Why Financialization Matters (w/ AK) | The One Thing

A decade out from the financial crisis, have we just kicked the can down the road? AK takes aim at one of the major contributors to the 2008 financial crisis — financialization. He asks: “How does it work?” “What are the knock-on effects?” and “Why should I care?” on this week’s episode of Real Vision’s “The One Thing.”

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AK brings a fresh spin to the world of finance. Often pulling from Real Vision content, each week, he dishes on what recent event or insight rises to the level of being "the one thing" that matters.

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Why Financialization Matters (w/ AK) | The One Thing

Transcript:
Last week we talked about housing and figured out that it's financialization that has caused prices to become so high. But housing isn't the only thing that's been financialized. It seems like the whole economy is going through it. And just like housing, the effects are not great for your average person. And it might be leading us down a dark path. And we're going to talk about that today on Real Vision's The One Thing.
What's going on, investors? AK here. One of the biggest ironies today is how we solved the great financial crisis, which was caused by extreme over-leverage and out-of-control financial products. Because the way we solved it was by making money cheaper than ever. And that cheaper money has just led to widespread financialization.
Now we hear that word a lot. But what does it actually mean? Here's Simon Mikhailovich to explain it.
Financialization of money in banking. When money stops being real, it becomes an unlimited-- it comes to be in unlimited supply, perverts the incentives in banking industry. And that's-- now we're talking about how that flows into the real industry and into the real economy.
So after the crash of the 1930s, for the next 30, 40 years banking was a very boring business. Because commercial banks were separated from investment banks. They had to husband their capital. They had limited capital. And so they lent their capital to industry. And they lent their capital for mortgages against real estate. And then they sat there and they collected the income, and they made a sort of a small spread.
So it's a banking thing?
Banking. Yeah. It's what used to be called banking.
Yeah. Exactly.
Right. Well, as the money became soft, and as the ability of banks-- or as the focus of banks has focused-- or has shifted into transactional mode from the relationship mode and long-term mode. And as the capital constraints on the banks lend started getting looser and looser, banks started coming-- not started. Banks start, always-- coming up with better, faster ways to make money.
So what happens in financialization with access of money, all of a sudden the prices of assets start going up, because it's a supply/demand. As more money chases a limited amount of assets, asset prices go up. It becomes more attractive instead of lending and waiting to repackage things.
So how does a bank, for example, use the same capital base to generate transaction fees over and over and over and over again on the same capital? How do you turn the same money 20, 30 times?
Well, you securitize it. So what you do is what used to be banking and lending, now it becomes origination and packaging. Right? So they go out. They find a bunch of companies, they find a bunch of deals, they find a bunch of mortgages, whatever it is. They put it in a complicated legal structure.

[relint]

This may have been mentioned elsewhere but in some cases after the venture capitalist comes in and buys out grandpas “cheap but good syringe” factory they then try to recoup their 50x leveraged buy out plus profit by gouging the customer instead of or maybe even in addition to an IPO.

It leads to crazy upward swings in cost across a range of goods especially in industries like Health and Aerospace where it’s not as easy to switch to alternate suppliers. That’s how you get Insulin Shots and Epi-pens going up 200x in cost over 10 years, see Martin Shkreli for an extreme example.

[jamesruscheinski]

Priest federation / international law to counter government

[threedogsandacamper]

I appreciate the content — it summarizes where the inflation went from the Quantitative Easing, but the presentation is a bit of a disconnect for me with the hip young guy leading into a bunch of stodgy old guys....

[Jaytraveler]

Why must we look at that dead flesh on the table??