What Crisis? the Capitalist State, Financial Power, and Elite Resiliency

In the decades preceding the 2007-2008 financial crisis, the American economy reorganized around financial markets, which enriched a powerful elite stratum. In the aftermath, many commentators and academics contended that the crisis marked the end of an era of financialization and enormous income concentration at the top. Indeed, crises like that of 1929 often have the effect of sharp asset destruction. Yet, seven years after the collapse of Lehman Brothers, this scenario has not materialized. Curiously, the U.S. financial sector has remained nearly insulated from “real” economic contraction meaning economic elites are similarly protected from material hardships facing the rest of the population.

            We seek to explain the preservation of capital by looking carefully at its supportive roots. Specifically, we study the state’s role in protecting financial property. Before the crisis, the state had effectively guaranteed existing financial assets. In the midst of crisis, the state merely followed through on its promises. Thus, the much-discussed “bailout” was not a last resort effort to “step in” and save the financial sector, but a drastic step to preserve institutional continuity. With the financial income streams still open and unadulterated, the state indirectly maintained class power for the super rich who barely experienced a crisis. Seen in this way, the crisis reveals fundamental relations about the capitalist state. We therefore use the crisis as lens to explore these relations. With its unique ability to create and preserve property, the state plays a critical role in reproducing stratification and elite power via finance.

            Theoretically, we return to older “structuralists” theories of the capitalist state to explain this phenomenon. In addition, we hone in on the response to the crisis and the state’s relationship to finance before it. Empirically, we use data from Federal Reserve’s Flow of Funds tables as well as Piketty’s World Wealth and Income Database. Our data indicate substantial levels of publically guaranteed financial assets before the crisis. As a result of state protection and bailout measures, personal financial wealth remained stable or improved after the crisis while all non-financial assets deteriorated significantly. Moreover, while the wealthiest Americans’ experienced overall declines in capital income, this is mostly attributed to declining interest income. Dividend income remained steady and even improved for the top 1%. Together these results address recent interest in the state’s ability to shape the parameters of wealth distribution and elaborate on long standing discussions on the symbiotic connection between the state and capitalism.