What is ‘Financialisation’? Why it’s bad. And what to do about it.

‘Financialisation’ is an opaque buzzword. If you’re not a city trader or multi-millionaire, you probably aren’t sure what it means.
 
So let’s simplify it, because it’s an important idea. Here goes.
 
In the old days, people saved up until they could afford something. For example, you saved to buy a sofa or a bed. You put money aside to buy a better car.
 
But not nowadays. Oh no.
 
These days, you go to a sofa showroom, and find one you like. Then you notice it’s expensive. “No problem,” says the sales person, “you can pay for it over three years.”
 
Now that’s a simple example. It’s just payment by instalments.
 
But maybe you don’t have good credit? Just down the road, there’s a shop that will rent you a sofa. Pay them just £15 a month, and it’s yours. Except that you have to keep paying that forever, every month.
 
And this gave the money men an idea. Why not get people to rent everything? Turn it into a subscription, rather than a purchase.
 
As a result, you lease your car. You pay £250 a month, every month, forever. And every third year, the company gives you a new car to drive.
 
But wait, there’s more. The company that’s taking your monthly payments (company A) scoops them all up into a pot, and sells it to another finance company (company B) for cash. Company B now owns your payments. It’s making money from money. Your car, or more specifically your monthly payments, is providing it with an income stream. As long as you keep up your payments, and the car doesn’t develop a fault, they’ll make a profit, because they set your monthly payments at a level that’s above what they paid the garage.
 
Do you remember the financial crash of 2008? That happened because the banks offered people a mortgage to buy a house, and then they sold the mortgage to a finance company. It all went swimmingly until the finance company discovered that wily estate agents were filling in the clients’ application forms, making them look more affluent than they were. As a result, the home owners couldn’t afford the payments, and the finance companies started to go bust.
 
But nowadays we’re further into financialisation that before. Now we have private equity firms, venture capitalists and hedge funds (each of them being broadly the same thing). They use rich people’s money to buy companies, load them with debt, and strip out the profits.
If your granny goes into a care home, it’ll be owned as part of a package of care homes that were bundled up, and sold on. Anything that has a regular income, like your granny’s monthly fees, is a target for financialisation.
 
But why is this ‘financialisation’ thing be so attractive? Well, it’s because the company that owns the care homes, or the garages, the mortgages, or the insurance policies – that company can sell your monthly fees and get 90% of its costs back straight away. Instead of getting a measly £250 a month from you, it gets £25,000 from a financial services company. That means it can put more cars on the forecourt, or build more houses. It’s a way to grow faster.
 
And that’s called ‘securitisation’. It involves rich people and corporations buying and selling mortgages, loans for cars, credit cards fees and student debt. They have the ‘security’ of the house, car or, more precisely, the income stream from them.
 
The underlying problem is that financial services are taking up a growing proportion of the economy. It about making money from money, not from making goods or providing useful services. And it gets people to take on debt, which they might not be able to repay in the event of a downturn.
 
Excessive financialisation helps a very few people make a lot of money, which leads to inequality. And when there’s a downturn, and people can't afford the payments, financialisation turns a recession into a crash.
 
But financialisation doesn’t just have its fingers on your car payments. Governments have found out that it works for them, too. Sort of. Let’s take just two examples: social housing and universities.
 
Social housing is now provided not by the government, but by housing associations, organisations that have to make a profit every year or go bust. As the grant they get from government has declined, they’ve had to borrow money on the markets to build houses. And to get the money, they commit their future rents to a finance house.
 
Universities, meanwhile, need money to build student accommodation. And so they borrow the money to build the tower block. Thus, the university hands over the future rents to the finance companies.
 
The invisible world of financialisation is ten times bigger than the real world of buildings, cars, nursing homes and the rest. It’s just waiting for the next crash, when we find out that the debts incurred by governments, banks and consumers can't be repaid. At that point, we discover no one wants to buy either the houses or the loans, and the assets aren’t worth what the ledgers claim they are. And then banks and companies go bust.
 
So, what’s the answer? In The Concierge Class, I identify various ways we can make financialisation less attractive. They include making finance houses hold more cash in their tills, so that in a downturn, when their loans turn bad, the investment banks won’t go bust. That has caused squeals of anguish from the money men, who know it will restrict their ability to borrow. But it means the world will be less based on people making money from money, and more on making money from goods and real services.