6.2.5 Financialisation

Helpful prior knowledge and learning objectives

Helpful prior learning:

Section 1.1.1 The economy and you, which explains what an economy is and how it is relevant to students’ lives
Section 1.1.2 The embedded economy, which explains the relationship between the economy and society and Earth’s systems
Section 6.1.1 Money systems, which describes the parts, relationships and functions of money systems
Section 6.1.2 History of money systems, which outlines the historical origins of different money systems and their functions
Section 6.1.3 Modern money creation, which explains how forms of money are created in modern money systems

Section S.1 What are systems?, which explains what a system is, the importance of systems boundaries, the difference between open and closed systems and the importance of systems thinking
Section S.2 Systems thinking patterns, which outlines the core components of systems thinking: distinctions (thing/other), systems (part/whole), relationships (action/reaction), and perspectives (point/view)
Section S.5 Causal loops, feedback and tipping points, which explains the feedback loops that can stabilise or destabilise systems.
Section S.9 System traps, which explains how system structures, like reinforcing feedback, too weak or late balancing feedback, and/or pursuing flawed goals, can create persistent problems.

Learning objectives:

describe financialisation
discuss how financialisation impacts everyday life and is a barrier to regenerative economies

In the Tambopata National Reserve in Peru, a rainforest is being preserved through a forest carbon project. Cutting down trees releases carbon into the atmosphere. By keeping the forest intact, the project avoids these emissions and earns carbon credits, certificates that represent one tonne of carbon emissions prevented. These credits are sold on international markets to companies or individuals who want to offset their emissions (Section 3.4.6 - coming soon!). The revenue from selling these credits supports conservation work and local development. The project involves international NGOs, carbon finance firms, and local communities.

Tambopata is one of several REDD+ projects in Peru. REDD stands for 'reducing emissions from deforestation and forest degradation.' While Tambopata has helped reduce deforestation and involved communities, other REDD+ projects have raised concerns. Some shift control away from Indigenous communities or fail to deliver promised protection.

Turning a forest into a financial asset raises important questions. Who gains? Who decides? What happens when financial logic begins to shape decisions about land, housing, education, or health?

Photograph of the reserve and its location on a map

Figure 1. The Tambopata National Reserve in Peru.

(Credit: Wikimedia Commons, CC BY 2.5)

What is financialisation and why does it matter?

Financialisation means the growing role of finance in how the economy works. Instead of earning money by producing goods or providing services, people and companies increasingly earn from financial assets like stocks, bonds, or investment products. Finance becomes a way to make money from money.

The financial sector is now one of the most powerful parts of many economies. In high-income countries, it often earns more profit than manufacturing or farming. Globally, the value of financial assets is more than three times the size of the world economy.

This matters because finance increasingly shapes decisions across markets, governments, households, and commons. When financial actors focus on short-term profit, resources are diverted from long-term wellbeing. Essential services like public transport may be expected to generate profit, even if their purpose is to meet human and ecological needs. If they do not, they risk being cut or privatised. Clean energy, affordable housing, and universal healthcare may also be neglected if they do not offer fast financial returns. Governments may avoid investing in these areas if they fear negative reactions from financial markets. Households face growing pressure to borrow or invest just to meet basic needs. Commons resources like forests, water systems, and digital platforms may be turned into assets for profit.

Figure 2. Financialisation means that many public services are judged by short-term, profit logic, moving the focus away from care.

(Credit: Transnational Institute, CC BY-NC-ND 3.0)

Assetisation

One part of financialisation is assetisation. This means turning things like forests, schools, or care homes into something that can make money. A forest, for example, might be managed to earn money from carbon credits, not just to protect nature.

To do this, people use tools like contracts, licences, or legal rights. These tools give control over how the asset is used. Some researchers call this process "coding capital" (Section 3.2.3). It involves using legal systems to turn shared or public resources into private property or controlled access, so they can generate income.

Once something becomes an asset, the main goal may shift from meeting needs to making returns for investors. This can change who benefits and how decisions are made (Section 3.2.5).

Rent-seeking

Another feature of financialisation is more rent-seeking. Rent-seeking means earning income from owning or controlling access to something, without adding new value. A company might buy housing and earn rental income without improving the homes. Or it might control water access and charge people for use. Rent-seeking allows owners to profit simply from ownership, while others face higher costs.

Speculation

Speculation means buying assets with the hope of selling them for a higher price later. This could involve buying property, land, or financial products. The goal is profit from price changes, not from using or improving the asset. Speculation can increase prices and make prices volatile, making essential goods harder to access.

Shadow banking

Shadow banking refers to financial activities outside regular banks. For example, a payday loan company that lends money at high interest is part of shadow banking. It’s not a traditional bank, but it lends and earns interest. Other shadow banks include investment firms or online platforms that manage money.

Shadow banks are less regulated than normal banks. They often take more risks and are harder to supervise. They handle large sums of money in ways that are complex and not always transparent.

If something goes wrong in one part of the shadow banking system, problems can spread quickly across the economy. Jobs, savings, and public services may all be affected. Governments may struggle to act in time during a crisis.

The Financial Stability Board estimates that the riskiest parts of shadow banking now hold more than USD 63 trillion in assets. That’s over three times the size of the US economy, and it has grown by 80% in the past decade.

Figure 3. The shadow banking system has increased rapidly in size and is a very risky part of financialisation.

How does financialisation affect everyday life?

Financial logic also spreads into everyday life. In a financialised economy, short-term, profit-maximising logic shapes decisions even in areas where the goal used to be care or access. A university might borrow money to expand and raise tuition fees to repay the debt. A private company might buy a water utility and raise prices to increase profits. These decisions prioritise profits over public wellbeing.

Even households make decisions differently. People choose education, housing, or healthcare based on what they can afford to borrow and repay. Families may feel pressure to invest in property, pensions, or insurance. Financial risks once managed by the public or community are increasingly pushed onto individuals. Financialisation changes how people access housing, education, healthcare, and even nature. It shifts more risk onto individuals and households.

Figure 4. Financial literacy and planning is essential in a financialised world where more and more risk and responsibility is placed on individuals and households.

(Credit: RDNE Stock project, Pexels license)

Education: In some countries, students take out large loans to pay for university. These loans are often securitised, bundled into financial products sold to investors who profit from repayments. Education becomes a private investment. Students carry the risk of debt, hoping future earnings will cover repayments to the debt holder-investors This brings stress and uncertainty.

Healthcare: In some places, governments reduce public health services and promote private insurance. People must choose between plans with different costs and coverage, often hard to understand. They must guess their future health needs. If they guess wrong or can’t afford good coverage, they face serious financial risk.

Housing: Like student loans, mortgages can be securitised and sold to investors. At the same time, financial actors like private equity firms buy up housing. As corporate landlords, they often raise rents and cut maintenance to increase returns. These are examples of rent-seeking that reduce affordability and quality.

Nature: Forests and wetlands are sometimes turned into financial assets to protect them. Companies buy carbon credits or biodiversity offsets to ‘balance’ environmental impacts. This can lead to nature being valued mainly for its market price, not its role in sustaining life (Section 3.4.6 - coming soon!).

Financialisation makes everyday life more expensive, uncertain, and unequal. It often weakens public systems and shifts responsibility onto individuals. People are expected to manage risks alone by budgeting, borrowing, buying insurance, and investing for the future. This turns everyone into self-reliant, and often rent-seeking and speculating financial actors. Individuals have to take on too much risk and have to rely on extracting value from others for their own financial security. That’s why it’s important for financial literacy to include understanding of how financial systems work, so individuals can try to avoid getting trapped in extractive systems (Subtopic 6.4 - coming soon!).

Why is financialisation a barrier to a regenerative economy?

The financialisation of our economies means that short-term, profit-maximising logic seeps into ever more areas of our lives. It shapes not only decisions in markets, but also policies, household choices, and even commons governance. It changes where money flows and what it supports. Instead of funding public services or climate solutions, finance often chases fast returns. This benefits those who already own assets, while others face rising costs and fewer opportunities.

Financialisation also shifts how people think. When public systems shrink, individuals are told to manage risks alone. This creates stress, inequality, and isolation. Services that once focused on shared wellbeing are judged by their profits instead.

A regenerative economy aims to reverse these patterns. It redesigns finance to support life, protect commons, and build shared resilience. Subtopic 6.3 (coming soon!) explores how this can be done.

Activity 6.2.5

Concept: Systems

Skills: Thinking skills (transfer)

Time: 30 minutes (each option)

Type: Individual, pairs, or small group

Option 1: The 2007-2008 financial crisis
Read the summary below of the 2007–08 financial crisis.

Work in pairs or small groups. Discuss and answer the questions below. Be ready to share your ideas with the class.

Which parts of the crisis are examples of:
- Securitisation
- Speculation
- Shadow banking
- Risk shifting onto households
- Socialising losses, privatising profits
What roles did financial institutions, households, and governments play?
Why is this crisis an example of how financialisation affects whole economies and everyday life?

The 2007–08 financial crisis

The global financial crisis showed how dangerous financialisation can be. In the years before 2008, banks in the United States gave out large numbers of risky home loans—called subprime mortgages—to people who often couldn’t afford to repay them. These risky loans were then bundled together into complex financial products known as mortgage-backed securities, a process called securitisation. Many of these products were bought and sold by shadow banks who were not strictly regulated.

Investors were speculating that house prices would keep rising, so they believed the products were safe. But when borrowers began to default on their loans, the value of these products collapsed. Financial institutions across the world had bought them, so the damage spread quickly through the system. Some of the biggest banks and shadow banks faced massive losses or were close to collapse.

Governments stepped in and used public money to rescue many financial firms, while millions of ordinary people lost their homes, jobs, or savings. In the end, financial risks had been shifted onto households, and profits were privatised while losses were socialised. The crisis revealed how financialised systems can concentrate power, hide risk, and pass the cost of failure onto the public

Click on the arrow for sample responses, but give it a go yourself first!

Which parts of the crisis are examples of:

Securitisation:
Banks bundled many home loans—including risky ones—into mortgage-backed securities and sold them to investors. This is securitisation: turning loans into financial products.
Speculation:
Investors bought these securities, betting that house prices would keep rising. They expected to make a profit even though the products were risky. That’s speculation.
Shadow banking:
Many of the mortgage-backed securities were traded by shadow banks—financial institutions like investment firms that are not traditional banks and are less strictly regulated.
Risk shifting onto households:
Banks gave risky loans to people with low income or poor credit. When the housing bubble burst, many of these households lost their homes. They carried the risk when the system failed.
Socialising losses, privatising profits:
Banks and investors made profits when times were good. But when things went wrong, governments used taxpayer money to bail out financial firms. The public paid the price for private mistakes.

What roles did financial institutions, households, and governments play?

Financial institutions designed and sold complex financial products. They gave out risky loans, traded them, and took on too much debt.
Households took on mortgages, sometimes without understanding the risks or being able to repay.
Governments failed to regulate the system properly beforehand. After the crash, they used public funds to rescue banks and try to stabilise the economy.

Why is this crisis an example of how financialisation affects whole economies and everyday life?

The crisis began in the financial sector but quickly spread across the world. It affected people’s jobs, homes, savings, and public services. It shows how financial decisions—like packaging and trading loans—can impact the real economy and daily life. When finance dominates, risks are often hidden, and the public can end up paying the price for private profit.

Option 2: Dutch pension reforms

Read through the following case study and discuss or write responses to the questions.

Case Study: Dutch Pension Reforms: Who Should Take the Risk?

In the Netherlands, most workers save for retirement through a pension fund. Each month, a part of their salary is saved into the pension fund, and their employer adds more on top. These savings grow over time and provide an income after they retire.

Until recently, most Dutch workers had a defined benefit pension. This means the workers were promised a fixed amount of money every month after they retired. To make sure they could keep this promise, pension funds needed to invest workers’ savings in ways that were as safe as possible. They couldn’t risk losing money, because they still had to pay the full pension even if markets dropped. That’s why they mainly invested in government bonds. Bonds are loans to the government that usually give steady, reliable returns. These low-risk investments helped pension funds protect people’s future income.

Photograph of people on bikes in the Netherlands

Figure 5. Dutch pension funds are by far the largest in the Eurozone. Are the Dutch people ready for the additional risk?

(Credit: Viridiana Rivera, Pexels license)

But between 2025 and 2028, the Netherlands is changing the system. Instead of promising a fixed pension, workers will only be guaranteed the amount paid in. This new system is called defined contribution. The final pension depends on how well the investments perform and which level of risk the individual has chosen. If markets rise, pensioners could receive more money than under the defined benefit plans. But if markets fall, they could get less. The risk of bad investments now falls on each person, not on the pension fund.

Supporters of the change say that it allows pension funds to invest in higher-returning assets like company shares (stocks or equities). The value of these can grow faster than government bonds, which are considered very safe but offer smaller returns.

Critics say the change increases insecurity. Workers now have to worry about financial markets they don’t control. If global stock markets crash, their pensions could shrink just when they need them most.

Meanwhile, many pension funds are now managed by huge international companies like BlackRock or Vanguard. These companies decide where the money is invested and they have an interest in maximising their own profits. But if things go badly for the pension firms, they don’t lose their own money. They charge fees to manage the funds, but they are not responsible for replacing lost pension savings.

This shift is part of a broader global trend that began in the 1980s, when countries like Chile, the UK, and the US moved to private pension systems. (Sources: Pettifor, 2025, McDougall, 2025).

Questions:

What is a pension? Why do people need one?
What’s the difference between a defined benefit and a defined contribution pension?
In the new Dutch system, who takes the risk if the value of investments goes down?
Why might some people want pension funds to invest in higher-return assets?
Why are some people worried about letting private companies like BlackRock manage pension money?
How does this case study show financialisation in action?
In your opinion, should pensions be treated more like public services or private investments? Why?

Click on the arrow for sample responses, but give it a go yourself first!

What is a pension? Why do people need one?
A pension is money saved during a person’s working life to support them after they retire. People need pensions so they can afford to live when they are no longer earning a salary.
What’s the difference between a defined benefit and a defined contribution pension?
A defined benefit pension promises a set monthly payment after retirement, no matter what happens in the markets. A defined contribution pension depends on how much is paid in and how well the investments perform. The final amount can go up or down.
In the new Dutch system, who takes the risk if the value of investments goes down?
In the new system, the individual pension holder takes the risk. If investments lose value, the person may receive less money when they retire.
Why might some people want pension funds to invest in higher-return assets?
Because higher-return assets can grow the money faster. This might lead to bigger pensions—but it also means taking more risk.
Why are some people worried about letting private companies like BlackRock manage pension money?
Because these companies are not responsible if the investments lose value. They can earn fees for managing the money, even if the pension holder ends up with less.
How does this case study show financialisation in action?
It shows how pension savings are being moved from safe, public investments into riskier financial markets. The focus shifts from long-term security to making profits in global finance.
In your opinion, should pensions be treated more like public services or private investments? Why?

Answers will vary.

Ideas for longer activities and projects are listed in Subtopic 6.5

Checking for understanding

Further exploration

The 2008 Financial Crisis: Crash Course Economics #12 - this ca. 12 minute video explains how mortgage lending, securitisation, speculation, and weak regulation led to the global financial crisis. It introduces key terms like subprime mortgages, moral hazard, and credit default swaps, helping students understand how risk was shifted and how public bailouts followed private profits. Difficulty level: easy
What is REDD+? - a ca. 4 minute video about the UN REDD+ programme. Difficulty level: easy
Are Private Equity Firms Plundering the U.S. Economy? - This ca. 60 minute Freakonomics podcast investigates how private equity firms operate and the risks they may pose to jobs, services, and the wider economy. Difficulty level: medium
The Guardian view on private equity and public services: this trend needs reversing (Editorial) - This editorial from The Guardian argues that private equity firms profit from essential UK services like transport, care, and education. It describes how financial engineering and offshore tax structures allow investors to extract public money while public systems remain underfunded. Difficulty level: medium
Understand the economy course - in four videos, financial educator Gary Stevenson explains wealth and inequality, raising points related to rent-seeking in the economy. Difficulty level: medium

Sources

Financial Stability Board. (2025, July 9). Enhancing the resilience of non-bank financial intermediation: Progress report. https://www.fsb.org/uploads/P090725-2.pdf

Gabor, D., & Vestergaard, J. (2018). Towards a Theory of Shadow Money. Institute for New Economic Thinking. Retrieved from https://www.ineteconomics.org/research/research-papers/towards-a-theory-of-shadow-money

Graeber, D. (2014). Debt: The first 5,000 years. Melville House.

McDougall, M. (2025, July 10). Dutch pension funds set to sell €125bn of government bonds. Financial Times. https://www.ft.com/content/8679cdb1-53f0-48ff-a9ec-ba590331190c?utm_source=substack&utm_medium=email

Pettifor, A. (2017). The production of money: How to break the power of bankers. Verso.

Pettifor, A. (2025, July 16). Is your future pension safe? ... tied to the spinning wheels of the Global Casino? System Change. https://annpettifor.substack.com/p/is-your-future-pension-safe

Reardon, J., Caporale, M. M. A., & Cato, M. S. (2018). Introducing a new economics: Pluralist, sustainable and Progressive. London: Pluto Press.

Sawyer, M. (2014). What is financialisation? University of Leeds Economics Working Paper No. 14-03. https://eprints.whiterose.ac.uk/id/eprint/82350/

Zaloom, C., & James, D. (2023). Financialization and the household. Annual Review of Anthropology, 52, 309–324. https://www.annualreviews.org/docserver/fulltext/anthro/52/1/annurev-anthro-052721-100947.pdf?expires=1751777009&id=id&accname=guest&checksum=501FD8A6FA5D5E85ABAAEEF55BA2C8A9

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