Capitalism – Titanic without life boats for the masses!

This entry is part 7 of 8 in the series Deriving Capital's Future

In the hollywood movie Matrix, Neo swallows the red pill and awakens, naked and weak, in a liquid-filled pod, finding himself one of countless people connected by cables to an elaborate electrical system. With the blue pill he would have remained oblivious of the reality. What does the red pill reveal in today’s world where people are connected by cables to an elaborate electronic system. Read on!


Derivative logic

Framed in terms of diversification and derivatives’ innate search for yield, there is a momentum in accumulation that exists beyond bubbles and lax regulation

First, the innovation of new sorts of financial products has to be understood in the context of the recognition that the world lacks any ‘objective’ financial anchor. With exchange rates and interest rates volatile, cash itself being necessarily denominated in a particular currency embodies significant risks. With interest rates on US Treasury bonds pushed to low levels, their rate of return was not compensating for the risk of a volatile dollar: a risk amplified by declining US macroeconomic indicators. With no safe (risk free) way in which to hold assets, the response of investors was to diversify, and, moreover, to go looking for assets whose prices would cycle differently from the stock market and other, more standard, products. Trading in derivatives and securities became the predictable response and, as we will consider shortly, investment in household income streams (securities based on mortages and other loan repayments) provided a new site for investment opportunities.

Second, the acquisition of derivatives as part of the strategy of diversification generated an innate search for yield. Whereas a bond (say a treasury bond) is an asset that generates a rate of return (an interest stream), derivatives are different. As an exposure to the performance of an asset, their price varies with the performance of the underlying asset, or that performance in relation to the performance of another asset/index. But they generate no rate of return themselves. Derivatives are not assets to which a rate of return attaches, but assets in which a competitively calculated rate of return is embedded. As contracts of capital commensuration, the search for yield (and its inherent calculus) is innate.

Framed in terms of diversification and derivatives’ innate search for yield, there is a momentum in accumulation that exists beyond bubbles and lax regulation. If diversification is driven, at least in part, by the absence of a safe store of value, then we must ask whether purchase of exotic derivative products should be cast as speculation, or as a manifestation of the absence of a stable unit of value? If the search for yield is innate within the structure of derivatives, is that search to be cast in a framework of ‘speculation’, with all its moral and regulatory implications, or as integral to the emergency system of calculation?


Derivatives Logic

the logic of derivatives while precipitating the global financial crisis, remains an on-going feature of, and site of innovation in, contemporary capitalism.

Concerns about risk management failure, lack of market transparency, speculation and bailing out the rich have brought forth a range of regulatory agendas inclined to tame speculation and excess, and return finance to a subordinate role in the economy. There are calls for the utilities functions of banking to be separated from the ‘gambling’ functions, taxes on financial transactions and on financial sector salaries.

None of these sorts of agendas goes inside the logic of derivatives and seeks to build a perspective based on reading the momentum within capital that, while precipitating the global financial crisis, remains an on-going feature of, and site of innovation in, contemporary capitalism. On the contrary, the recent recovery in derivative turnover is being widely interpreted as a rebuilding of speculative positions and creating the preconditions for the next crash.

The issue here is not an opposition to markets being made transparent or financial salaries being made modest, but that these agendas look to the flaws of finance and financial management, not to the transformations and contradictions, that financial innovation brings. They frame a response to the crisis in terms of creating an environment in which finance is secondary to ‘real’ production – indeed, they often even hark back to an idealized conception of capitalist economy before the rise of derivatives. But the dichotomy between the ‘real’ and the ‘financial’ is functionalist at best and contrived and ahistorical at worst: it is unsustainable analytically and unenforceable in regulation.

Our lives run by Finance algorithms

Our lives run by Finance algorithms

The derivative form of capital is not an aberration: it is changing capitalism in critical ways, for it gives fluidity to that which has always aspired to be flexible; where to be fixed is to be competitively vulnerable. But fluidity is the enemy of regulation. Swaps permit one form of asset to be made to appear as another form, so short-term finance can be made to appear long-term: so-called speculative transfers can be made to appear like long-term investments. As assets which give exposure to competitive performance but without ownership of the performers, derivatives change the concept of ownership in capitalism. Derivatives are breaking down the difference between equity and debt, and hence what it means to ‘own’. The class of capital appears as much less personal (the bloated capitalist) and even institutional (the large corporation) that Marxists would generally like to think. ‘Who does labour confront when in confronts capital?’ was always a difficult question to specify, but it has become more complex. Labour now confronts a competitive system of calculation, which we name as ‘capital’.

Moreover, labour itself is being incorporated into capital in new ways, not just via the workplace discipline that comes with intensified competitive calculation, but via the process of securitization. Some have sensed this new development, but have cast it in terms of growing household debt, with the appropriation of interest payments out of labour’s income being treated as a further ‘take’ on surplus value.48 But this is not the critical aspect of the development, and it is certainly not new: labour has paid interest (and rent, a similar appropriation from wages) for thousands of years. The critical securities, to facilitate asset diversification and the search for yield. The rapid growth of mortage, auto, credit card and student loans, as well as contracts on telephones, energy and health care, all provide the raw materials on which securities are built to meet the demands of global investors. Indeed, a Robert Shiller noted in 2003:

Far more important to the world’s economies than the stock markets are wage and salary incomes and other non-financial sources of livelihood such as the economic value of our homes and apartments. That is where the bulk of our wealth is found.49

Labour’s expenditures are now even more integral to capital’s profitability and its risk management strategies than when Keynes nominated effective demand as a critical category of policy. The conditions of working-class life – the need for multiple income households; the needs of old age, education, health, and others – are re-configured so as to privilege the payments that will form the basis of securities. The question – ‘What is the class of labour?’ – now increasingly needs to be framed in terms of systematic risk shifting that comes with financial innovation. The International Monetary Fund captured a key dimension of this process when it described households as the financial system’s ‘shock absorbers of last resort’.50

(continued in concluding part 8)

From analysis of derivatives markets  by Dick Bryan and Michael Refferty. originally published in Socialist Register vol 47 in 2011

Series Navigation<< How the 1% drove 99% to debt and destruction – US experienceHow to save the world from the capitalist madness! >>

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