Financialization and the Faithful Investor

Recent economic policy seems singularly focused on rampant inflation resulting from the COVID hangover and its supply-side issues, the massive provision of government stimulus to avoid a COVID-inspired recession, and energy shortages prompted by the war between Russia and Ukraine. The Federal Reserve’s delicate balancing act to reign in runaway prices without precipitating a major recession dominates the public’s grievously narrow attention span.

But the inflation crisis also deflects awareness from a morally corrosive economic transformation that has been underway for decades and against which policy prescriptions have been virtually nonexistent. Often described by the term financialization, it involves the steady and substantial transfer of resources from non-financial sectors of an economy to the financial sector in ways that can depersonalize markets and greatly complicate the ethics of investment. This seismic shift in the American economy impedes the goals of investors who wish to express their faith through their investments. It similarly erodes virtues promoted by the free-market system such as integrity, trust, and the cultivation of community that free exchange inspires.

A major consequence of financialization has been to enhance demand for financial tools of increasing novelty and complexity across society, with the idea that “not” to invest in such innovative products is to fall behind. The breadth of institutions that suffered losses in derivative and other forms of speculative trading — from Harvard University to the Church of England — points not only to the reach of finance but also its value-shaping character. Another result of financialization is that ostensibly risk-averse institutions have taken on riskier investments in the pursuit of income.

This black hole-like pull of institutions into the financial orbit is considered by some merely another phase in the development of a maturing economy. As traditional means of production and money-making become obsolete or migrate to less-developed economies in our global economic system, the financial sector becomes an increasingly attractive source of revenue in developed economies like that of the United States.

Financialization and Business Ethics

Several years ago, at a business ethics conference in Boston, I had a conversation with a noted business ethicist on the impacts of financialization. I anticipated a largely negative response when I asked for his views on the phenomenon. To my surprise, he said that despite the massive number of bankruptcies being experienced at the time during the so-called Great Recession inspired by the financial crisis, he thought the “net” of financialization was positive. It provided greater overall liquidity to the economy, which enabled more consumers to become homeowners, although it contributed to delinquencies and foreclosures as well. He believed that the rocky ride we were experiencing at the time was better on the whole than a potentially slower growing economy with more limited possibilities for homeownership.

The words of this prominent business ethicist were unsettling at the time, and they still cause me to reflect on that highly volatile economic period. He seemed rather unconcerned with the human toll of the countless bankruptcies and business failures that occurred. He also did not address the “opportunity cost” of this radical acceleration in the financial sector on the “real economy” — the production of goods and services that contribute tangible benefits to society. Financialization shifts business activity away from traditional, personalized sources that enhance human relationships and provide benefits that extend beyond economic growth. Among the greatest benefits of the real economy is shaping the character of market participants as they engage one another in free and fair competition.

Financialization’s Dark Side

A 2021 report by Amanda Fisher of the Washington Center for Equitable Growth has shown how financialization has resulted in the hoarding of financial wealth, the seemingly endless expansion of executive versus employee compensation, and an outsized concern for shareholders vis-à-vis workers that makes even strong economic growth socially detrimental. It is not simply that increases in worker pay have not kept up either with executive compensation or, more basically, inflation; rather, the extreme emphasis on financial return results in company policies and practices that often weaken their organizational cultures. According to Fisher, such corporate deterioration occurs “as companies increasingly earn money through financial engineering rather than investment in people.” In the financialized economy, short-term profits are emphasized over the reinvestment needed to support a firm’s long-term health; and stock buybacks to pump up executive compensation tied to a company’s stock price are prioritized at the expense of preserving living wages for lower-level workers.

Financialization’s negative consequences pose unique challenges to investors who wish to express their faith through investment. Layers of financial complexity keep both individual and institutional investors from discerning the real impact of their financial decisions. Financialization amplifies what British humorist and social critic G. K. Chesterton long ago described as “economic indirection.” Chesterton demonstrates this principle in his classically sardonic style, stating that modern man “is the type of cultivated Cockney who said he liked milk out of a clean shop and not a dirty cow.” Chesterton was adept in pointing out not just modern ignorance of how things function but also the difficulty of maintaining a moral economy where an ever-expanding maze of transactions obscures the connection between intended action and actual results.

Chesterton believed that to ‘give in’ to the indirectness he observed in the inordinate pursuit of wealth is unacceptable. “The evil is not so much that people do adopt indirect methods, which up to a point is rational enough,” Chesterton stated, “but that they deny that there is any disadvantage to indirect methods and are therefore ready everywhere to substitute them for direct ones.” Chesterton’s proposed solution, a highly utopian system called Distributism was wrong-headed in the belief that he and other members of the movement — Hilaire Belloc, H.G. Wells and other prominent artists and public intellectuals — could persuade the British upper-crust to distribute much of their wealth for what Distributists believed was the nation’s long-term good.

Financialization and Christian Investors

But Chesterton’s economic writings, collected in a book titled The Outline of Sanity, posit a critical theme that Christian investors should heed in this age of financialization: the form of property we own and the degree of personalism in our markets matter. It is not enough for Christian and other religious investors to simply profit from their investments without considering what those investments contribute to the world and how they shape human values. The great challenge for religious investors is how to reestablish intentionality and directness in their investment decisions even as investment products and processes grow ever more complex.

“Directness” is what investors experience when they invest in companies that contribute products and services consistent with their values and with the knowledge that those companies treat employees fairly and exercise care over God’s creation. Faithful investors are called to shape their portfolios by investing in companies that seek to preserve humanity both in their corporate cultures and in their relations with customers, suppliers, and other stakeholders. In an intensely financial economy like ours, however, such forms of investment often can be identified only with considerable effort.

But despite the challenges, faithful investing is essential not only to enable investors to maintain ‘value consistency’ in their own lives but also to help reclaim a moral economy in which virtues like honesty, industriousness, and stewardship may flourish. Importantly, faith-based investment firms are thriving today and there are investment organizations and tools to match an incredible array of religious investor needs from Dow Jones Islamic and Dharmic market indices to Mennonite, Catholic, Quaker, and other mutual funds established to support investing based on Christian values.

Investors have the resources necessary to contribute goods beyond their material self-interests; in effect, they can make a vital statement about the world they wish to live in. “Transformative investment” that prioritizes investor values over return has potential to advance humane markets where honorable corporations operate by transparent principles and where algorithms empowered by technology are subordinated to principled decision-making. In this way, faithful investors are best equipped to make a stand against the ‘economic indirection’ that, regrettably, seems part-and-parcel of a financialized economy.