A great article by DeLong; of all the travails that financialization brought in, it is the lingering doubt that it did not solve the very basic problem of allocating capital for productive use of the society as is evident in the BIS paper 69 which has shown that “if output per worker is plotted against the share of employment in finance, there emerges a point where both financial development and financial system’s size turn from good to bad beyond a point (that point lies at 3.2% for the fraction of employment and 6.5% for the fraction of value added in finance). Based on 2008 data, the United States, Canada, the United Kingdom and Ireland were all beyond the threshold for employment (4.1%, 5.7%, 3.5% and 4.5%, respectively). And the United States and Ireland were also beyond the threshold for value added (7.7% and 10.4%, respectively)”. Thus we have a problem of stranded capital if too much is following to little economic change. It is also true for global finance and de-globalization pushes back the problem to the original, one of stranded capital and its inability to ‘push’ beyond a point.



The financial markets helped by Central bank advances have amassed assets that have compounded annual growth rate of 9% (even after the painful adjustments), whereas the world economy has not even grown by 3%. This apparent dysfunctional arrangement had raised the doubt that financial markets instead of propounding systemic stability, consumer protection and risk mitigation practices to benefit large sections of people may have actually not served the lofty goals of bringing financial service access to greater majority of people, who go through the pains of adjustment more than the larger institutions; in providing the balance between serving

those sections who have less knowledge of the products on offer that could advance credit and could be actually used judiciously through a mode of smoothening consumption (not excessive leverage), the larger focus had shifted to misallocation of resources to housing and consumer credit at an alarming rate which is not sustainable. People who need to keep their financial savings in safe custody actually succumbed in this process with large scale erosion of their net worth. But more importantly the competitive efficiency of the global

financial markets whose benefits should have flown unequivocally to the larger sections of the society actually petered to an excessive financialization that made

some of the sovereign back-stops insufficient. The question of sovereign insolvency, which was never in doubt, has become a very common word and the

moral hazard has multiplied its preponderance in recent times.



The linkage of financialization and commodity market volatility is one recurring item that does not bode well as is evident in the seminal paper, "Financialization, crisis and commodity correlation dynamics", which states the following, "Results point to increasing integration between commodities and Financial markets. Higher commodity returns volatility is predicted by lower interest rates and corporate bond spreads, US dollar depreciations, higher expected stock volatility and Financial traders open positions. We observe higher and more variable correlation, particularly from mid-sample, often predicted by higher expected stock volatility. For many pairings, we observe a structural break in the conditional correlation processes from the late 1990s."