The Rise of Fragile Finance

Abstract

Not so long ago, finance and credit were considered to be a ‘service’ economy, supporting what many still consider to be the ‘real’ economy — manufacturing, labour, trade, tourism and so on. However, from the late 1960s onwards, perceptions about the role and functions of credit and finance have begun to change dramatically. To begin with, it appeared that on its own, financial system was able to generate massive, and relatively easy, profits, and that a growing proportion of the GDP of many advanced capitalist countries was generated by the financial sector alone. In the UK for instance, by the 1990s, the share of the financial sector in the economy as a whole surpassed 20% of the country’s GDP. More importantly, the financial sector has acquired a far more prominent role in the political economy as a whole, especially when compared to the ‘golden age’ of capitalism — the economy of the Bretton Woods regime. Increasingly, the success or failure of an economy was related to the success or failure of the financial system. What were the causes of such a dramatic shift?