30: How Finance Took Over the World

SPEAKER_1 (0:00)

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Tracy Alloway (0:22)

You Welcome to Odd Lots, I'm Tracy Alloway, executive editor of Bloomberg Markets. My co-host, Joe Weisenthal, is away this week. But never fear, because his absence means we are about to geek out on some of the most finance-y things of all things in finance. So today, joining me, we have a former banker and corporate treasurer. He's also an all-round derivatives expert. He is the author of one of my all-time favorite finance books, Traders, Guns and Money. I am talking, of course, about Xiuquanjit Das.

He actually has a new book out, but we are going to be talking about something much broader than that. The topic of today's podcast was inspired by a recent column by my Bloomberg colleague, Noah Smith.

His column was called How Finance Took Over the Economy.

Das has previously spoken about the financialization of the world economy. Many of his books are full of specific examples of this. But we are not just going to talk about financialization of the economy. We are also going to talk about the financialization in markets and monetary policy. And that is, of course, one of the big, big questions for investors at the moment. So Das, thank you so much for joining us today.

Satyajit Das (1:41)

It's my pleasure.

Tracy Alloway (1:42)

All right. Maybe just to begin, we should start by defining our terms and talk about what we mean when we say financialization.

Satyajit Das (1:51)

Well, that's a very, very difficult question. I think it's a bit like trying to define a smile because I think it was a professor who once said, a smile is the drawing back and slight lifting of the corners of the mouth, which partially uncovered the teeth.

So I think financialization is a little bit like that. And I have seen many people struggle with that. So I actually tend to think about its manifestations. And I think there's a few of them which are very important, one which is obviously very topical, which is the use of debt to drive financial and economic activity.

The second is, which actually has become topical again, is the size of the financial sector and how large that is relative to the real economy. And this is the whole idea, which is a third point, that instead of using traditional ways to drive the economy, which is things like innovation, productivity, new markets, we now start to use financial techniques or financial engineering rather than real engineering to try to create growth, wealth and prosperity. And the last one is an excessive reliance, I suppose, on financial techniques and instruments. And maybe underlying all of that is the increased emphasis on not the real economy, but just creating and trading financial claims of different types on them. And the best way to describe it is you and I are creatures of that, because in an earlier age, we might have been useful and worked in real industry, instead of which we keep talking about financialization.

Tracy Alloway (3:29)

Oh, wow.

You went there. Okay. Well, I'm going to turn this back on you. You have a long career as a banker and a trader. Was there a particular moment in time that you can remember thinking that financialization was a thing or that the finance industry had grown too big or that financial engineering was starting to get a little bit weird?

Satyajit Das (3:52)

Well, I think there was never one magic moment in all of this, but I realized there was something very odd when I used to be a corporate treasurer. And in those days, it was fashionable to run corporate treasuries as profit centers. That's something that's fallen into disrepute recently.

But in a particular year, we made more money than the real business, which was to me a sign of considerable alarm in the sense that we were a transport company, but the financial jiggery-pokery and petty-foggery that we were doing was actually creating more wealth than the business of shifting parcels around the world, which I didn't think was healthy. And the other thing I suppose was earlier in my life when I used to work in banking. And I remember, with some degree of shame actually, thinking that my bonus in one year was more than the earnings that my father, who was a mechanical engineer, had earned over probably a decade or probably more than that. And I thought there was something, I suppose, wrong with the world, which actually looks at that type of valuation relatives.