The Collapse and Reconstruction of the American Financial System: From JPMorgan to BlackRock (III)

Original Title: "The Fall and Rise of American Finance"

Original Authors: Scott M. Aquanno, Stephen Maher

Original Compilation: MicroMirror

4: Neoliberalism and Financial Hegemony

The emergence of neoliberal capitalism from the Volcker Shock is characterized first and foremost by a new form of financial hegemony. The rise of finance is reflected not only in the increasing power of the financial sector but also in the growing importance of financial logic and operations within industrial firms themselves. The latter increasingly resemble financial institutions, as top executives allocate investment pools not only in internal corporate operations but also among external contractors providing cheaper labor, especially in the global periphery. In this way, the ongoing financialization of non-financial firms has facilitated the globalization of production.

However, with the restructuring and abandonment of capital controls and barriers from the Bretton Woods New Deal order, the emergence of a seamless world of capital accumulation also relies on the integration of global finance. These processes of financialization and globalization restored industrial profitability, ultimately ending the long crisis of the 1970s. This financing provided the necessary infrastructure for the deepening of globalization in the following decades, intertwining the interests of financial and industrial capital more closely. Whether within or outside industrial firms, the rise of finance has enhanced the liquidity and competitiveness of capital, making a new world of streamlined capital accumulation possible.

The emergence of a more authoritarian state, particularly characterized by the concentration of power in the Federal Reserve, is an integral part of globalization and financialization. The isolation (or "independence") of the Federal Reserve from democratic institutions is necessary to ensure its ability to intervene quickly, flexibly, and in international coordination to meet the demands of a rigid global trade and monetary order. At the same time, the state increasingly relied on debt rather than taxation to fund its expenditures, which limited fiscal policy and further strengthened the power of the Federal Reserve. State institutions associated with legitimacy, including representative democratic structures, political parties, welfare state programs, and union rights, were dismantled or hollowed out. The emergence of an authoritarian neoliberal state, tightly organized around its accumulation function, signifies a more naked form of coercive state power.

In the neoliberal era, the hegemonic financial capital includes not only banks but also a relatively decentralized integration of different institutions. Unlike the direct control of companies by banks that defines financial capital, what has formed now is a multi-centered form of financial hegemony, where competing financial institutions establish temporary alliances on corporate boards to exert broad influence and discipline. Most importantly, this includes commercial banks and investment banks, but also encompasses mutual fund companies, pension funds, insurance companies, hedge funds, and brokerage firms. As we will see, these companies are interconnected, forming a unique market financial system that developed during the neoliberal era, where non-bank financial institutions became increasingly important in credit and money creation. It is this system that became central to the 2008 crisis.

Financialization of Non-Financial Companies

The emergence of financial hegemony is reflected in the shift in the distribution of surplus value between finance and industry. As we have seen, during the managerial era, the weakness of finance relative to industry was manifested in its limited ability to extract surplus from industrial firms through interest and dividend payments. Consequently, industrial firms were able to retain a larger share of the surplus value generated in production in the form of retained earnings. Subsequently, the continuous strengthening of financial power is reflected in its ability to capture an increasing share of surplus. As shown in Figure 3.1, throughout the managerial period, the proportion of retained earnings in GDP consistently exceeded that of dividend payments. Notably, this relationship reversed sharply in 1980, after which the proportion of dividend payments in GDP has remained higher than that of retained earnings.

Similarly, during the managerial era, industrial firms dwarfed even the largest financial institutions in terms of income and profits, a situation that reversed during the neoliberal period. In 1960, only one bank (Bank of America) was listed among the 20 most profitable companies in the U.S.; by 2000, two of the top five were banks, and five of the top twenty were financial institutions. However, even these figures often underestimate the significance of financial institutions. More telling than the number of profitable financial companies is the share of total corporate profits that these companies represent. This relatively small number of financial firms increased its share of total corporate profits from 8% in the early postwar period to over 40% by 2001 (Figure 4.1). Thus, the proportion of finance in the growing whole has become increasingly significant.

Figure 4.1: Proportion of Financial Profits to Total Profits (1948-2021) (%)

Source: Bureau of Economic Analysis, author’s calculations. Note: "Average for the neoliberal period" covers 1980 to 2008. Other financial profits as a share of domestic industry.

In the 1980s, so-called corporate raiders like T. Boone Pickens and Carl Icahn conducted hostile takeovers of industrial companies, marking one of the first signs of a profound shift in the power relationship between shareholders and managers. These "raids" involved purchasing a controlling interest in a company with borrowed money, firing the CEO, and then selling off the company's assets to repay the debt. Raiders financed these actions through "junk bonds" arranged by once-reputable investment banks like Drexel Burnham Lambert, the employer of junk bond king Michael Milken, known for his annual "Predator Ball," which was packed with these brash Wall Street types. These investment banks were willing to underwrite high-risk, high-yield bonds, provided that once the target company was taken over, they would use the target's assets to repay the bonds.

Leveraged buyouts were particularly concerning for industrial managers, as they allowed disreputable raiders to purchase controlling interests in target companies almost entirely with borrowed funds. This effectively meant that anyone could become a threat. The response from corporate managers was to protect their companies by establishing defenses such as "poison pills" and "golden parachutes." In the former, existing shareholders could choose to purchase additional shares at a discount in the event of a hostile takeover attempt. This helped to prevent an opposing activist investor from consolidating enough shares to influence management changes. In the latter, executives ensured that they would receive excessive compensation in the event of being fired due to an acquisition.

Maintaining high stock prices helps to deter such takeover attempts. In fact, companies that are perceived as "undervalued" in the eyes of raiders become prime targets for potential acquisitions, as they can be acquired relatively cheaply and easily. Keeping stock prices high increases the cost of acquiring companies, thereby reducing or even eliminating the profits gained from splitting and reselling assets. Consequently, managers attempted to fend off such threats by executing what are known as stock buybacks, where companies repurchase their own shares to drive up stock prices, a practice that was legalized by the SEC in 1982. In addition to dividend payments, the increase in stock buybacks during this period is also reflected in the declining percentage of retained earnings as a share of GDP, which is an important mechanism through which finance has gained a larger share of surplus (Figure 4.1).

Thus, buybacks and increased dividend payments are strategic responses of industrial firms to the emerging financial hegemony. They constitute a core part of the "shareholder value" doctrine, which posits that corporate strategy should focus more on increasing stock prices. Embraced by corporate raiders, this ideology became the calling card of a new era of financial power, as complacent industrial managers faced new disciplinary pressures. General Electric CEO Jack Welch became the most prominent master of this new doctrine. Others adapted more slowly. But as increasingly confident boards began to fire management that failed to improve stock prices, most notably IBM in 1992 and General Motors in 1993, it became clear that even the largest and most powerful companies had no choice but to yield to the power of investors.

The emergence of multi-centered financial hegemony is supported by the concentration and centralization of equity in the hands of large financial institutions. This is driven by pools of monetary capital controlled by institutional asset owners, particularly pension funds. Ironically, the surge of such funds reflects the strength of unions in collective bargaining during the 1960s. By the mid-1970s, pension funds had become the largest single holders of corporate stock. While this led some to speculate about the arrival of "pension fund socialism," these funds ultimately contributed to shifting the balance of class power toward capital and intensified the financial pressures on non-financial firms. The state encouraged the growth of such funds, as tax incentives for companies and workers played a significant role in expanding pension plan coverage from one-fifth in 1950 to nearly half by 1970.

As a result, large financial institutions directly owned or indirectly managed a significant portion of available equity. In 1940, the stock holdings and trading of financial institutions accounted for less than 5% of the total market value of all stocks in the U.S. By the mid-1970s, they accounted for about 25%, and by 2008, this surged to 70%. However, even these figures often underestimate the extent of concentration and centralization occurring during this period. While the concentration of stock ownership among large institutional investors is clearly significant, the vast amounts of equity accumulated by these institutions were subsequently consolidated by other investment companies managing them, forming even larger ownership stakes.

The scale of equity amassed by large institutional investors means that they find it difficult to constrain underperforming companies simply by selling off shares, as this could depress the value of their remaining holdings. Therefore, investors sought other ways to exert influence, including establishing more direct connections with management. They also pushed for stronger, more independent boards, which during the managerial period were primarily controlled by insiders. Similarly, shareholders could exercise their voting rights to replace management, nominate external directors, or otherwise influence corporate strategy through "proxy fights." By the 1990s, proxy fights became more common than hostile takeovers, a stark contrast to the pattern of the 1980s. By the early 21st century, they had become almost the only means of exerting investor pressure, reflecting the formalization and consolidation of the new hierarchy.

Those who were once the industry rulers, at the top of the corporate power pyramid, increasingly found themselves accountable to investors, who, along with their allies in the business media, were often accused of being overly focused on short-term profitability while lacking the necessary knowledge of specific industries or companies. But if it is clear that the rise of finance has little to do with the so-called "perfect efficiency" of capital markets in distributing social surplus, finance is also not merely a rentier interest. Rather, it is becoming a powerful disciplinary force in industrial production, ruthlessly pushing for maximum profits from its investments. The increase in profit margins and enhanced capital liquidity brought about by financialization is not a matter of "hollowing out" or weakening industry; rather, finance has intensified the pressures on firms to restructure operations to reduce costs and maximize efficiency, competitiveness, and profitability.

Meanwhile, the strategic, regulatory, and structural transformations of the state apparatus supported the reorganization of the power group around the rising status of financial capital, thereby forming a new political hierarchy. The foundation of the New Deal regulatory framework is the actions taken by the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Securities and Exchange Commission to maintain the fragmentation of the banking system and limit its participation in corporate governance, thereby preventing the re-emergence of financial capital. However, powerful institutional investors now found these practices "arduous, confusing, expensive, and generally disappointing." In the 1990s, the SEC enacted a series of regulatory reforms that expanded "shareholder rights" and empowered boards. Particularly important was the reform that made it easier for large shareholders to coordinate regarding the companies in which they held shares, facilitating the formation of investor coalitions that could challenge insiders.

These regulatory shifts significantly lowered the costs of engaging in proxy fights and directly led to an increasing frequency of proxy contests associated with hostile takeovers. Importantly, these changes were implemented in response to the defenses established against investor discipline companies in the 1980s. In addition to adopting poison pills and golden parachutes, industrial managers also sought protection under federal anti-takeover laws. When a unsympathetic Reagan administration rejected these efforts, industrial executives turned to state-level protections, where they were often the largest employers. Unsurprisingly, these efforts were more successful: by 1990, 42 states had enacted such protective measures. With the regulatory restructuring of the 1990s, the SEC took action to offset these defenses and limit their impact by providing investors with more orderly means of exercising influence, thereby institutionalizing investor power.

Thus, the SEC intervened in the conflict between finance and industry and contributed to the establishment of financial hegemony. But this does not mean it has been "captured" by finance. The reorganization of economic institutions reflects not only the influence of specific enterprises over the state but also the importance of finance within the structure of accumulation. Stabilizing fiscal power requires establishing "accountability" and "good governance" within industrial firms. This is also reflected in a series of other new regulations introduced by the SEC: while the Sarbanes-Oxley Act increased the power and independence of boards, FD rules prevented the disclosure of insider information to large institutional investors. Particularly, the latter seems aimed at preventing the emergence of client relationships between internal managers and shareholders.

However, the financialization of non-financial firms is not merely a matter of external financiers forcing industrial firms to restructure. As we have seen, the roots of financialization can be traced back to the core of the postwar golden age, as firms responded to the complexities of diversification and internationalization. Thus, despite the increased concentration of control over investments, non-financial firms have decentralized operations. This has led to an increasing power of corporate finance departments within organizations, as they are responsible for designing and implementing quantitative metrics that lay the groundwork for establishing equivalences between qualitatively different production processes. As long as these quantities are measured in terms of a universal equivalent, monetary capital mediates the relationships between different business operations within the firm.

This amounts to a gradual development of the integration of financial and industrial capital. In the 19th century, this integration was established through interconnections between investment banks and industrial firms, and now, a century later, it manifests as the integration of capital within industrial firms through M-C-M′ and M-M′ circuits. Although the New Deal regulations aimed to strictly distinguish between these two forms of capital, this situation has emerged. In fact, the direct result of these regulations has been the internalization of a range of financial practices by industrial firms, which previously relied on investment banks. These regulatory barriers have effectively incentivized industrial companies to provide financial services, as they could evade the regulations faced by formally designated financial institutions. This emerging integration of internal finance and industrial capital, along with the reorganization of the investment system, particularly highlights the rise of the Chief Financial Officer (CFO). While no large company had a CFO in 1963, by the 1970s, companies in the business world began to establish such positions, and by the 1990s, this role was nearly ubiquitous. The rise of the CFO reflects a fundamental change in corporate management logic, which now emphasizes apparent "financial" considerations. The CFO has traditionally been a relatively dull and mundane position, primarily responsible for bookkeeping, tax matters, and so on; now, the CFO is the second-in-command, a key aide to the CEO in formulating all aspects of corporate strategy.

The CFO's tasks include assessing the performance of business units, formulating strategies to leverage financial leverage to support the overall competitiveness of the company, managing acquisitions and divestitures, and fending off hostile takeover attempts. They are also the primary point of contact with investors and financial analysts, particularly through their management of the "investor relations" function. In addition to providing data and making forecasts that shape "investor expectations," CFOs also drive the discipline necessary for the company to meet these expectations. Just as the influence of CFOs reflects the expansion of financial operations after corporate decentralization, this power is also essential for driving further financialization and restructuring to meet the demands of external investors. Therefore, CFOs are the main pillars of shareholder value, embodying the new power of external investors within the company.

The integration of finance and industry within industrial firms means that they have developed a range of financial functions that do not strictly adhere to the industrial capital circuits they control. Industrial firms are increasingly organized around the circulation of interest-bearing capital within the company, while also profiting from the circulation outside the company. Initially, industrial firms massively lent due to the accumulation of retained earnings during the managerial period; otherwise, these retained earnings would have sat idle or been deposited in banks with relatively low returns. In fact, by the end of the golden age, industrial firms had become major lenders in the commercial paper market, just as they borrowed heavily from other companies in these markets.

During the neoliberal period, the integration of non-financial firms with financial markets accelerated sharply. Figure 4.2 shows a dramatic increase in the total amount of bonds issued by non-financial firms in circulation during the neoliberal period. The removal of restrictions on the external sale of such bonds in 1984 effectively globalized the U.S. corporate debt market and significantly expanded the financing options available to non-financial firms, thereby transforming these markets. Greater reliance on bonds also meant that companies were bound by these markets in new ways: as firms began to depend on bonds as an indispensable source of financing, they also became increasingly concerned with their credit ratings, particularly as reflected in bond prices.

Figure 4.2: Total Amount of Bonds Issued by Non-Financial Companies (1946-2008) (in billions)

Source: FRED, author’s calculations. Note: Annual average, in billions.

The importance of derivatives for the global flow of capital is another factor driving the internal integration of industrial and financial capital. During the Bretton Woods capital controls and fixed exchange rate period, companies invested abroad by "skipping" tariff walls, establishing subsidiaries, and producing products for sale within specific economic zones. However, the removal of tariff protections during the neoliberal period allowed for streamlined global production. Excess facilities were dismantled, and production stages were located where labor, regulatory, and tax costs were lowest. The result was the creation of a seamless, globally integrated production network. In fact, a significant portion of the world's "trade" occurs through the flow of products and capital via cross-border corporate production chains.

The risks associated with cross-border capital flows are that unexpected fluctuations in exchange rates and interest rates can erase value before finished products enter the market. Companies manage these risks by entering into derivative contracts: from the early 1980s to 2007, daily trading volumes of derivatives grew 50-fold, from nearly zero to nearly $20 trillion. Derivatives ensure the right to purchase assets at fixed prices in the future, effectively "locking in" given prices. Thus, they transfer risk to speculators, who are willing to take on risk in exchange for the possibility of substantial profits. In doing so, they establish some consistency in fixed exchange rates, even in a world of fluctuating currency markets. Therefore, derivatives regulate the continuity of industrial capital in the process of producing and realizing surplus value.

In derivative contracts, one party pays a fee, known as a premium, in exchange for protection against unstable events (such as sudden changes in exchange rates). If such an event occurs, the agreed amount is transferred to the contract holder to compensate for part or all of the loss. To be trustworthy, derivative contracts must be managed by a reputable third party that can oversee the flow of funds between the two parties to the contract. This role is played by large banks, which facilitate the transfer of fees and premiums and settle final payments at the end of the contract. Thus, banks create new revenue by transforming their central position in the global financial system into a unique role in expanding the derivatives market. In addition to profiting from service fees, banks also enter into derivative contracts themselves to hedge their own risks.

As we have seen, competition is a function of capital flow. In terms of promoting investment inflows and outflows among sectors, facilities, and geographic areas, corporate financialization reinforces the competitive discipline on industrial capital (to maximize profits) and on workers (to exert downward pressure on wages and working conditions). Unlike the norm during the managerial period, divesting from lower-profit businesses became a routine practice for companies adopting new "portfolio management," rather than endlessly expanding. Financialized companies gained a competitive advantage from their ability to withdraw from relatively unprofitable sectors while quickly assessing and investing in more profitable ones.

By the late 1990s, these trends ultimately replaced the corporate organization in the form of multi-sector conglomerates that had formed in the decades following World War II with new multi-layered subsidiary structures. Increasingly, industrial firms not only organized production within their own business units but also contracted with external companies providing cheaper labor, often located in the global periphery. Thus, multinational corporations integrated external contractors and their internal divisions into a global production and investment network. The flexibility of these subcontracting arrangements further intensified the competitive pressures on workers and their countries regarding investment and employment, driving down wages, limiting troublesome environmental and labor regulations, while providing multinational corporations with relatively easy relocation capabilities.

The multi-layered subsidiary structure is the organizational form through which capitalist globalization occurs. These multinational corporations are at the top of the global political economy because they possess two unique financial assets: brands and intellectual property. Both forms are monopolies granted by the state, as ownership of these assets confers exclusive control over the production of certain products or the use of specific brands. Multinational corporations then ensure control over production by entering into licensing agreements with subcontractors. In this way, the multi-layered subsidiary structure's power over production is constructed around the further reorganization of the company around financial assets.

Therefore, for the rise of finance, what is more important than the changes in the distribution of surplus between financial and industrial capital is its continuously evolving systemic function within the organization of capital accumulation. The neoliberal globalization processes that unfolded in the 1980s and 1990s deepened the entanglement between finance and industry. Whether within or outside the firm, financing is crucial for the liquidity of investments, enabling industrial firms to create a new world of globally integrated accumulation. Financialization is far from a symptom of decline; rather, it has ushered in a prosperous new era for industrial firms and financial institutions alike. The growing power of finance in American social formation reflects its status as the nerve center of global capitalism.

Asset Accumulation and Market Finance

The financialization of non-financial firms and the rise of large institutional investors are predicated on the development of a new form of accumulation based on ownership and control of financial assets. This asset-based accumulation model is defined by the increasing importance of non-cash financial assets as forms of monetary capital for both financial and non-financial companies. Asset accumulation is a crucial component of the market financial system formed during the neoliberal period, where the financial system and its credit-generating functions are reorganized around the ownership and exchange of assets. Market finance integrates pension funds with investment banks, commercial banks, and other financial institutions.

A fundamental premise of asset-based accumulation is the definition, construction, and regulation of a broader range of tangible and intangible objects and processes as abstract financial assets. For example, as senior managers of non-financial firms increasingly become monetary capitalists, the firms themselves are simultaneously constructed around the objective of transforming their various concrete business operations (the industrial capital accumulation processes that exist over time) into abstract financial assets. This facilitates the integration of these industrial circuits within the logic of monetary capital, which increasingly dominates within firms. Meanwhile, the operation of the financial system itself increasingly relies on decomposing economic processes and restructuring them into different types of tradable financial assets.

Financial assets are specific forms of monetary capital. Their primary characteristic is the ability to ensure property claims on future income through sales or other contractual arrangements (for example, licensing agreements for intellectual property). From baseball cards to masterpieces by da Vinci, from loans to intellectual property, anything can become a financial asset as long as it is integrated into the M-M circuit of monetary capital. As assets, these items' only use value is their ability to be transformed into large amounts of money through exchange. In fact, as we saw in Chapter 2, the monetary nature of financial assets depends on their ability to store value, thereby transforming into a universal equivalent form (i.e., money). It is through monetary exchange that the returns on asset value are realized, completing the M-M' circuit.

Different categories and forms of assets constantly compete for their valuation in universal equivalent forms. As assets (i.e., stocks), companies are in competition not only with all other companies but also with all other financial assets, from artworks to houses. Therefore, asset-based accumulation deepens the penetration of monetary forms within industrial firms and the entire economy. This exerts tremendous constraints on firms, profoundly impacting their strategies and even the structure of industrial capital itself. One cannot view assets merely as virtual capital existing in an independent financial realm separate from the "real" economy. Rather, assetization has made finance and its competitive pressures more deeply embedded in production than ever before.

Asset accumulation supports the re-emergence of financial hegemony through the concentration of equity within non-bank financial institutions. In Marx's model of financial accumulation, banks advance a sum of monetary capital to operating capitalists, who control the capital until the loan is repaid from the surplus generated by production. The financier provides capital to the industrialist, who then returns it to its owner along with interest. However, because non-bank financial institutions that support financial hegemony during the neoliberal period do not issue bank loans, they cannot extract surplus value from companies in this way through interest payments. Therefore, they must find other ways to "get a piece of the pie" from the value created by industrial firms.

One way they do this is through dividend payments. In fact, as we have seen, the growth of dividend payments reflects the strengthening of financial power. However, dividends are determined by the board of directors year by year, rather than being established through contractual arrangements before loans are received. Consequently, dividends often fluctuate in ways that other interest payments do not. Therefore, for institutional investors, asset valuation, specifically stock prices, becomes more important. While leveraging these valuations does not equate to a direct transfer of surplus value, it does grant stockholders the right to a larger share of the social product. Thus, institutional investors accumulate wealth through periodic payments and increased stock values.

It is clear that the distribution of profits between finance and industry is insufficient to understand the extent of financial power during the neoliberal period. Beyond the income obtained by financial firms, their monetary power is also reflected in the value of the assets they hold. Figure 4.3 illustrates the dynamics of asset accumulation by showing the relationship between stock prices and corporate profits. As it indicates, during the neoliberal era, the growth rate of market prices for stocks far outpaced the growth rate of corporate profits per share. This divergence suggests that stock prices themselves have become the basis for financial accumulation. Furthermore, it indicates the extent to which neoliberalism has ruptured with the early stages of capitalist development, as this ratio exceeds that of any other period in the twentieth century, including classical financial capital.

Figure 4.3: Price-to-Earnings Ratios of S&P 500 Companies (1880-2008)

Source: Global Financial Data, WRDS, author’s calculations.

Crucially, the success of asset accumulation fundamentally depends on the ability of firms to generate profits. Holding stock in companies that cannot do so cannot serve as a basis for investors to accumulate monetary power over the long term. An inflated stock price without a profitable underlying company defines a classic stock "bubble." It is certain that even the stocks of profitable companies can become inflated. Theoretically, in either case, the ultimate outcome is a "correction" in the market that brings stock prices down to "equilibrium" levels. We often see this happen, for example, during the "internet" bubble of the 1990s. Importantly, there will inevitably be some correspondence between investors' expectations of future accumulation (as reflected in stock prices) and the actual ability of the underlying company to generate surplus value.

Thus, while Figure 4.3 shows that overall price-to-earnings ratios have risen during the neoliberal period, and the divergence between stock prices and corporate profits has increased, this does not mean that the correspondence between the two has been interrupted. Rather, it indicates that equity assets have become the basis for accumulating monetary power in a new way—namely, through rising stock prices. But this can only occur under the expectation that these companies remain profitable. Similarly, the stock prices of unprofitable companies may rise because it is anticipated that these companies will become profitable at some point in the future.

Therefore, stock prices reflect speculation about the future prospects of certain capital, which can only be measured in terms of profits. Of course, there is no guarantee that these speculations are correct: some investors will always bet wrong, while others will be rewarded. Regardless of the outcome, one cannot assume that investments in the stock market are merely a transfer of "real" investments. The abstract nature of monetary capital means that stock market returns can be redistributed into any specific capital circuit, thereby entering new physical investments and new products. Moreover, investments in the stock market and fixed capital investments are by no means mutually exclusive: throughout the neoliberal period, corporate investment remained at historical averages (Figure 4.7), while corporate profits surged (Figure 4.8), and R&D expenditures increased (Figure 4.6).

Financial hegemony is rooted not only in the growth of corporate stock values but also in the specific powers conferred by equity. Equity has become increasingly important, creating a new form of separation between ownership and control. Of course, the capital flowing within the company is still controlled by its managers. However, unlike loans that cease to exist after repayment, stocks grant their owners the right to permanently share in surplus. They are not based on claims to monetary capital in the hands of industrial capitalists but rather establish ownership of the company itself. This also grants shareholders a certain degree of control over the company. Thus, the concentration of equity and the long-termism tendencies brought about by these large assets' illiquidity tend to make financiers more directly involved in production.

However, the concentration of asset ownership is accompanied by the fragmentation of the financial system. The dispersion of power among a range of financial institutions is achieved through the emergence of "market finance." Traditionally, loans were concentrated under the control of banks, which were the "general managers of monetary capital." Thus, Marx viewed monetary capitalists and bankers as essentially interchangeable. Market-based finance represents a completely new model of financial intermediation, whereby funds flow from lenders to borrowers. In a market system, borrowers can obtain credit directly from financial markets without going through banks. Similarly, savers can invest in a range of financial instruments, such as stocks and bonds, through non-bank financial institutions as alternatives to bank deposits.

As a result, with the development of market finance, an increasing number of financial transactions bypassed banks in a process known as "disintermediation." The increase in disintermediation during the 1970s and 1980s posed a significant competitive challenge to banks. First, the emergence of money market mutual funds—managed by mutual fund companies and investing in safe, short-term debt securities—drew savings away from checking accounts. Since the Q regulations on interest payments did not apply to these funds, they were able to offer investors higher returns than banks. This spurred the growth of non-bank financial institutions, particularly in the context of rising market interest rates driven by inflation in the 1970s. The Volcker Shock further intensified these pressures, pushing interest rates a full 10% above the levels set by Q regulations.