The financial explosion

Credit where credit is due. For a long time now we have been harping in this space on the theme of a monetary system out of control; of the wild proliferation of new financial institutions, instruments, and markets; of the unchecked spread of a speculative fever certainly more pervasive and perhaps even more virulent than any recorded in the long history of capitalism's get-rich-quick obsessions. With few exceptions, accredited economists, as is their wont, have ignored these bizarre goings-on: they are not part of the way the economy is supposed to operate and are hence unworthy of "scientific" attention. The media, on the other hand, especially the serious business press, have reported the facts as they have unfolded--the rapid growth of options and futures markets, the near bankruptcy and rescue by the government of one of the country's largest banks, etc., etc.--but have generally steered clear of any attempt to put these discrete developments into a coherent account of an enormously powerful dynamic process rooted in the nature of the economic system and loaded with implications for the country's future.

Now, very much to its credit, Business Week has broken ranks and made a serious attempt to fill the gap. The result, a cover story entitled "The Casino Society" in its issue of September 16, is a noteworthy journalistic achievement. Colorfully written and packed with facts, it tells an exciting story well worth the careful attention of everyone intereted in understanding the current economic scene.

What is the casino society? Here, in an introduction (included on the cover of the magazine) is Business Week's shorthand answer:

No, it's not Las Vegas or Atlantic City. It's the U.S. financial system. The volume of transactions has boomed far beyond anything needed to support the economy. Borrowing--politely called leverage--is getting out of hand. And futures enable people to play the market without owning a share of stock. The result: the system is tilting from investment to speculation.

Data in support of these statements are focused on the expansion in the volume of financial transactions. A composite quotation can serve as a summary:

On the NYSE [New York Stock Exchange], 108 million shares change hands daily, up from 49 million five years ago. In the government securities market, trading volume is averaging $76 billion a day, quadrupling 1980's level. Yet this growth seems tame compared with the action in financial futures and options trading pits. For example, daily volume in Treasury-bond and T-bill futures tripled in 1984 alone, to $26 billion.... The volume of financial transactions in this country has soared beyond calculation--and beyond economic purpose.... Stocks are not greatly overpriced, and margin borrowing is modest [in contrast to 1929]. But the speculative use of debt and other forms of leverage is pandemic in the rest of the financial world. "The markets," says NYSE Chairman John J. Phelan, "are leveraged to the teeth." Washington, of course, is setting an unrivalled standard fo profligacy, running a $180-billion annual budget deficit. Total federal debt doubled during the 1970s and hit $1 trillion in 1981, the Reagan administration's first year. Next year, it will top $2 trillion. Meanwhile, borrowing is suring all across the economy. Total debt of households, corporations, and governments jumped by a postwar record of 14 percent, to $7.1 trillion, in 1984. That's considerably faster than the economy is growing. Credit-market debt now stands at an ominous 1.95 times GNP, compared with 1.68 a decade ago. [Moreover, there is a vast debt equivalent which doesn't show on anyone's books.] Barred by law from underwriting mutual funds or commercial paper, the big banks have been retaliating against Wall Steet's incursions by offering corporate clients liquidity in the form of commitments--to make loans, to buy or sell foreign currency, or to guarantee the obligations of a creditor. Banks can charge tidy fees for making these commitments and yet not set aside capital to back them up, as they would loans. At the end of 1984 these "off-balance-sheet liabilities" at the 15 largest banks totaled $930 billion, or about 8 percent more than their assets.

Here, then, are the kind of figures which, taken together, give an idea of the fantastic dimensions of the financial explosion that has taken place in the United States in the last decade or so.

On the question of what it all means--i.e., of the relation of the financial explosion to the performance of the economy as a whole--the Business Week story has little to contribute beyond dark hints and ominous warnings of unknown perils that lie ahead. But the editors of the magazine, in an accompanying editorial, show that they are fully aware of the problem, and their way of formulating it has the merit of pointing toward the kind of analysis that is needed: "Although the emergence of the casino society," they write, "coincided with the economy's prolonged slowdown in the mid-1970s, nobody can demonstrate which is the chicken and which the egg. But clearly, slow growth and oday's rampant speculative binge are locked in some kind of symbiotic embrace." What we need to know is the nature of this embrace.