taxation of the financial sector, as well as a stronger engagement to reduce income and wealth inequality.

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Photo by Alice Pasqual on Unsplash

Photo by Alice Pasqual on Unsplash

Why is it important?

This paper offers an analysis of financialization often neglected in previous works on this topic. It explains how financialization has been indeed allowed and fostered by structural changes taking place in the financial sector of the economy as the development of the so-called shadow banking.