by Edward Ring
Financialization: “A pattern of accumulation in which profit making occurs increasingly through financial channels rather than through trade and commodity production.”
– Greta Krippner, Economic Sociologist, University of Michigan
There are plenty of examples of how America’s economy shifted from a production-based economy to a financially-based economy over the past forty years. Starting around 1980, with the economies of post-World War II Europe and Japan fully rebuilt and roaring, and emerging Asian economies turning into powerhouses of manufacturing as well, America chose financialization as an alternative to rising up to meet the competition.
Abandoning a productive economy in recognition that foreigners were willing to work for daily wages that wouldn’t buy a pack of gum in America may or may not have been an unavoidable choice. But the result is a nation that has, for over four decades, spent far more than it has earned. America’s total credit market debt now sits at nearly 800 percent of GDP; federal government debt exceeds 120 percent of GDP. The cumulative trade deficit since 1980 is $16.2 trillion; $6.6 trillion in the last ten years. Since 1980, the United States has not had a single year with a positive balance of trade.
To cope with this level of debt, collateral is required. Whether it’s business assets or home equity, collateral is the engine of liquidity. No wonder we have inflation, and if inflation isn’t undercutting the real value of debt fast enough, engineer more inflation. That would explain one of the hidden agendas behind environmentalist restrictions on growth. Limiting development constricts supplies of essentials, leading to demand-driven asset inflation. But there are more sophisticated ways to engineer more collateral for an economy running on debt.
Remember when investment banks and brokerage firms started going public in the 1990s? It defied common sense at the time. These were service partnerships that made money by packaging productive private companies for sales, mergers and initial public offerings, or by collecting commissions on stock trading done on behalf of clients. Where was the equity?
What might have been common sense then is naivete today. Of course, they could securitize their business. Who said that publicly traded common stock had to be connected to actual physical assets? Sure, if you owned stock in Chevron, your equity was secured by actual oil wells and refineries. If you owned stock in General Motors, your equity was secured by actual automotive manufacturing plants. But so what? If you purchased shares in Goldman Sachs, you were owning part of a business that was making money hand over fist. Who cares if they just provide services? America’s publicly traded financial sector now has an estimated market capitalization of over $10 trillion, edged only by high tech.
In terms of financial innovation to create collateral, securitizing banks and brokerages was primitive by today’s standards. The next wave came around ten years later, when creative traders bought mortgage loans, bundled them up, and sold equity that was secured by these collections of mortgage debt. Amazing contrivances followed: credit default swaps, collateralized debt obligations, and, as the scheme grew beyond any bounds of prudence, subprime mortgages. The whole thing crashed in 2008, nearly taking down the global economy.
Undaunted, the financial wizards of Wall Street continue to innovate. Now they’ve got their eyes on the entire global energy economy via carbon trading. Under this scheme, literally all consumption of carbon, or in its gaseous form, CO2, will be measured and reported. A floating market price will be set per ton of carbon, and carbon users will pay for the right to burn carbon (coal, oil, natural gas) and emit CO2, and that money will flow through a brokerage and into the hands of either government or private entities that will engage in activities purported to mitigate the alleged impact of CO2.
Through all these transactions, brokerages will collect commissions on what is currently a global energy market with an estimated turnover of $6 trillion per year. Even that figure grossly underestimates the stakes, since this doesn’t involve merely energy transactions, but everything energy touches—that’s everything, folks. With “carbon accounting” and soon to be mandated “carbon monitoring and reporting,” the embodied carbon in every human activity and every product and service will have to be assessed. Exceeded your ration? Pay up. Buy an “offset.” The market at work!
One might laugh at such audacity. Once again, financialization, on a scale unprecedented even for Wall Street. Even the New Yorker, in an October 2023 expose, ridiculed the idea in an article titled “The Great Cash-for-Carbon Hustle.” But hustle or not, carbon credits are on the way. Just ask those pioneering Californians.
The Financialization of Nature
Which brings us to the next great idea to stimulate collateral formation without actually producing anything: the concept of publicly traded “natural asset companies.” This scheme, long in gestation, was formally proposed to the U.S. Securities and Exchange Commission in September 2023 by the New York Stock Exchange, which hoped to list these new companies. From the offices of Harriet Hageman, a congresswoman from the freedom-loving state of Wyoming, comes this explanation of how these companies would operate:
“According to the proposed rule, a Natural Asset Company (NAC) would ‘hold the rights to ecological performance,’ giving these companies license to control the management of both public and private lands through quantifying and monetizing natural outputs such as air and water. In other words, NACs would use the air you breathe as currency. Under the guise of climate change, NACs would make this ‘control’ mechanism profitable without the actual use of the land itself. By monetizing and leveraging the management of these natural outputs their war cry of ‘ecological performance’ would fall under the rules of sustainable development. ‘Natural assets’ would now belong to corporations that are potentially run by special interest groups such as The Nature Conservancy and the World Wildlife Fund, thereby requiring all production tied to the land to fall under the sustainability rules established by these non-governmental organizations.”
Hageman’s assessment is accurate, and in January 2024, the SEC, bowing to pressure from 25 state attorneys general, thankfully deferred approval of publicly listing NACs. But as the New York Times dutifully reported in the aftermath of the SEC’s decision, proponents of NACs will continue to implement the concept using private equity.
What financializing nature ultimately relies on is the idea that conserving nature has an economic value. While that is undoubtedly true, the idea assumes that somehow the preservation or enhancement of an ecosystem’s health can be quantified and monetized, generating a return equal to or greater than the value of the commodities that can be extracted from that land. This is a dubious assumption. For example, sustainable logging operations generally enhance the quality of forest ecosystems, making them more resistant to wildfires and often creating more hospitable habitat for wildlife. So how do you differentiate between the value of a property based on its marketable timber versus the value of a property because it hosts a healthy forest? Do you double-dip? Extract the timber and realize that profit, while also assessing your ecosystem health and placing an appreciating value on that as well? Maybe so. After all, that creates more collateral. But who makes those assessments?
The threat posed by natural asset companies must be viewed in the context of a preexisting land grab, funded by billionaires, billionaire-backed NGOs, and sovereign wealth funds, that is permanently transforming and consolidating land ownership in the United States and around the world. Permitting these companies to be publicly traded would inject additional billions, if not trillions, of capital into their treasuries, which would dramatically increase the capacity of these buyers to acquire more farmland, rangeland, and other valuable rural properties.
Natural asset companies enjoy a pernicious synergy with what has become a full-blown regulatory assault on farmers, ranchers, miners, and drillers throughout America and Europe. As millions of landowners, often working land that has been in their families for generations, are driven insolvent by regulations, in come the big corporate raiders to buy them out. If publicly traded natural asset companies come on the scene, the transfer of land from financially stressed families and small corporations into the hands of global financial interests will accelerate.
In the first few decades of the financialization of America, at least there was no pretense of virtue. Asset stripping American factories and offshoring operations, turning banks and brokerages into publicly traded companies, inventing subprime mortgages, and securitizing them—it was just business. There might have been some warbling about free markets and democratizing home ownership, but these moral rationalizations were generally subsumed in the mechanics of creating collateral out of nothing to facilitate another few decades of an epic debt binge.
That’s not the case today. Carbon trading and natural asset companies are a new type of financialization. They have an explicitly trickle-up impact as well as an operating model that depends on unprecedented government mandates and restrictions on energy consumption and land use. They differ in kind from earlier forms of financialization. They create collateral by using scarcity to inflate the value of existing real assets, and by inventing new asset categories that have no relation whatsoever to genuine productivity. And they will justify all of it in the name of fighting climate change. Buckle up.
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Edward Ring is a senior fellow of the Center for American Greatness. He is also the director of water and energy policy for the California Policy Center, which he co-founded in 2013 and served as its first president. Ring is the author of Fixing California: Abundance, Pragmatism, Optimism (2021) and The Abundance Choice: Our Fight for More Water in California (2022).
