The 2008 Crisis and the Rise of the Asset Managers

Durand is correct that state intervention following the 2008 crisis was enormously significant. But what have its actual systemic functions and historical implications been?

This intervention was not the result of the instrumentalization of the state and the plundering of its coffers by financial institutions, as Durand implies. Rather, they were the product of a relatively autonomous state seeking to resolve a systemic economic crisis and support accumulation as a whole — acting not at the behest of particular firms, but in the interest of the financial system. It was these interventions, and in particular the continuous extension of QE over a decade and a half by the Federal Reserve, that led to the historic shift in the structure of corporate capitalism that became the new finance capital.

QE involved the Fed purchasing large quantities of assets and generating enormous liquidity through the creation of central bank reserves. While this aimed to provide cash to financial institutions, it was primarily about supporting the market-based credit system that had evolved over the neoliberal period.

At the center of this system were repo markets, on which financial institutions accessed short-term cash in exchange for collateral assets. The most important collateral, and therefore the basis for credit generation, were Treasury bonds and mortgage-backed securities. In order for the system to work, financial institutions had to see these assets as safe. Once the value of mortgage-backed securities was thrown into doubt, lending on these markets seized up, and financial institutions were unable to access liquidity.

By purchasing mortgage-backed securities, the Fed backstopped their value, thereby de-risking them and supporting repo markets. As the Fed absorbed what were seen as the safest assets, especially government bonds, it pushed financial institutions to purchase other assets, especially stocks and corporate bonds.

The large flood of money into the stock market drove a steady, across-the-board rise in equity prices. With a rising tide lifting all boats, it became harder for actively managed investment funds — which attempt to “beat the market” by strategically trading — to justify their high management fees. The result was a large-scale shift of investment into passively managed funds, which trade only to reflect the shifting weight of firms in a given index and can thus offer very low fees.

Before 2008, three out of four US equity funds were actively managed; by 2020, more than half were passive, with nearly $6 trillion in assets under management (AUM). This concentration was especially centered around the Big Three, and BlackRock in particular. Between 2004 and 2009, BlackRock’s AUM grew by a barely believable 879 percent.

These firms are also incredibly diversified. They are, collectively, the largest or second-largest holders of companies that comprise 90 percent of total US market capitalization, including 98 percent of the S&P 500. Moreover, they hold an average of more than 20 percent of each of these firms — reversing the long-standing trade-off between ownership strength and diversification, whereby the weight of holdings tends to decline with increasing diversification (“diluting” holdings across a wider range of firms). Asset managers have become strong owners in practically every publicly traded firm, including other large owners like the big banks.

This extent of ownership concentration, centralization, and diversification is unprecedented in the history of capitalism. Yet this regime remains intensely competitive. Asset managers compete with each other, as well as with all other outlets for savings. To attract capital, they must offer the highest returns and the lowest risk, imposing strict limits on the fees rates they can charge. Therefore, asset managers must grow their profits by maximizing AUM, since their fees are typically calculated as a percentage of this. They do so by accumulating assets as well as by increasing the value of assets they already hold.

But since the passive funds managed by these firms are highly illiquid, unable to trade other than to track a particular index, they cannot simply dump shares of underperforming companies. Instead, asset-management firms directly pressure the managers of their portfolio companies to maximize competitiveness and asset values — attenuating the distinction between corporate ownership and control.

Asset-management firms have effectively become permanent and active owners of all the largest and most important corporations in the economy. These relationships are organized through the asset managers’ “stewardship divisions,” which centralize oversight of industrial corporations. This includes coordinating share-voting strategies, collaborating with portfolio companies on governance reforms, influencing board composition, approving executive compensation, and supervising strategy.

Their large blocs of ownership ensure that asset management companies have the ear of management and are able to engage in routine “behind-the-scenes” coordination — backed by the possibility of exercising share-voting rights, which they have not been shy about doing when necessary. As Rakhi Kumar, head of corporate governance at State Street, put it:

Our size, experience and long-term outlook provide us with corporate access and allow us to establish and maintain an open and constructive dialogue with company management and boards. The option of exercising our substantial voting rights in opposition to management provides us with sufficient leverage and ensures our views and client interests are given due consideration.

Yet the metrics Durand deploys — the balance of profits between the financial and industrial sectors, the liquidity in the financial system, and asset values — do not include the structure of corporate ownership. So he ends up missing one of the most important foundations of financial power: unprecedented concentration of ownership of industrial capital by the Big Three asset-management firms.

As a result, Durand’s assessment of the decline of financial hegemony falls wide of the mark. Though QE was essential for the initial formation of finance capital, its existence and dominance does not necessarily hinge on QE continuing. In the current context of market volatility and QT, it is likely that the relatively safe, diversified, and extremely low-cost passive funds managed by the giant asset-management firms will remain competitive. Indeed, these funds have continued to grow strongly — poised to surpass actively managed funds worldwide this year. Although the profits of the asset management companies have declined and inflows into passive equity funds have slowed, as would be expected in a bear market, the continuation of ownership concentration and centralization suggests that the power of these firms is actually increasing, not deteriorating.

Finance Capital, Industrial Capital, and Globalization

The formation of finance capital has also reinforced the consensus among the capitalist class around globalization. Contrary to some wishful thinking, these “universal owners” cannot lead the decarbonization of the economy or serve as the basis for a new social democratic class compromise around expanding the welfare state. Far from displaying a willingness to sacrifice the profitability of individual firms in service of the general interest of the system as a whole by forcing them to “internalize externalities,” asset-management firms have an incentive to maximize the competitiveness of individual portfolio firms. Insofar as corporate competitiveness is bound up with free capital mobility — allowing corporations to circulate investment around the world in search of the highest returns — the interests of asset management firms are tied to this as well.

The deepening of globalization through the elimination of barriers to capital mobility, especially the liberalization of exchange rates and capital controls, both empowered finance and helped resolve the 1970s crisis by aiding in the restoration the profitability of industrial corporations. The construction by multinational corporations of flexible and dynamic cross-border networks of production and investment depended upon the creation of an internationally integrated financial architecture dominated by large US financial institutions.

The globalization of capital therefore meant that finance became more central to the structure of accumulation and more politically powerful. However, because nonfinancial corporations themselves benefited from this, they ultimately accepted finance’s dominance. The interests of financial and industrial capital became ever more closely entangled over the ensuing neoliberal era.

Financialization was further entrenched by the deeper restructuring of the nonfinancial corporation during this period. Through a series of adaptive responses to the challenges posed by diversification and globalization, top managers increasingly became investors, circulating money-capital among competing corporate divisions, operations, and facilities based on their ability to generate monetary returns.

While investment was centralized, operational control was decentralized to self-contained business units that competed for investment from top executives. The formation of capital markets within the corporation in this way enhanced discipline toward cost-cutting, efficiency, and profit maximization. The difference between financial and nonfinancial firms therefore became blurred, as the fusion of financial and industrial capital — finance capital — was consolidated within the nonfinancial corporation itself.

Far from being rooted in “the exhaustion of the productive dynamic,” financialization and globalization enabled the restoration of industrial dynamism . In this context, Durand’s implication that domestic investment is “productive,”  despite being hampered at that moment by a profit squeeze, in contrast to apparently unproductive or speculative investment in “globalized production chains” — which he admits enabled the exploitation of “cheaper labour” and brought “higher returns” — is confusing. In effect, Durand appears to identify the entire process of globalization as simply unproductive. While he is correct that this process led corporations to rely upon derivatives in order to manage the risks associated with globalized production, this only demonstrates how critical these financial instruments are to production  and thereby points to the problems with seeing them as simply “fictitious capital.”

In any case, the financialization of the nonfinancial corporation did not simply begin in the neoliberal period, but at the height of capitalism’s “Golden Age.” It was spurred not by industrial decline, but by the accumulation of large pools of retained earnings by industrial corporations, itself the result in part of weak investor discipline on these highly profitable firms. Rather than let these cash pools sit idle, industrial firms circulated them as interest-bearing capital, becoming by the 1960s the largest lenders on commercial paper markets. Industrial firms were also the largest borrowers on these markets, which served as an important source of financing for industrial operations. In this way, financialization enabled the redistribution of the retained earnings accumulated by large corporations across the economy, supporting industrial profitability.

It is incorrect, then, to say that financial hegemony emerged as a result of declining industrial profits, supposedly leading capitalists to divert investment toward speculative financial services. Nor have the subsequent neoliberal decades of financial hegemony been characterized by declining corporate profits, investment, or spending on research and development (R&D). It was during the 1980s and 1990s that the cutting-edge high-tech firms that dominate the global marketplace today, like Apple and Microsoft, emerged. Indeed, R&D spending actually grew as a percent of GDP throughout the neoliberal era.

Meanwhile, corporate investment sharply increased relative to GDP, significantly diverging from the postwar norm. And this increasing investment yielded a tremendous boom in the mass of nonfinancial corporate profits. While financial profits grew more quickly, this did not come at the expense of industrial investment, profitability, or competitiveness.

To be sure, financial hegemony is reflected in the larger share of the surplus captured by financial institutions through share buybacks and dividends. But this is in no way a sign of industrial decline. On the contrary, that corporations are making high profits, partly as a result of financial restructuring, means that they are able to both reinvest in production and return unneeded cash to shareholders. Such financial gains can then be reinvested elsewhere.

In the postwar years, industrial corporations themselves circulated surplus cash as interest-bearing capital, earning financial returns; today, they also distribute a share of their high profits to financiers to invest across the economy. Neither of these represents a more dysfunctional capitalism — the difference simply reflects the changing structure of corporate organization and capitalist class power.

The rise of finance is not a symptom of industrial decline, but a condition for industrial competitiveness. As financialization facilitated the movement of capital into and out of sectors, facilities, and countries, competitive disciplines to maximize returns across all investments was intensified. The interpenetration of financial and industrial capital highlights how problematic it is to see finance as a “deadweight” on capitalism — and makes it hard to imagine how financialization could be reversed.

The End of Financial Hegemony

Durand’s “fork against finance,” in which either the implementation by central banks of a restrictive monetary policy or the continuation of mid-level inflation amounts to “a choice between apoplexy and slow-motion agony” seems largely imaginary. For one thing, Durand fails to convincingly demonstrate that inflation is entrenched, and that the combination of declining asset values in relation to industrial profits is not merely cyclical. Indeed, inflation now seems to be abating.

Nevertheless, Durand is right to highlight the possible trade-off faced by central banks between controlling inflation, on the one hand, and maintaining financial stability and asset-price appreciation, on the other. But there is no reason to believe that central banks cannot navigate such contradictions, avoiding a full-scale crisis while maintaining the overall policy of monetary tightening to bring down inflation. In this respect, if Durand overestimates the intractability of the dilemma between monetary and price stability, he underestimates the capacities and autonomy of central banks, as well as the importance of controlling inflation for a financialized global capitalism.

Nor is there a clear contradiction between the current regime of finance capital and QT. Indeed, BlackRock CEO Larry Fink called for monetary tightening and insisted that the Federal Reserve would have to change policy before Fed chair Jerome Powell did so (who was insisting at the time that inflation was merely “transitory,” and that there was no need for a sharp hike in rates). This is the precise inverse of the dynamic one would expect from Durand’s argument: central bankers pushing to continue easy money and powerful financial firms calling for tightening. There are structural reasons that asset managers would want to control inflation, first among which is that they are dependent on the competitiveness of the industrial firms they own.

BlackRock and other asset managers not only manage equity funds, but they are also central institutions within the shadow banking system. If the profits these firms receive from their equity funds have been diminished by the falling stock prices that are the result of tightening, their cash-management operations and other investments have simultaneously become more profitable, though these make up a smaller proportion of total revenues.

There is every reason to believe, therefore, that the Big Three will emerge from the current bear market in an even stronger position. While profits may have temporarily dipped, they are by no means at a crisis level, and are supported by diversified holdings and operations; meanwhile these firms continue to accumulate assets and ownership power.

There is certainly a risk that monetary tightening will lead to a liquidity crisis or a stock-market crash creating widespread financial panic. But finance could well emerge from a crisis in an equally strong or even stronger position, as occurred after 2008. To begin with, this would presumably end the current bout of inflation. And while such a crisis would demand extraordinary state intervention, there is no reason to conclude that this would exceed the capacities of central banks.

The broader problem with suggesting that financial hegemony is collapsing on its own is that it blocks us from seriously thinking about how to deal with the very real obstacles that finance poses for working-class and environmental struggles. Similarly, framing finance as merely “fictitious” or a “deadweight” can imply — as William Lazonick, Elizabeth Warren, and other social democrats explicitly argue — that “productive” industrial capitalism can be restored by simply reining in a corrosive financial sector.

But it is simply not possible to separate industrial capitalists, who have been supposedly victimized by financialization, from financial capitalists who are said to have benefited from it. The effect in both cases is to downplay the challenge and the urgency of addressing the accumulating social and environmental harms inflicted by global capitalism — and the need to build an alternative.