July 9, 2009 / 12:05 PM / 10 years ago

Business Books: How finance reshaped America

NEW YORK, July 9 (Reuters) - Homes as investments, workers as human capital, friends as social capital: these are a few of the things the modern economy wrought.

It all stems from finance replacing manufacturing at the center of American life, according to Gerald Davis, author of “Managed by the Markets: How Finance Has Reshaped America” (Oxford University Press, $29.95).

Davis, a professor of Management at the University of Michigan’s Ross School of Business, deconstructs many of the slogans that infected the political and economic conversation of the last third of the 20th century: phrases like “democratization of credit” and “ownership society.”

In the ownership society, retirement plans shifted from guaranteed benefits to defined contributions. This shift benefited mutual fund companies, he writes, while individuals were left owning the risk of a retirement tied to the stock market.

Another financial innovation, mortgage-backed securities, originated in a government program created to make mortgages more readily available.

This effort to expand home ownership, “marked by lax regulation and Wall Street innovation, resulted in the largest number of people losing their homes in American history,” Davis writes.

In the mortgage crisis, corporations ceased to behave like institutions, devolving into mere networks at the beck and call of shareholder value, he says.

Meanwhile, financial markets, touted as transparent and all-knowing, increasingly influenced decisions of government, business and individuals. Those markets turned out to be far murkier than advertised.

“The surprising suddenness of the mortgage meltdown revealed that many prices are, in effect, pure guesswork,” Davis writes. Banks, and now the government, are still struggling to discover the true value of many bank assets.

Another benefit of the modern economy was the “stunning productivity” of U.S. agriculture and manufacturing.

With only a tiny fraction of the population’s hours needed to produce all of our food, clothing, shelter and material goods, “surely we were on the verge of a society devoted to a life of art, literature, and contemplation,” he writes.

Instead, Americans face economic anxiety and chronic insecurity about the future, and millions of families are one medical crisis away from bankruptcy.

“If we don’t have to work in the fields and we don’t have to work in factories, we should be living a more idyllic existence than we are,” Davis said.

His solution is a new set of institutions to fill the void left by the demise of corporations that once served as functional substitutes for the welfare state.

These new institutions must offer comprehensive financial regulation. They must also address the increased inequality and stalled mobility in American society. And, he says, they are best created by government. (Reporting by Ellen Freilich; Editing by Eddie Evans)

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