Introduction
Over the past century, banking and financial services have expanded from a supporting role in the economy to a dominant force shaping economic outcomes. This process of financialisation has seen finance grow rapidly relative to other sectors, with banks and markets exerting outsized influence on policy and everyday life. Central banks, deregulation, rising debt and political influence have all contributed to a system where governments and individuals often feel captive to financial interests. The following sections provide a deep dive into how this system evolved and its consequences, covering the historical rise of finance, the role of central banks, deregulation and neoliberal policies, government influence, debt dynamics, inequality and risks, and the industry’s political power.
Historical Evolution of Financialisation
Financial services have dramatically increased in size and importance relative to other sectors over the last 100 years. In the mid-20th century, manufacturing dominated profits and employment, while finance was a relatively modest part of the economy. For example, around 1950, manufacturing generated about 40% of UK corporate profits and nearly 30% of jobs, whereas the financial sector accounted for only about 10% of GDP. In contrast, today the roles are nearly reversed – by 2020, the finance industry’s share of GDP had risen to roughly 22%, and it captured around 40% of all corporate profits while providing only 5% of jobs. This indicates that a low-employment sector (finance) has replaced a high-employment sector (manufacturing) as a leading profit centre, concentrating income in financial firms and investors.
The expansion of finance accelerated especially from the 1980s onwards. In the post-World War II decades up to the 1970s, banking was relatively “boring” – highly regulated and focused on basic lending. The financial sector was only about 3–5% of UK GDP through the 1970s. Starting in the 1980s, however, waves of deregulation (discussed later) and innovation fuelled explosive growth in financial activities. By the mid-2000s, finance’s share of GDP and corporate profits had surged. UK financial sector profits grew 800% (inflation-adjusted) from 1980 to 2005, vastly outpacing the non-financial sector’s ~250% profit growth in that period. In other words, finance went from growing in tandem with the rest of the economy (as it had from the 1930s to 1980) to greatly outstripping it. By the 21st century, banking, investment, insurance, and real estate activities together exceeded 20% of UK GDP – double the contribution of the manufacturing sector. This era of financialisation reflects not just a bigger financial sector but an economy increasingly driven by financial motives, transactions, and debt.
Central Banks and Monetary Policy
Central banks have played a pivotal role in enabling the financial sector’s dominance through their control of interest rates, money supply, and crisis interventions. In the era of easy money that began in the late 20th century, central banks frequently lowered interest rates and provided ample liquidity, which encouraged borrowing, asset inflation, and financial market growth. For example, during the mid-2000s “Great Moderation” of low inflation, the Bank of England kept interest rates relatively low; investors came to expect that the Bank would cut rates or otherwise rescue markets whenever trouble arose – a phenomenon dubbed the “central bank put.” This policy stance reassured financial market participants that downside risks were limited, which encouraged greater risk-taking and speculative investing. In effect, central banks signalled that they would backstop major financial market declines, creating a moral hazard where banks and investors felt protected even when pursuing risky strategies.
The active role of central banks became especially evident during financial crises. Following the 2008 global financial crisis, major central banks embarked on unprecedented quantitative easing (QE) programmes – creating new money to buy bonds and other assets – to stabilise the system. The combined balance sheets of the four largest central banks (the Bank of England, the US Federal Reserve, the European Central Bank, and the Bank of Japan) ballooned from about $5 trillion in 2007 to $20 trillion by 2018. After the COVID-19 shock in 2020, they expanded further, reaching $31 trillion by 2022 (over 30% of global GDP). This massive injection of liquidity propped up banks, kept interest rates near historic lows, and fuelled a rapid rebound in asset prices. While these moves averted immediate collapses, they also solidified the financial sector’s power – markets became increasingly dependent on central bank support, and banks enjoyed cheap funding and rising asset values. Central banks’ policies thus often had the effect of boosting financial institutions and markets (through higher asset prices and trading volumes), even as the broader economy recovered more slowly. Critics note that prolonged ultra-low rates and QE also inflated asset bubbles and widened wealth inequality (since the wealthy hold more financial assets).
Moreover, by repeatedly intervening to rescue the financial system (2008, 2020, etc.), central banks have intertwined public policy with the fate of finance. The Bank of England, for instance, has had to assume a lender-of-last-resort role, providing emergency liquidity to stabilise markets. This underscores how central banking decisions in areas like interest rates and money supply not only influence inflation and growth but also effectively safeguard the financial sector, thereby reinforcing its central position in the economy. The risk, however, is that after multiple rounds of interventions, governments and central banks now have stretched balance sheets and high debts, potentially limiting their ability to counter the next crisis. In short, central bank monetary policy – from routine rate cuts to extraordinary quantitative easing – has been a major factor in expanding financial sector influence and in tying the health of the overall economy to the stability of banks and markets.
Deregulation and Neoliberal Policies
Financial deregulation has played a key role in the expansion of financialisation. From the 1980s onwards, UK and global policymakers embraced neoliberal economic ideologies, arguing that reducing government intervention and loosening financial regulations would encourage economic growth. The Big Bang deregulation of the London Stock Exchange in 1986, for example, removed restrictive trading practices and allowed foreign firms greater access to UK financial markets. Similarly, in the US, the repeal of the Glass-Steagall Act in 1999 removed the separation between commercial banking and investment banking, leading to the rise of massive financial conglomerates engaging in high-risk speculation.
Deregulation enabled banks to take on more leverage, develop complex financial instruments, and expand their market reach. While this boosted short-term economic growth, it also increased systemic risks, as seen in the 2008 financial crash. Banks became “too big to fail”, knowing that governments would bail them out in a crisis to prevent economic collapse. This moral hazard encouraged reckless behaviour and reinforced the financial sector’s dominance over policy decisions.
Case Study – The Fall of Liz Truss and Kwasi Kwarteng
A striking example of financial sector dominance was the rapid downfall of Liz Truss and Kwasi Kwarteng in 2022. Their economic policies, intended to spur growth through large tax cuts and deregulation, were met with ferocious resistance from financial markets. Truss and Kwarteng’s “mini budget” in September 2022 included £45 billion in unfunded tax cuts, scrapping the top income tax rate, and removing a planned rise in corporation tax. This spooked financial markets, leading to a sharp drop in the value of the pound and a dramatic rise in UK government bond yields.
Investors, fearing that the UK’s debt burden would spiral out of control, dumped UK government bonds (gilts), causing borrowing costs to surge. The financial sector’s reaction triggered a liquidity crisis in pension funds, which had relied on gilts for stability. The Bank of England was forced to intervene with a £65 billion emergency bond-buying programme to prevent a full-scale market collapse. As pressure mounted, Kwarteng was sacked as Chancellor, and Truss resigned after just 49 days, making her the shortest-serving Prime Minister in UK history.
This episode demonstrated that financial markets, rather than the electorate, could dictate economic policy. The collapse of Truss’s government showed how financial institutions hold immense power over elected officials, shaping decisions through their control over debt markets and currency stability. Ultimately, the Truss-Kwarteng experiment collapsed not due to parliamentary opposition but because the financial elite deemed their policies unacceptable. This case highlights how modern democracies remain vulnerable to financial sector pressures, reinforcing the argument that finance wields excessive influence over government policy.
Conclusion
Over the past 50 years, financialisation has fundamentally altered modern economies, shifting power from productive industries to speculative finance. The dominance of banks and financial services has led to rising inequality, a dependence on debt, and a political system increasingly influenced by financial interests. Central banks, deregulation, and government reliance on financial markets have created a system where finance serves itself rather than the broader economy. Addressing these issues will require stronger regulation, a more balanced economic structure, and a political shift away from financial sector dependency. If left unchecked, the cycle of crises, bailouts, and rising inequality will continue, trapping both individuals and governments in perpetual financial servitude.