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Financialization: In Search Of A New Normal

Here is the abstract of my research paper titled Financialization:  In Search Of A New Normal, which has been accepted at the International Research Conference on Management, Banking and Finance (IRCMBF), organized by the Jamanalal Bajaj Institute of Managment Studies to be held on March 5th - 6th, 2012.

The global financial crisis starkly revealed the punishing downside of Financialization. It also highlighted its role in boom-bust cycles as asset prices wielded a secularly increasing dominance over real economy and influenced policy thinking as well as household and corporate behavior. This paper highlights the broad contours of financialization and their evolution over last few decades. It also examines the role of financialization in exacerbating turbulence in financial markets. 

Following the advent of Anglo Saxon capitalism, financial superstructure of advanced economies kept on rising in relation to the stagnant production system underlying it. Empirical evidence explains how more and more economic activity was geared not to production but to the pursuit of paper claims to wealth. The tipping point came in 2007-08 as this engrossing wave of financialization finally overwhelmed the global financial system and led to an inevitable collapse in asset markets across the board. 

Evolving global macroeconomic structure and the inevitable transfer of wealth and resources from advanced economies to emerging Asia indicate that financialization in these economies is likely to be the single most critical factor determining longer term growth prospects for the entire globe. The paper argues that given the experience of last three years, it is clear that the process of household and business deleveraging in advanced economies is likely to continue well into the current decade. 

This means that prospects of a heightened credit filled boom in emerging economies, particularly Asia over next few years are very high and its sustainability would depend upon how financialization improvises itself after debacle of 2008. The demographics and low consumption levels in these countries could complicate such booms further. The paper sums up how financialization needs to evolve in a new normal in light of experiences in last few years and avoid previous policy mishaps. 

Keywords: Financialization, world economy, crisis, emerging economies, banking