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Financialisation  in  advanced  capitalist  economies 1

4.3     FINANCIALISATION  VARIED:  THE  EMPIRICAL  EVIDENCE  IN  ACEs

4.3.4     The  household  sector

Perhaps the most simple and telling measure of the financialisation of the household18 is the level of household total financial liabilities as a share of gross national disposable income (figure 4.16). This ratio illustrates the increasing assumption of financial liabilities relative to the ability to pay.

16 Source: Bundesbank MFI lending to MFIs (OU0081) and big bank lending to MFIs (OU0828).

17 Landesbanken accumulated upwards of $80 billion of US sub-prime mortgages in the run-up to the crisis of 2007-8 (Reuters, 2008).

18 For statistical purposes, this refers to households and private non-profit institutions’ serving households. Unlike the non-financial corporate and financial sectors, intra-sectoral consolidation is not a significant issue here.

104 Figure 4.16: Household financial liabilities to gross disposable income

Clearly, the data indicate two distinct trends. US household indebtedness rises steadily from 1955 until 1991, but then accelerates markedly from the late 1990s until 200719. UK household indebtedness rises rapidly from 1997, accelerates through the housing price bubble, and crests at 175 per cent of disposable income in 2007. French household indebtedness has historically been quite low, however in the last ten years it has started to grow at Anglo-Saxon rates, surpassing indebtedness levels of German households.

The other pattern is that of the Japanese and Germans. Japanese levels rise during the 1980s, flatten out in the 1990s, and then start to fall in the 2000s. Levels never exceed 90 per cent of disposable income, half the level reached by the UK.

The levels of liabilities of German households grow from 1991 to 2001. Like Japan, these liabilities have fallen off as a share of disposable income in the past decade. It is interesting to note that the counter-movement in German and French levels coincides with the introduction of the euro.

19 Note that these figures underestimate US household indebtedness relative to the other countries, due to the US custom of excluding sole proprietorships from the household category. Inclusion of non-farm non-corporate data in the calculation, which takes US indebtedness above that of the UK, would equally overestimate the level.

0   0.2   0.4   0.6   0.8   1   1.2   1.4   1.6   1.8   2  

1980   1982   1984   1986   1988   1990   1992   1994   1996   1998   2000   2002   2004   2006   2008  

GBR   USA   JPN   DEU   FRA  

105 Critical  roles  for  pension  reform  and  housing  finance  

On the asset side there are two distinct patterns at work through the 1980s and 1990s20. Households in the US and the UK hold relatively lower levels of deposits and higher holdings of market-based assets (either direct holdings of shares and other equities, or life insurance and pension fund reserves invested in the securities markets). Even within deposits, this is increasingly made up of money market mutual fund share holdings. In both the US and the UK, securities holdings shift away from government securities and towards corporate and foreign bonds, though from a lower level in the UK.

The others hold higher deposits and lower market-based assets. Japan is unique in several respects. In terms of deposits, Japanese households have been increasing their share of assets held in deposits while households in all the other countries have moved in the opposite direction. In terms of securities, they have been increasing the share of government securities. In the equities category, Japanese households hold more in insurance than pension reserves (though falling from 80 to 55 per cent of the combined total). In the 1980s, private Japanese insurance and pension funds held a roughly equal portion of loans, securities and equities, while public pension funds held over 70 per cent of their assets in deposits with the government-sponsored Fiscal Loan Fund. Through the 1990s, private insurance and pension fund holdings of loans and equities fell, while holdings of securities rose (mostly government bonds). In public pension funds, the decline of holdings with the Fiscal Loan Fund to near zero starting in 2000 is mirrored by a rise in holdings of government-sponsored securities.

However, from the crash of the dot-com bubble in 2000-1, household balance sheets in all countries start to move in unison: an increasing share of deposits in the wake of the crash, then falling in the subsequent mini-boom, then rising once again entering the current crisis. There is now an interesting change in levels. From

‘Anglo-saxons and the rest’ at the start of the 1990s, there now appears to be the Americans at one extreme, the Japanese at the other, and a convergence of the Europeans in the middle.

20 The analysis here reflects the author’s analysis of national accounts data, plotting the change in the portfolio composition of the balance sheets of households over the period in question.

106 One of the most dramatic transformations revealed by this research is that experienced by French households. Deposits have fallen by half. Holdings of shares and equities grew significantly in the 1980s after reforms which made investing in stocks more appealing to households21. Most dramatic however has been the growth in life insurance and pension fund premiums, claims and reserves from seven per cent in the late 1970s to 40 per cent last year. These funds went from 30 to 50 per cent invested in equities during the 1990s, with the rest in securities22. A back of the envelope calculation suggests that within a generation French households have moved from a situation where only approximately five per cent of their financial assets were subject to capital risk to one where 20 to 25 per cent are so subjected today23.

On the liability side, one important trend jumps out. Across the five countries mortgages make up an increasing share of household liabilities. However, there are two distinct levels. On the one hand the US, UK and France; on the other, Japan and Germany (US – 65 to 75; UK – 65 to 80; FRA – 62 to 75; JPN – 30 to 47;

DEU – 30 to 52). Contrary to what might be considered ‘common knowledge’, there is no clear trend in levels of consumer credit.

The overall picture of household financialisation is reinforced by a partial view of the household income statement. In the US, dividends as a share of total income rise from ten per cent in the early 1980s to over 15 per cent more recently.

Duménil and Lévy (2006) calculate total financial incomes as the aforementioned plus a measure of capital gains corrected for inflation. As a share of total income it

21 Up until 1996, this growth was in mutual fund shares and money market mutual fund shares. After 1996, the share of mutual funds falls back, and the growth is in unquoted shares. Quoted shares make up about 15 per cent throughout.

22 Insurance and pension fund holdings of securities has moved from being almost entirely in fixed coupon longer-term bonds to 30 per cent short and medium-term negotiable securities since 2003.

Equities holdings have moved from less than 50 per cent mutual funds in the early 1990s to nearly 70 per cent more recently. Eighty per cent of mutual fund holdings are in general investment funds.

Direct holdings of shares and other equities has seen a growth in unquoted shares from less than 50 to over 70 per cent.

23 In 1980, ten per cent of household assets were in shares and equity, of which about a third were in quoted shares and general investment mutual funds. Less than ten per cent was in pension funds, of which 25 per cent was in equities, about half of which was subject to capital risk. In 2008, 25 per cent of household assets were in shares and equity, of which about 40 per cent were subject to capital risk.

A further 40 per cent of assets were in pension funds, of which about 40 per cent were in equities, over 60 per cent of which are invested in either quoted shares or general investment mutual fund shares. Note that Charlemagne, in The Economist (2010) says: “… three-quarters of all French household financial assets are free from capital risk” – while this is true, the change in risk profile over time is nonetheless significant.

107 oscillates around ten per cent through the 1950s, 1960s and 1970s, before beginning an ascent to 40 per cent before the collapse of the dot-com bubble. Their data show a similar trend for France. On the expenditure side, US household outlay on financial services and insurance rises from four per cent in the early 1960s to nearly ten per cent recently24. Meanwhile, the US household debt service ratio has crept up from 11 per cent in 1980 to 14 per cent in 200825.

In a nutshell, the household sector is clearly divided between the ‘eager financialisers’ and the ‘reluctant financialisers’. The division replicates the traditional market-based versus bank-based divide, though this is not to suggest simple causation from changes in finance to changes in the household balance sheet.

France is moving from the latter in to the former. For the former, economic growth over the last decade or more is being driven by rising household indebtedness. For the latter, growth (if there is any) has to be found elsewhere. The composition of pensions is critical in judging the degree of household financialisation, as is the issue of the financing of home ownership. On both counts, Japan and Germany stand apart.

4.4    CONCLUSION  

This chapter has, first, provided empirical evidence in relation to the theoretical framework established in chapter three; this framework understands financialisation as a global phenomenon representing a structural transformation of relations among non-financial corporations, banks and households, located within the contemporary characteristics of the world market. Second, within this analysis, I have argued that the ‘diversity within convergence’ which is suggested by this thesis, marks a refutation of the divergence hypothesis common to much of the comparative capitalisms literature. Specifically, I expected that while bank-based vs. market-based differences would still have purchase, these differences would be systematically eroded by the process of financialisation.

What has emerged is that corporations are indeed moving away from bank-based borrowing and are, at the same time, acquiring portfolios with an increasing weight given to financial assets. However, resistance to both trends is more marked

24 Source is NIPA table 2.3.4 personal consumption expenditures.

25 Source is Federal Reserve household debt service ratio.

108 in the traditionally bank-based countries of Japan and Germany. French firms appear to have joined the eager financialisers. For banks, deposits have fallen and have themselves become more market-based, and lending to corporations is falling. Once again Japan stands out for both the resilience of its traditional deposit base and the continued relatively high level of corporate lending. There has been an increase in lending to finance, real estate and households, though the shift is less marked for both Japanese and German banks.

This picture is one of a complex of inter-related processes which are variously facilitated, restrained or blocked by regulatory, cultural and technological change. The corporate turn to self-finance is universal. But should this imply a universal turn to investment in financial assets? Not necessarily so. But if, at the same time, household assets are shifted out of deposits and into market-based pensions or direct equities, there is pressure on the corporate sector for higher, short-term returns (exemplified by the twin movement of French household and corporate assets). This move away from holding assets in deposit form – facilitated by policy change – in turn also puts pressure on the liability side of the bank balance sheet.

Banks replace these funds with those raised via the repo-securitisation complex. On the uses side, banks shift away from long-term relationship lending to corporations and towards lending to individuals, real estate and other financial institutions. Not surprisingly, though certainly not unavoidably, this leads to increased household indebtedness.

This inter-related web of transformations can of course be altered or broken.

Policy and culture in Japan mean household assets have stayed within bank deposits or with pension funds which invest in state bonds. This puts less pressure on the liability side of the banking sector balance sheet, at the same time as it may reduce the pressure for non-financial corporations to invest in financial as opposed to fixed assets. Similarly, cultural norms and institutional history in Germany and Japan mitigate against households assuming high levels of mortgage debt, meaning overall indebtedness is more manageable. However, it would be disingenuous to suggest that German and Japanese corporations do not feel the pressures of financialisation via international market competition. Indeed, large banks and firms must either play the game, or find other ways to squeeze costs and force profits up.

109 Having empirically established the presence of the tendencies of financialisation across a range of institutional formations, in the next chapter I will develop a theoretical framework to account for the distinctive form of financialisation in emerging capitalist economies, or what will be termed subordinate financialisation.

Chapter  5