This blog post calmly examines why the investment craze failed to build personal wealth, exploring the structure of financial capitalism and the reality of a bank-centric investment system. It also questions the nature of the risks individuals have come to bear.
The Beginnings of Financial Capitalism
In a capitalist society where money functions as the supreme value, we all dream of becoming wealthy. And many people think of ‘wealth management’ as a means to grow their assets. Of course, wealth management encompasses various methods like real estate, savings, and investments, but a significant portion of it is inextricably linked to banks. Living in a financial capitalist society, we must understand how banks operate internally and the underlying assumptions behind the various financial products they promote.
Until the 1990s, ‘finance’ was not perceived as a critical domain in our society as it is today. The term ‘wealth management’ was also not widely used. People back then believed that working diligently, saving steadily, and accumulating money little by little was the best approach. It was common to feel small joys watching the interest accumulate, bit by bit, in one’s savings account. The savings accumulated in this way were invested in companies, becoming the foundation for the growth of Korean industry. As overseas exports increased, the nation’s overall wealth grew as well. Individuals, too, gradually gained more financial breathing room within this flow of growth.
However, the situation began to change gradually as the 1990s arrived. As the Korean economy gained greater weight in the global market, external pressure for financial market liberalization intensified. Consequently, the ‘Financial Liberalization and Opening Implementation Plan’ was announced in 1992, rapidly opening the financial markets. Subsequently, foreign capital poured in en masse, and advanced financial companies began competing to introduce dazzling financial products. From this point onward, the financial capitalist society began moving at a pace entirely different from before. The money supply fluctuated dramatically, exchange rates fluctuated daily, and the stock market exhibited extreme volatility.
By the 2000s, banks had firmly established themselves at the center of financial capitalism, actively selling funds and insurance while expanding credit card issuance. This marked a significant expansion of the status and role of banks, which had previously focused solely on ‘savings’. The period when the term ‘wealth management’ spread like a trend also coincided with this shift. ‘Financial capitalism’ signifies that capitalism, which had operated around labor, was restructured around finance. Whereas in the past, the goods and services produced by workers at their places of employment were the source of wealth, at some point, a ‘society where money makes money’ emerged in earnest. Wealth began to be generated simply by holding assets and participating in the financial system, without the need to directly produce goods or provide services.
How did this become possible? At its core lies the process of ‘investment’. Under the guise of investment, massive amounts of capital flow into banks, which then manage these funds to generate new profits. On the surface, “wealth management” sounds like “invest your money to earn returns,” but hidden beneath is the demand: “Entrust your funds to the bank.” The problem lies precisely here. This process inherently carries risks that cannot be taken lightly.
Professor Raghuram Rajan of the University of Chicago Booth School of Business has warned about the dangers of financial management as follows:
“If you jump in without knowing what not to touch, you’re likely to get your fingers cut off. Thinking it’s okay to enter financial markets without understanding their components is courting disaster. It’s especially dangerous when you believe you can make money easily. Financial hype creates the illusion that making money is incredibly easy. You hear it everywhere—from the hairdresser, from shop owners—“Just put your money here and it’ll double.” That’s precisely when you need to be most vigilant. When money seems to roll in effortlessly, that’s when the trap lies in wait. Learning about risk is paramount.
And if it seems like too many people are making money through finance, it means something is wrong, and problems are likely to erupt soon.”
Does the bank teller sitting at the counter truly recommend investment strategies solely for your benefit? While anyone can participate in investing, it’s not a field where just anyone can easily make money. Jumping in without understanding can lead to a price far greater than imagined. The next chapter will examine why such financial wealth management is risky and how that risk is transferred to individuals.
Investing for the Bank, Investing for Me
The 1999 U.S. passage of the Financial Services Modernization Act played a major role in establishing banks as the core of financial capitalism. The historical roots of this law trace back to the 1930s. At that time, the U.S. identified the causes of the Great Depression, which swept across the globe, as reckless speculation and lax management by commercial banks. Consequently, the Glass-Steagall Act was enacted in 1933, clearly separating commercial banks from investment banks. This was a measure to prohibit banks from using customer deposits for risky speculation.
However, the Financial Services Modernization Act enacted in 1999 effectively abolished these regulations, allowing financial holding companies to own not only banks but also securities firms, i.e., investment companies. In other words, it opened the door for banks to actively engage in speculative activities in financial markets using customer funds.
This trend was directly mirrored in Korea. Under the banner of strengthening the financial industry’s competitiveness, the Financial Holding Company Act was enacted. Banks rushed to establish investment banks and began encouraging investment over savings. Korean society, having experienced high growth since the 1970s, maintained a long “era of high interest rates.” However, the 1997 IMF foreign exchange crisis marked a significant shift in the overall economic structure. Companies shifted their focus from aggressive expansion to stable management, and the national economy entered a low-growth phase. With the halt of high growth, the high-interest era also came to an end, and the void was filled by a wave of financial investment fever.
Banks were no longer institutions solely promoting deposits and savings accounts. They constantly presented customers with new choices, spearheaded by numerous financial products like funds, insurance, credit cards, debit cards, telephone banking, and internet banking. George Soros, dubbed the ‘Emperor of Global Finance,’ described this situation as “like opening the bulkheads of an oil tanker.” He foresaw the risk of greed in the financial markets losing its restraints and erupting all at once.
The low-interest-rate environment that took hold in earnest since the early 2000s also served as a significant backdrop. As the interest earned on deposits and savings failed to keep pace with inflation, the notion that ‘investment is the best choice’ gained even more persuasive power. However, this investment frenzy sometimes led to irreversible tragedies. Among those who trusted bankers’ recommendations and invested in funds, many poured their entire life savings—accumulated over 10 or 20 years—into a single investment. When funds boasting record-high returns suddenly crashed overnight, the only ones left to bear the losses were the individual investors themselves.
Banks bore no responsibility for investment failures from the outset and had no obligation to compensate for losses. Consequently, those who lost their entire retirement savings or squandered a lifetime of assets were left to live in deep frustration and despair, blaming themselves. In extreme cases, some even chose to end their lives.
The bigger problem was that many people didn’t even properly understand why this happened to them. Back then, bankers were perceived as ‘people who would never say anything wrong’ and were socially coveted professions. Why did choosing a fund touted as having the ‘highest returns’ based on a banker’s word lead to the exact opposite outcome? Why did investing in derivatives promising ‘instant profits’ fail to even preserve the principal? No one provided a clear answer to these questions.
At times like this, we need to reframe the question itself. Instead of asking, “Was I, the investor, solely at fault?”, we should ask, “Was there a problem with the structure and role of the bank?”, or “Did I perhaps trust the bank too naively?”. These are questions individuals in a financial capitalist society must ask themselves, questions they must never turn away from.
