If you read the AFR, FT or Wallstreet Journal, you would easily believe that a massive, highly profitable financial sector is essential to a nation’s economy and prosperity. We are told that the finance sector creates economic growth and enables innovation.

But what if the opposite is true? What if having a massive banking and finance sector is a curse that strangles industries, hurts workers and weakens national economies?

To understand the finance curse, it is essential to know what financialisation actually is.

At its core, finance is the system of managing money, credit, and investments. It is the interconnected network of loans, ownership and speculation that primarily focuses on the creation, allocation and acquisition of money and other types of wealth. After WW2, the banking system was strictly regulated and controlled. It was “society’s servant, not its master”. However, in recent decades and especially since the 1980s, the global economy has undergone a massive transformation called financialisation.

Financialisation refers to the unprecedented global spread of gigantic banks, financial markets, and investment funds that now dominate the world economy.

When something is financialised — if a company is financialised — it changes its focus from producing something like a product or service in order to make profit, into a focus of making profits by extracting wealth.

For example, a company like General Electric used to make most of its profits through producing all kinds of products (lightbulbs, jet engines, medical equipment, etc) but now it makes most of its money by selling high-interest loans.

If it sounds complicated, this is by design — discussion about finance is purposely mystified by bankers and economists to prevent scrutiny.

Thanks to the deregulation of financial markets, advanced algorithms and high-speed internet, vast amounts of money can be used, spent and “bet” on the value of assets at speeds that are impossible for humans to track.

Financial institutions like banks and hedge funds use financial engineering to go deep into our economy and society and extract wealth upwards. These banks and hedge funds force businesses that produce real things to move away from creating those real things and instead siphon wealth to the financiers.

The financialisation of housing is the simplest, clearest illustration to understand how this operates.

Financialisation exposes the raw class conflict between genuine wealth creators (workers) and wealth extractors (financial predators). To satisfy the relentless demands of the ultra wealthy, companies are forced to use mechanisms like massive debt, aggressive outsourcing, and monopoly power to squeeze workers.

This financialisation is a curse because it drains the economic vibrancy and capacity out of genuinely productive industries (many of which are essential to a nation’s wealth or life). Banks and hedge funds divert the best-educated talent away from doing socially or economically productive work and instead have “quants” focused on designing spreadsheets and algorithms that shave an extra fraction of a percentage point of additional profit.

Economists call this the “crisis of over-accumulation”, where the ultra-rich can no longer find enough ways to make mega-profits through making real things, so instead cannibalise existing businesses, infrastructure, public service and workers’ wages.

Australia has a double curse — we have an excessively large and overly powerful finance sector dominated by the Big Four Banks, and we also have the “resource curse”, where commodity producers (companies that dig up minerals) are also excessively powerful and profitable.

These large companies do not get big and powerful by being efficient businesses, but rather through sabotage and rigging the system.

The banks have rigged the system through successive wages of deregulation that allowed them to grow enormous through buying up their competition.

The mining companies have rigged the system through using lobbyists to write the tax laws that means Australia’s royalty system results in the minerals and gas costing the companies almost nothing.

In short, massive corporations have rigged markets against workers, consumers, and taxpayers to guarantee themselves ultra-massive profits.

Australia is often praised for having a stable banking sector, but in reality it is a trap.

One of the greatest dangers to any country is when banks gain monopoly control over how loans are allocated. If a few powerful banks control the who can get access to credit, they effectively control the nation.

In Australia, banks prefer to lend to people buying up housing instead of lending to businesses who make real products or goods to build new factories. This has weakened Australia and directly resulted in deindustrialisation — we are country that increasingly cannot make things because banks make more money through selling credit cards to buy overseas made cars and TVs, and more money providing loans to buy up houses and property.

Today, the extraction by financialisation is justified by a political and media narrative of “competitiveness”. This narrative claims that we must allow continued financialisation and deregulation or else there will be “capital flight” — the ultra billionaires and multinational corporations will go overseas. In order to attract foreign capital, nations instead must remove all restrictions on their behaviour, cut corporate taxes and reduce regulations.

This is a narrative designed to justify the systematic shift of wealth upwards from everyday people to the ultra-rich.

The threat of capital flight only exists because financiers deliberately built offshore escape routes. Starting in the 1950s, banks created a rootless, unregulated global playground to escape domestic democratic controls and taxes. Panama, Jersey, Luxembourg, Bermuda, Singapore, British Virgin Islands, and Cayman Islands are all no or low tax jurisdictions that have been completely integrated into the global system. Their express goal is to reduce the amount of tax paid by multi-national corporations and billionaires.

The offshore tax havens were justified by neoliberal ideology, which argued that subjecting every part of society to relentless competition would deliver efficiency. The logic goes, when capital can flow freely, it is allocated efficiently. In the real world, it has allowed the ultra-rich to dodge tax and become unimaginably wealthy and powerful.

Private equity firms are an example of modern financial wealth extraction and is a good example of one kind of financial engineering.

With private equity, the owners of the firm invite outside investors to contribute money to a pool of money, which is then used to buy up and take control of real companies. Once they buy the target company, the private equity firm will typically borrow massive amounts of money, restructure the company and sack large amounts of workers, cut long-term investment in the actual business, and attempt to sell it on for a profit.

It is a highly aggressive and destructive form of business activity that is solely designed to extract wealth from the target company and redistribute it to the firm’s owners.

Despite promoting itself has a kind of heroic capitalism — dynamic, cost cutting bosses “saving” failing businesses” — in fact that vast majority of private equity buyouts have been disasters for the workers and communities.

This financialisation and private equity predation also targets public services like water and energy utilities, through outsourcing and private finance initiatives. While promising private-sector dynamism, these privatisations lock taxpayers into decades of poor services and high profits. The profits almost always are sent overseas.

Because financial ultra profit-maximisation dictates corporate strategy, companies cut real investment, jobs and training to fund share buybacks and dividends. This obsession with short-term profits hollows out a nation’s industrial base and crushes productivity.

This perfectly explains the ongoing productivity stagnation we debate constantly in Australia. It also explains the hollowing out and deindustrialisation of the UK.

For Australian politics, the lessons of the finance curse are clear. We must not bow to the demands of powerful banks or multinationals. Shrinking the oversized influence of finance is essential for Australia to have a thriving economy and genuine democratic sovereignty.

We must choose to unilaterally step out of this global race to the bottom by implementing capital controls, enforcing tough anti-monopoly laws and breaking up the Big Four Banks and other monopoly industries. An we need to invest in alternative public finance in order to fund essential services, jobs and productive industries.