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Introduction to "Financialization"


Introduction

The video version of this training runs through to the 18-minute mark. 

Higher education in the U.S. is in a state of crisis. We see evidence of this crisis in huge cuts in funding for public schools, skyrocketing costs of attendance at both private and public schools, and increases in student debt burdens. These interrelated trends are connected to the underlying phenomenon of the financialization of our economy generally and of higher education specifically. Mike Konczal, who runs the Financialization Project at the Roosevelt Institute, defines financialization as the “increase in the size, scope, and power of the financial sector—the people and firms that manage money and underwrite stocks, bonds, derivatives, and other securities—relative to the rest of the economy.”

Over the past 40 years, the role of the financial sector has shifted away from channeling productive investments in to the real economy toward short-term profit making. While finance accounts for 25% of all corporate profits in the United States, it contributes a mere 4% of jobs to the economy. Shifting the bulk of our economic activity away from the real economy (Main Street) engaged in the production of goods and services to the financial economy (Wall Street) has serious consequences for economic inequality.  The encroachment of the financial sector to local governments and universities is especially dangerous as it draws greater public resources unto itself and builds a culture of short-termism and profiteering over access and equity.

The Roosevelt Networks have been looking at the pernicious effects that Financialization has had on higher education, including increases in overall borrowing by colleges and universities, increases in the cost of interest payments on debt on a per-student basis, and a concentration of endowment assets at a small group of the wealthiest institutions—a form of concentration of wealth. One way that financialization manifests is expensive, risky, complex financial deals that colleges and universities have entered as they have increased their reliance on debt financing, which is why we spent Year One of our Financialization project focusing one particular financial instrument - the Interest Rate Swap - and writing a report about how swaps have cost our schools billions of dollars.  Now, in Year Two, we are expanding the focus of our work, and grappling with other ways in which the system of higher education has begun to increase social and economic inequalities instead of serving as the equalizer we have long imagined college to be.

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Why

Broadly, we have taken on this research agenda to identify the ways in which our system of higher education has been increasing social and economic inequalities instead of serving as the equalizer we have long imagined college to be.  

With student debt in real danger of choking a generation and with schools across the country falling prey to wall street deals, the time for this work is now.  

  • Context: Comes at a time of rising tuition rates + state budget cuts.
  • Timing: Regressive fees and interest rate hikes hit hardest on poorest colleges at the times they can least afford it
  • Financial Cost:  Billions have already been lost on Interest rate swaps alone.
  • Shifting priorities: Financiers and capital projects are dominating school spending shifting financial priorities to new stadiums not financial aid. In the process a new model of higher education, focused on profiteering is emerging.
  • Concentration of Wealth: Investing endowments in financial capital has helped some universities expand wealth at unprecedented amounts

Knowledge

  1. Greta Kippner- Capitalizing on Crisis
  2. Rana Faroohar- Makers & Takers
  3. Jerry Davis- Managed by the Markets
  4. Charlie Eaton- The Financialization of Higher Education
  5. Wallace Turbeville- The Detroit Bankruptcy

How to do this at my school

Roosevelt is looking to analyze three aspects of Financialization at your school: 

  1. Interest Rate Swaps: These complex, risky financial deals, adopted by a number of schools in the early 2000’s, have cost institutions of higher education millions. Identifying these deals and calculating their costs over time helps us understand the depth and breadth of one aspect of the financialization issue.  
  2. Hedge Funds and Endowments: Investing in hedge funds- unregulated, high-cost investment vehicles that charge high fees and distribute poor returns- has emerged as commonplace for many endowments. The fees that schools are paying for the privilege of investing in hedge funds are another example of how money is trickling up to Wall Street, and identifying where and how your school is investing its endowment dollars helps flesh out another aspect of the problem.  
  3. Conflict of Interest: Many schools have a direct relationship with Wall Street - prominent bankers and other financial professionals sitting on their Board of Trustees. While this does not necessarily create an issue, many of those same people represent banking institutions that are making exorbitant profits off of the school's finances.  The third focus of our research agenda is to identify the ways in which financial institutions are literally calling the shots in how a school invests, and trace these conflicts of interest to see if and how they have resulted in losses for higher education.  

Example