Derivatives – a demon sucking the world dry!

This entry is part 1 of 8 in the series Deriving Capital's Future

Modi is bludgeoning us into a new era of digital banking, cashless economy, and e-payments. As rightly claimed by ruling circles this process has been going on for more than 10 years. Aadhar, Direct Benefits Transfer, Micro credit to rural women, bank accounts for rural employment scheme workers, all started during the previous UPA rule led by Congress. Modi just continues this fin-cap-sewa with his characteristic terrorist style.

dbtThe financial industry calls it “banking the unbanked”, “financial access to the masses”, “financial inclusion” so on. They present it as benefiting the masses. But what they really intend to do is ‘to include’ crores of Indian people into their web of global banking, global financial markets, financial products and speculation and gamble with our lives.

Such gambling in the US reached huge proportions and ended in the financial melt down in 2007. Investment banks and financial players were bailed out using tax money by various governments.

What is happening? Is the problem only due to the misdeeds of a few black sheep? Or is it systemic, inherent in the growth of capital accumulation in 21st century? Why should it result in crises? What is happening to government regulation of financial markets?

Read on  for an analysis of derivatives markets  by Dick Bryan and Michael Refferty. This was originally published in Socialist Register vol 47 in 2011. We are publishing the tamil translation of the same along with the English text for reference.

This is what is in store for us in digital economy. We should be prepared to face, oppose and struggle against these developments.

Deriving Capital’s (and Labour’s) Future – Dick Bryan and Michael Rafferty Part – 1

Financial derivatives have been identified as the prime suspect in recent financial crises. For those not in the business of derivative analysis, perhaps the first revelation of their potency, and of their capacity to disguise underlying financial exposures, came with the Long Term Capital Management, Enron and Worldcom episodes around the turn of the century. Then came the subprime financial crisis of 2007-8 where securitization, a derivative-based process, came to prominence as the global distributor associated with the predatory practice of subprime lending. Credit default swaps betting on corporate insolvency followed. Derivatives seemed to ensure that betting on the misery of others soon became the misery of all. It is hardly surprising that derivatives are widely seen as crisis-laden : financial weapons of mass destruction, as Warren Buffet is often quoted as describing them.1

derivativesThe label and the reputation may be justified. But presented as explanations they make us jump too quickly to judgment and they miss much. The propensity to depict the global financial crisis in terms of distortion and speculation, with financial derivatives their principal instrument, is, we argue, not fruitful. Indeed, we conjecture that derivatives are not a pathological growth on capitalism – a distortion of some ‘true’ capitalism. They are integral to capitalism and the expression of its essential property relations and its inventiveness. The contradictions of derivatives are the contradictions of capitalism.

If, in explaining the financial crisis, we go searching for specific flaws within derivatives in terms of their mathematical limitations, their lack of transparency, or their ‘toxicity’, we are likely to build an analysis of catastrophic inevitability and a politics which is dominated by nostalgia, with the intent to recapture a seemingly safer and more financially innocent era before derivatives. If we rest with such interpretations, it is likely that we will miss the true potency of derivatives both in the recent financial crisis and in the future.

The growth of derivatives trades preceded the financial crisis, and was in aggregate, surprisingly unaffected  by the crisis. Their growth looks to be continuing in the aftermath of the crisis. Some argue that this is simple reloading for the next downturn, but Marxism must amount to more than ‘shorting the future’ (to use the financial term for predicting a downturn). We need to look at how derivatives are shaping capitalism’s present and possible future, and situate the current financial crisis within that momentum.

The objective of analysing the 2007-8 crisis is not simply to identify it with a propensity to destruction, to again reveal capitalism’s fragility (something which, as Gray notes, is not particular to the left).2 It is also to look for signs of capitalism’s adaptability to build new processes of capital accumulation. Rather than Marx’s theories of crisis, this paper is motivated by Marx’s ‘other’ innovation to identify the frontiers of capitalist development and the momentums which drive them. Accordingly, we seek to develop an analysis of how financial and other derivatives markets have become integral to contemporary capitalism: a role in which the recent financial crisis, while socially severe, may prove to be analytically more incidental.

Global Financial Crisis

Global Financial Crisis

In developing, this case, we first explore the nature and role of derivatives in a way that identifies how they have become integral to capital accumulation. Specifically, derivatives present new forms of accumulation in what has conventionally been seen simply as sites of ‘circulation’. We then turn to their evolution and the role they played in the global financial crisis. In explaining this role, we build the argument that the crisis can be interpreted as a result of the immaturity of derivative markets, rather than, as is popularly held, their over-development. Indeed, derivatives present a site of new potential for capital accumulation. We conclude that the crisis of 2007-08 may well come to be seen as a crisis within that momentum, rather than a crisis of that momentum. The difference is important not only analytically, but politically too, for it projects a different agenda onto regulatory reform, and a different politics for labour.


There is no simple, universal definition of derivatives, and those advanced in the past have rapidly become redundant as financial markets have evolved.3 A one-sentence dictionary definition will identify a derivative as an asset or security whose price depends on (or is derived from : hence the etymology of ‘derivative’) one or more underlying assets. It is a definition which points to the historical way of thinking about derivatives, but it is not very helpful contemporary definition, certainly if we are seeking to capture a wider social conception of their current role. In any case, it defines only the pricing structure of a derivative, not what a derivative is or does.

Derivatives are conventionally associated with financial products like interest rates and exchange rates, but they apply to many more aspects of society too. Some of these have already been developed in formal financial markets; others remain future possibilities. It is important to conceive of derivatives in a way that includes them all, and thereby create analytical access to these future possibilities.

Derivatives present the logic of deconstructing the social and economic world into ever more precisely defined attributes, each of which can be configured into a measurable (but sometimes contestable and often fragile) instrument to be priced and traded. This logic can be thought of in at least three dimensions :

1. segmentation : decomposing the social and economic world into more and more precisely-defined constituent ‘elements’ or ‘attributes’. This is an act of imagination.

2. quantification : configuring each element as a measurable entity with attributes of risk, such that each element is in principle comparable with other elements. This turns a contingency of the social and economic world into a recognizable unit of measure, which can be made commensurable with other, different elements or attributes. This is an act of production in the sense that a risk is being consciously configured and calculated.

3. commodification : trading each attribute of risk through securities, derivative or insurance markets. This is an act of circulation. The price at which derivatives circulate remain variable, contingent upon both the prices of underlying assets, and what is innocently termed ‘market sentiment’ or ‘predictions’.

To clarify these three aspects it will be useful to highlight some more general features of derivatives by way of a few leading questions.

(continued in part 2)

courtesy Socialist Register (vol 47 in 2011)

Series NavigationHome loans, Oil Price, Weather – Derivatives gamble on everything! >>

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