Is financialisation inevitable? The power of finance as a policy choice.

Can we reign in the power of finance? This dissertation asks if an industry that is often portrayed as an unstoppable force can, in fact, be stopped. Over the past two decades the study of ‘financialisation’ has been at the centre of debates in political economy. This body of research has addressed the increasing role and vast expansion of national and international financial markets and analysed the often destructive social and environmental effects. This research is important, but often inconsistent in one major respect. The literature often neglects the question if financialisation is inevitable and how to stop the power of finance. This dissertation fills this gap and asks ‘what could be done’. We look at the emergence of international financial architecture and historical case studies of three countries to show that, after all, financialisation is a policy choice. By tracing these countries’ institutional history, the thesis provides a novel insight into the evolution of national financial systems and how they manage the impact of financialisation. Chapter 1 outlines the emergence of financialisation in the US due to the desire to retain international US hegemony by putting the US dollar at the centre of the global financial system. Having outlined the origins of financialisation and its purpose in the US, we look at the case of Germany in Chapter 2. This chapter shows how German capitalism is inextricably linked to financial institutions with a mission beyond profit. It is shown that the balance of mission and profit-oriented institutions has allowed Germany to fend off financialisation. Chapter 3 then looks at the case of a prominent emerging market economy, South Korea, which has often been described as a ‘victim’ of international forces promoting financialisation. However, the chapter shows that policy changes towards financial liberalisation were mainly driven by domestic interests, and several of these policies were reversed after the 1998 Asian financial crisis showing that there is significant domestic control over the degree of financialisation in South Korea. The final chapter looks at the evolution of patient capital in the US and Germany to analyse why and how financial systems change. It is argued that patient capital provision used to be similar until the 1970s and that country-specific interest groups transformed the financial system leading to a demise of patient capital in Germany but not in the US. Social dynamics are much more relevant to explain the divergence between the two countries than aspects of technological change, the impact of ideology or the capitalist search for yield. The research suggests that financialisation is not a unidirectional, inevitable force. While some countries might embrace the expansion of finance, other countries remain resistant. Still others might experiment with a degree of financialisation, but will ultimately reverse these policies if they threaten economic stability. The degree of financialisation in a given country will not depend on regulations alone, but much more on domestic interests shaping the financial system