Until about wo decades ago shipping was the world’s most extensive mom-and-pop operation. Most companies were family-owned and most operated under the parochial protection of states where the vessels were flagged and where the owners lived or had some relationship other than registry. Debt financing was the way ships were bought and working capital came from lines secured by equity. This has all changed. Shipping has become financialized. What does this mean?
First we have to define financialization. A capitalist economy can be divided into two parts. The real economy produces goods and services. Shipping is a part of the real economy and produces a service. The financial economy is not a part of the real economy but is a facilitating adjunct to the real economy to make it work. Financialization occurs when the financial sector gains overarching importance over the real economy and a small group of companies and people control the real economy through financial and market methods. Hence the financial economy contributes little to the general welfare in its facilitation of real deals. It takes a disproportionately large amount from the real economy from either deal making or for access to the capital markets. Financialization operates through three different conduits; These are changes in the structures and operations of financial markets, changes in the behaviors of nonfinancial corporations, and changes in economic policies.
The phenomenon is difficult because of its emphasis on sort-term results and the allocation of regulation to financiers rather than to government. Hence there is no incentive for a financier to regulate when he or she is making large profits on mere market shuffling and deal transactions. Thus, financialization is a process in which financial markets, institutions, and a financial elite class gain extraordinary influence over economic policies economic. Financialization transforms an economy macro and micro levels. Its principal impacts are to (1) elevate the significance of the financial sector relative to the real sector, (2) transfer income from the real sector to the financial sector, and (3) increase income inequality and contribute to wage stagnation. Additionally, there are reasons to believe that financialization may put the economy at risk of debt deflation and prolonged recession.
Countering financialization requires changes in policies that (1) restore policy
control over financial markets, (2) challenge the economic policy paradigm
encouraged by financialization, (3) make corporations responsive to interests of
stakeholders other than just financial markets and (4) reform the political process so as
to diminish the influence of corporations and the wealthy financial elite. Hence to reverse the trend there must be a willing legislature and a willing court led by a willing leader.
The change in shipping’s money structure is a result of the need to raise capital for very costly assets. This requires access to the capital markets. Where capital makes a good return, investors flock and the mechanisms of taking invested money and applying it to an industry within a mature banking and financing system is financialization at work. In the upper reaches of large shipping companies and specialized companies, shipping is wholly financialized and seen by the markets as just another industry taking publicly regulated capital. Private capital in the form of hedge funds and others also plays a part in shipping. Hence shipping has become merely another financial asset with liquidity of stock and accounting management.
What does this mean to shipping as a whole? Heretofore banks and debt financing allowed an owner to raise capital. Debt financing came under heavy attack with the more stringent regulations of Western banks after the recent financial crisis. Hence, the friendly banker who might have rolled a note for several years on a losing proposition was constrained in doing so by regulators. Hence that form of capital dried up in many cases. That is not good for shipping.
No, it is not. Shipping is “in play” like any other entity and at the mercy of any buyout artist coming along. Shipping however cannot emphasize short-term quarterly results and cannot be run by accountants. We have too much experience in the past with that kind of thinking. Hence, in the medium term shipping is not going to be treated well by financialization.
This means that in the past shipping was treated differently. Shipping in the past was a relationship market for financing. Banks with which an owner had a relationship – sometimes for many decades – backed the owner in good times and bad. The banks knew that shipping always got better and many specialized in it. Financialization tends not to foster relationship banking. In that sense shipping is hurt by financialization.
There are other problems brought about by financialization. There is a simple disparity in value difficulty. The CEO of a shipping company might be happy in a very good year to get say $5million in cash, options and other benefits. The hedge fund partner controlling the company and putting the deal together might walk home with $50 million for manipulations of institutions and money. The value simply is not there when the real economy is controlled by the financial economy.
The Libertarian will say, “So what?” This is akin to being a No-Nothing or a bimetallist. Taken its logical conclusion a laissez faire market cannot sustain itself in the current state and would not. That is a pipe dream we will likely not have reified.
The opinions expressed by Dr. John A.C. Cartner in the ‘Conversations with Cartner’ Video Series and accompanying blogs are the opinions of Dr. Cartner and do not necessarily reflect the views of the staff and management of Maritime TV, or its parent network, TV Worldwide, Inc.