Question

. Please describe what financialization is and how it affects firms, households and the government.

Answer 1

FINANCIALIZATION

It refers to the increase in the size and significance of financial sector of a country as compared to other sectors. It happens when regulatory environment for financial markets changes and tends to transfer big amount of national income into the financial sector.

EFFECT OF FINANCIALIZATION----------

A) EFFECT ON FIRMS

It encourages the accumulation of capital and production of goods and services in the economy.

* It results in virtualisation of the economy which tends to increase the risk of financial crisis.

* People suffer economic inequality due to financialization.

B) EFFECT ON HOUSEHOLDS

* Relative decrease in savings and increase in debt

* Change in the structure of savings towards riskier financial resources.

* consumption driven indebtedness

* shaping social relationships by exerting disciplinary effects

* Impeding social mobility

C) EFFECT ON GOVT.

The financialization of capitalist economies is closely related to the creation and commercialisation of debt .

It helps the govt in favouring liquidity through debt policy innovations.

The degree of financialisation lays institutional mechanism that allows the transformation of the banking crisis into sovereign debt crisis.

It has a negetive impact on economic development and employment.