HackingFinance@Goldsmiths

Living in today’s crisis we lack a framework through which to coherently understand its development. Nancy Fraser looks at manifestations of crisis within land, labour and money via “burgeoning markets in carbon emissions and biotechnology; in child-care, schooling and the care of the old; and in financial derivatives” respectively.

Unlike isolated critiques of late capitalism (political economy - money, ecological theory- land, feminism- labour via social reproduction), Fraser wants to maintain a thoroughgoing understanding of each of these ‘strands’ without neglecting the possibility that they share a common grammar’ and originate in overlapping structural causes. This project she deems ‘large scale social theorising’ in the style of Karl Polanyi. She takes as a point of departure Polanyi’s The Great Transformation, which speaks of the ways in which economically liberal advocates of ‘self regulating markets’ sought to subsume the foundational social factors of production “land, labour and money” under the same logic of ‘self regulation’, eventually leading to societal conflict between ‘protectionists’ and ‘free marketeers’ in recent Western history.

Fraser argues that this sort of critique is especially salient today.  Yet as a critical theorist, Fraser does not embrace Polanyi’s limiting focus on free market ideology but considers pernicious effects originating from within non-commodified parts of society (e.g. patriarchy) and invites us to consider further how protectionism itself and not solely the market, has entrenched oppressive institutions.

Fraser looks to Polanyi’s concept of “Fictitious Commodification”, which states that “the necessary conditions for commodity production themselves [cannot be made into] commodities”, because land, labour and money cannot be disembedded from the cultural systems that make them possible. Moreover, none of the three ‘fictitious commodities’ are produced for sale; land and labour are never ‘created’ and money has the special status of a ‘medium’ of ‘social convention’ like language. Thereby, crisis in unavoidable in a ‘market economy’ because man is reduced to labour and nature to raw materials.

Fraser believes that this interpretation is helpful but flawed in that it appeals to an pure, ahistorical and intrinsic status of ‘land, labour, and money’ which never existed in human history. Fraser reminds us that even before these factors were ‘marketised’ they were embedded in systems of social activity that were oppressive, providing examples of “feudalism, slavery, and patriarchy”, and noting that in fact marketisation in many cases alleviated oppressive hierarchies. A fact often underlined by market proponents (but also by Karl Marx). Thus, a reactionary conservatism that takes all existing social relations to be of positive normative value is not helpful in Fraser’s line of critical theorising. Instead of this interpretation she deems ‘ontological’, Fraser advocates a ‘structural’ interpretation in which states that society cannot be commodities ‘all the way down’ because it cannot commodify the conditions of a market’s existence. The reason why it cannot do so then hinges on sustainability, a necessary consequence of the very idea of conditionality.

Commodification then detriments the capacity for social reproduction, resource availability, and bonds of social welfare that make capital accumulation possible. Fraser sees commodification in the realm of social reproduction or labour, as responsible for a growing market in adoption, babies, sexual services, organs, and elderly services. Because social reproduction largely consists of care work that is done by women, when western women enter the workforce, their care labour is filled by women from poorer countries, while the gap left by them is filled by even poorer laborers. In the realm of nature, Fraser notes the “the privatization of water, the bioengineering of sterile seeds and the patenting of DNA” as sustainability-threatening market effects.

At the level of money, where Polanyi advocated the possibility of national protection and currency controls, Fraser notes that financialisation has transformed the financial landscape requiring a new identification of those subject to protection and risk. The ‘embedded liberalism’ of the postwar era allowed Western states to continue financing their welfare systems due to unequal terms of exchange between them and former colonial countries. Finally, an area in which Polanyi’s nation-state centric perspective doesn’t hold is that of today’s EMU without true political and fiscal integration in Europe.

Despite threats to the sustainability of social bonds on which the financial system is predicated, Fraser notes that we don’t see a bifurcation of struggle between those advocating ‘Free Markets’ and ‘protectionism’ but that “we also find alter-globalization movements, movements for global or transnational democracy and those who seek to transform finance from a profit-making enterprise into a public utility that can be used to guide investment, create jobs, promote ecologically sustainable development and support social reproduction, while also combating entrenched forms of domination.”

Financial Crisis Report: The South Sea Bubble

Fredrico Charles Louis Danielle Clarissa Gabrielle

Each group member has collated their research and we are putting our effort into piecing our findings together. We are working on sequencing each section and ensuring that there are no overlaps in the report. We will have the main body of the policy report completed this week so that we can start on our presentation. We hope to make the presentation interesting and full of content with extra poems, satirical images and writings from the time as well as novel, yet strategically important information from the time of the South Sea Bubble Crash of 1720.

Wigan begins by stating that the originate-distribute model at the heart of the crisis. His discussion is divided into a historical explanation of the advent of certain financial innovations, a technical discussion of derivatives markets/credit default swaps, and a commentary of reforms/proposals for reform:

Basel - promoted inflation of market liquidity and made ‘risk transfer’ determine ‘market power.

Credit derivatives markets - financial innovation broke limits of financial production. Trade of derivatives could “expand irrespective of the underlying bond supply”

Market oriented short term reforms vs long term reform recommendations

BCBS 1988 - (Basel I) implemented a ‘risk weighted flat capital reserve of 8% to reduce systemic risk.

Criticisms:

50M loan to 1 counterparty required same reserve capital as five 10M loans to 5 different counterparties.  (greater risk of default on one of the above”

“multilateral netting” was ignored..”the inability to offset individual risk exposures against asymmetrical exposures within a portfolio represented a substantial inefficiency”

“capital charge’ on assets was calculated notionally and according to historic cost.  (in derivatives contracts, risk and value of contract change throughout)

BCBS 1996 updated these regulations for the calculation of market risk.

The authors contend that this constituted a move to a new regulatory object; from ‘credit risk’ to volatility in market prices (market risk) - “privately constructed risk management”.

“The amendment effectively proposed that a large bank’s strength and productive power was a function of the capacity to navigate all future possible changes in all relevant market prices, rather than a simple function of the creditworthiness of their borrowers and static capital buffers” (112)

WIgan states that Basel I “spurred a headlong rush in the banking industry to securitisation”

E.g. Subprime mortgage and asset-backed securities. “Capacity” of lenders to sell slices of these

Basel II (BCBS 2004)- introduced 1999, marked from implementation in 2007.

Introduced three approaches to managing capital reserves:

(1) Standard

(2) Internal Ratings Based, and

(3) the Advanced Internal Ratings Based Approach.

Operating through “3 pillars” of:

(a) Minimum capital requirements

(b) supervisory review of capital adequacy, and

(c) public disclosure

‘The more advanced you are, the more your risk management is determined internally”.

The author claims that even before Basel II was formally implemented, private regulatory mechanisms were arising from financial firms (e.g. Riskmetrics, Creditmetrics, in the mid to late 1990s). Moreover, ratings agencies gained a new role as “guarantors of market integrity”

Credit derivative markets

2009 market for CDS (credit default swaps) grew to approx. USD 38-42 Trillion.

The author details how “in December 1997, JP Morgan launched its Broad Index Secured Trust Offering(BISTRO), the first synthetic Collateralised Loan Obligation (CLO).... the market for CDS became ‘liquid’ when the International Swaps and Derivatives Association (ISDA) issued standard documentation in 1999”. “Index trading reached $22 trillion at year-end 2006, for the first time out-stripping single name swaps”. (155, 116)

The author states that whereas cashflow CDOs pool ‘real’ debts, in synthetic CDOs (through Credit Default Swaps), the ‘originator’ sells “protection in a series of CDS, then places this exposure in a Special Purpose Vehicle.

Thereby, this market is not constrained by the supply or maturity of credit underlying it. The author argues that this has transformed the relationship between ‘borrowers’ and ‘lenders’, encouraging situations in which “banks would… originate more credit business than they would have done..transfer the credit risks to non-or less-regulated entities, particularly with regard to capital adequacy requirements.” (117)

The author then contends that short term reforms (liquidity injections, public insurance of collapsing assets, or cuts to targets, accepting broader range of assets as collateral etc) is a result of the Banks throughout the West accepting this “financial innovation” as equivalent to ‘money’. They further state that “proposals for reform” such as those of Ben Bernanke (such as recommending consolidated oversight of SPVs) misreads the problem as ‘the system proper functions correctly but it needs adjustments’ vs the authors’ own implicit beliefs that the problem is somehow more deeply rooted.

Questions:

The author states in his discussion of the Basel accords that the 1996 reform and move to ‘market risk’ incentivised individuals avoidance of risk while encouraging the augmentation of systemic risk. Is this suggesting a causal mechanism between government action and further developments? Had the government responded to ‘portfolio exposures’ differently, would this newly created incentive been avoided?

In contrast to Ben Bernanke’s ostensibly naive optimism about ‘the system’, the author implies that the encapsulated by the CDS situation is somehow more deeply rooted. Where are these intrinsic problems located?

And finally… what kinds of assets are taken into account when ‘broadening’ their acceptability as collateral?

I have so far established that the 2008 Financial Crisis was largely due to the creation of ever-riskier financial assets and negligent lending practices within the financial industry. However, when delving further into the nature and causes of the crisis it is quite apparent that the problem is more institutionally based. Whereby institutionalised unaccountability for leveraging risk within the financial industry tends to favour private interests at the expense of public interests. Which, above all, demonstrates a failure in government policy and inadequate regulation. However, due to international competition, financial regulation can also be seen as a jeopardising economic productivity, and therefore, national economic and political prospects. Further demonstrating that although the financial industry may favour private interests over public interests on a national level, the current status quo demands government inaction for fear of losing economic superiority on the world stage. Indeed, without a complete re-structuring of the global economy and the implementation of some form of international regulations that can be unanimously adopted to prevent issues over competition and the threat of multi-national financial institutions simply moving their headquarters to another location, there seemingly are no solutions to the problems we now face in the United States and Great Britain.

 I will now focus my efforts on completing the individual policy paper that will be primarily based upon, but not limited to, the findings presented in the 2011 Financial Crisis Inquiry Commission (FCIC), 2011 Bretton Woods Project (BWP) and 2013 Vickers Commission reports.

This article looks at two frameworks for the analysis of finance and its role in the world economy. These two frameworks are: (1) International Political Economy (2) Newer work on ‘Financialisation’

how are these differentiated with respect to the analysis of ‘finance’?

In short:

IPE approaches view finance as constituting or participating in some changes within the global political economy that are deemed significant to power within the system. These changes are termed ‘epochal’.

The Financialisation framework (FF), provides an account of finance’s embeddedness in social life through qualitative and quantitative inquiries.

Both ostensibly reject positivism and rationalism in method but have different objects of study.

Strengths and Weaknesses of the Two Approaches

IPE subsumes new financial developments under old categories of analysis (presumably used in political economy. Financialization posits that these changes are unique and are primarily driven by the “scale and scope of current financial accumulation”.

IPE sees the financial economy as increasingly separate and separating (dis-embedded or decoupled) from the “real economy” whereas FF sees finance as more socially embedded than before the Bretton Woods collapse (and thereby it is implied that it does not recognize the salience of the above distinction between the ‘real’ and ‘financial’ economy, as it sees all economic activity as socially embedded.)

However, the “Financialisation” literature looks overwhelming to the US and UK cases in isolation from the global political economy, and in this regard would benefit from the wider considerations of the IPE approach.

Story of IPE

IPE views finance through an ‘epochal framework’ that focuses largely on the United States and its status in the global economy and thereby political system (“Money is power”).

Sees the Bretton Woods system as attempting to regulate global financial flows through the adoption of capital controls, the gold-dollar standard and a fixed exchange rate system for currencies.

As the story goes, it was impossible to maintain the dollar convertibility into gold while still allowing capital mobility and autonomy for national monetary policy due to the appearance of euro-markets in dollars, largely facilitated by action on the part of the UK and US governments. (This is presumably, the lifting of interest rate caps)

IPE then views the “resurgence of the American economy, with finance-led expansion” after the BWS collapse within such an epochal narrative. The articles states that it is not analytically salient to import with this analysis, BWS categories such as “national currency, capital flows, balance-of-payments and FDI” which are presumably rendered partially or wholly irrelevant in the analysis of contemporary economic (financial) phenomena by new innovations in financial practice.

Financialisation 

The FF is said to keep up better with these innovations, by conceptualizing finance as a relationship between actors and markets that is constantly changing. Mid 90s-00s, Information Technology is seen as fundamental to the dot com boom and crash.  2001-2007, characterized by “loose monetary policy”, low interest rates, excess liquidity, and expanding fiscal (military) spending meant that high-risk speculation would pay off, culminating in the subprime mortgage crisis.

Approaches in the FF literature often look at the conditions that allowed the advent of such a coupon pool capitalism (stock value focus for corporations with the advent of larger financial activity profits for previously productively oriented types of firms in the Fordist era). This sort of approach focuses on the causal mechanisms underlying institutional arrangements.

The picture of the financial economy as ‘dis-embedded’ from the real economy (as presented by IPE) encourages analysis of finance that ignores everyday social practice. The FF, unlike the IPE approaches, focuses on the discursive aspects of ‘shareholder value’ talk and the manner in which households are ‘intimately engaged in new processes of financial market expansion” (for example, the historical transfer of capital in bank savings to pension and mutual fund savings throughout the financial transformation of the late 20th century). The FF is said to focus almost solely on these US and UK financial cultures in its sociological analysis, and it is recommended that it examine the effects that these cultures have on the global system.

The question I am left with is:

Does the IPE, FF, or an amalgamate approach really offer a different methodology?

Both approaches still make truth functional, causal claims (though these claims may be socially or historically contingent). If they didn’t, they would not be informative.

Both approaches make social-explanatory claims using system-level characteristics and do so at a high level of generality (evidenced by the common occurrence of words with the the suffix ‘-ation’ and ‘-ise/ize’).

This is often the case with disciplines that examine higher level social entities that cannot be uncontentiously reduced to lower level entities (or where their higher level properties are realizable via multiple variants of individual level behaviour, such as in case of international relations).  

Yet, when these approaches use individual level actions/intentions as evidence (trading ‘euphoria’ in dotcom bubbles), they cannot isolate themselves from claims made in other disciplines, including ‘positivist’ ones (e.g. psychology). However they can, and rightly do, make explicit the normative commitments of their theoretical frameworks rather than shrouding them in pseudo-technical language (as much economic literature originating in the United States seems to do).

 Fredrico Charles Louis Danielle Clarissa Gabrielle

Captain: Fedrico Pieracci:

What I have mostly focused on exploring and writing about so far concerns the extent to which the cause of the Crisis was “Rational” or “Irrational”. By this I mean the extent to which the meteoric rise in the price of the company’s stock was the result of deliberate action or, instead, the entry into the market of a number of inexperienced speculators whom would otherwise not have involved themselves with the Markets. Larry Neal explains, by using statistical analyses, that the crisis was both a Rational AND an Irrational Bubble during different periods of its course: In other words, the rise in the price of the company’s stock – the inflation of the Bubble –was caused both by the deliberate will of its insiders and by the money pouring into the market by investors, especially foreigners (mostly Dutch). What I haven’t yet established, and am currently researching is the extent to which the bursting of the Bubble was likewise spontaneous and unforeseen or instead something that was expected to happen in advance, and if so, to what extent? Was the share price generally expected to plummet by contemporary investors – meaning the rational and knowledgeable ones –, by the company’s directors, and by the British state that counted on the company’s rising share value to help refinance itself from the debts incurred during the War of the Spanish Succession? Or was it instead expected to stabilize around an approximate value? These questions, of course, raise a whole series of further questions that need exploring, which is what I intend to refine and focus on next.  

Port Master: Charles Lambert:

Currently I am looking at creating links between the way in which the early financial markets of the 18th century operated and the some of the financial mechanisms that are used today, especially looking at the securitisation of debt in order to generate new lines of capital. As well I am looking at how the South Sea Bubble can be seen as a microcosm of the financial markets of the time. I am doing this by investigating patterns of behaviour by investors, and by studying the growth of secondary markets and the infrastructure that grew up around them. A lot of help in this comes from the almost forensic recreation of trading accounts by Anne L. Murphy. This points to a high level of sophistication within the secondary markets, as well as a greater degree of popular participation than some other authors give credit to.    

To examine how people approached this at the time I am looking at Berkeley ' An Essay towards Preventing the Ruin of Great Britain' one of his earliest pieces of economic writing. He examines it as a both a major economic event, as the first market crash. But also as a major turning point in British politics. Through this, and looking at some other contemporary works, I hope to examine how this event was profound in changing the economic and social relationship of Britain and its colonies at the start of the 18th century. The upheaval that this generated rapidly changed the relationship between the realms of economics, finance and politics of the time.  

Skipper: Gabrielle Blakemore:

My focus so far for this project has been gathering the background information that surrounds the South Sea Bubble. In doing this i have found the difficulties of documenting the crash as mentioned by John Carswell that England had a 11 day gap in their calendar to the rest of the continent making the findings of precise dates difficult as it is not always clear if the calendar had been modified. This also shows the difficulties in daily business activites that contributed to the crash. I have also been investigating how the speculative nature of the South Sea compmay enbaled it to appear to be doing well when it was not the companies trading activities that were actually creating to wealth. It has been interesting to see how so many wealthy aristocrats and politicians even the King had an interest / share in the company and that the crash actually led to the creation of the fist Prime-minister.

Scallywag: Clarissa Marston 

Clarissa has been looking into the role of the supernatural in the contemporaries understanding and explanation of the South Sea Bubble. As the crash pre-dates the likes of Ricardo, Smith and Malthus’ sophisticated economic analysis, Clarissa’s research is focused on how contemporaries explained the events at a time when witchcraft was still a punishable offence. Research into the evidence from poems, pamphlets and plays suggest the Devil was pivotal in how the population dealt with the incident. This research helps us understand the context of the bubble better, in the populations reaction, change in legislation and scapegoating.

Stowaway: Louis Davis:   

changes to legislation and law as the result of the south sea bubble  

A key piece of legalisation that was passed as a result of the south sea bubble was the banning of the sale of stock certificates this was in order to attempt to control financial speculation.

The bubble act was passed in parliament just before the collapse of  the south sea share price. This act prohibited the use of stock and shares and tightly controlled the financial instruments that companies without a royal charter could use to raise capital. This was an attempted to prevent fraudulent trading and to provide confidence to the financial system. The act was successful with regards to smaller financial bubbles in the early 1720s however it made the south sea bubble worse. This was because parliament provided the south sea company with a royal charter this was because of pressure from pro south sea members of the uk parliament. The issuing a a charter increased confidence in the south sea company and swept away the very little scrutiny that was already in place before prices exploded before the popping of the south sea bubble.  

When the south sea bubble popped there was a general tightening up there was a general tightening of anti corruption laws and a fight against graft. With many prominent politicians and business people implicated in fraudulent claims about the south sea company many high level politicians went to prison.  

It is possible to argue that the lack of extensive regulation and the lack of structural change in the financial system after the south sea bubble popped was due to a lack of understanding of markets, a emphasis on personal guilt and a belief that supernatural forces may have been effecting market outcomes.  

Effect of the south sea bubble on Adam smiths view of the company  

“They had an immense capital dividend among an immense number of proprietors. It was naturally to be expected, therefore, that folly, negligence, and profusion should prevail in the whole management of their affairs.” this quote by Adam smith shows how Adam smith had an early understanding of the moral hazard caused by business structures that had diluted ownership and how greed and personal/psychological factors could drive markets in a destructive direction. It is possible that Adam smiths general view of markets being good but corporation and monopolies being bad comes from Adam Smiths experience with the south sea company.  

This general context and overview will help to inform further research.  

Quartermaster: Danielle Jones:

Evandro, Farhan, Oskar, and Sean

We have focused our research so far on ECB policy in relation to private banks and heavily indebted countries. The European Sovereign Debt crisis of 2009 was the result of the global financial crisis exacerbating existing structural imbalances in the European Economic and Monetary Union (EMU). Both Greece and Ireland benefitted from cheap credit based growth, in Ireland it was used to fund an artificial real estate boom, and in Greece to maintain an unsustainable public sector overcome by clientalism and patronage. In both cases debt became catastrophically high after the financial crisis and prompted the necessary and urgent bail-out of domestic banks. The ECB assisted in providing liquidity to these banks by taking on long-term securities in exchange for more short-term assets, facilitating de-leveraging. The primary focus of our policy problem and policy response will be to do with this process; by looking at how banks were allowed to become so over-leveraged, and the limits to the ECB’s policy response to the former. We agree that the ECB had no choice but to bail out the banks, which is why our focus will be on how they could have avoided this problem in the first place, but also what they failed to do since, in relation to the periphery countries, and the tax payers in these countries, who are shouldering the burden of the subsequent restructuring process.

In the long-term reform section we plan to look more closely at the issues which arise around a common interest rate and varying degrees of competitiveness in the eurozone economies. While, in the first section of the report, we will discuss debt levels, this will specifically relate to how bailing out the banks -and not the heavily indebted countries, or at least not initially- made this situation worse. In the long term reform section we will look at how these issues relate to the Maastricht treaty and the Stability and Growth Pacts that shaped the conditions under which the crisis occurred. In this sense the ECB could have a larger role to play in tackling problems faced by the less competitive countries in the eurozone, operating under a common interest rate. We will also look at the extent to which German influence in ECB policy may be disadvantageous to other eurozone economies, and whether this is something that can or will change in the longer-term.

Scott’s principal aim in this highly enjoyable chapter is to demystify the most important aspect of the culture of modern finance: the figures of the financiers themselves. Far too many people are keen discuss and pass judgement on the infamous “Banksters”, yet very few of those doing so appear to really know, let alone understand, the reality of the people whom they are discussing. In other words, Scott attempts to lay the Emperor bare, and encourages his readers to do so too; by trying to spend time around with – and thus get to know – the interesting, eclectic set of figures that make up the real world of finance.

Largely thanks to Scott’s witty writing and unorthodox approach and viewpoints, the chapter is a lot of fun to read, yet it has a rather dark and quite disturbing undercurrent. To put it simply, the mere fact that part of Scott’s mission is to humanize those in the financial community – by highlighting that they are far more nuanced people than the caricatures of greed that have captured much of the public imagination – is something that further illustrates just how far many “average people” feel themselves to exist from the world finance, although they simultaneously remain very conscious that this world will most likely have profound and real effects on their lives. Laymen aren’t just ignorant about the trappings of markets and the definitions of the myriad of financial instruments that exist, but they have also come to often view the people of the financial world themselves as alien beings at best or as soulless film-like villains at worst. This, to my mind anyway, is something that is very troubling, because it shows the lack of an element that is extremely important to the running of a healthy Free-Market Economy: Trust.

As Ann Pettifor explains in her book “Just Money”, the very worth of modern, post-Gold Standard fiat Money, is ultimately solely determined by popular Trust in its inherent value, because it is not a finite, fungible commodity: the modern money supply is essentially infinite. Consequentially, without Trust in financial institutions, and the people who run them, the whole system is bound to contain an inherent undercurrent of instability and volatility, because finance and the general public will come to see each-other not as customers, but as potential adversaries. The public will not trust in financial institutions to make sound financial choices on their behalf, and thus is likely to either make unsound ones on its own, or, worse yet, rely on unofficial “financiers” such as potentially-ruthless loan sharks, or, worse still, completely insulate itself from money markets, something that will leave bright, imaginative, innovative people without access to funding for ambitious enterprises. Likewise, Finance will attempt to insulate itself from popular accountability and from what some have dubbed as “The Real Economy”, and operate solely as a consequence of its own processes, and thus create, whether wilfully or not, a whole series of troubles for all other sectors.

It could be argued that what I have described above is already, to a large degree, the contemporary reality. If so, perhaps, the first step to finding a solution is for the average man or woman to understand not just HOW it is that finance operates, but also WHY it operates as it does. A good first step in that process certainly does entail getting to know the people that are running it.

Monday, 22nd of February 2016

Elisabeth, Lauren, Caitlin, Antonio, Alexey

Antonio has written a brief summary and typology of the immediate policy responses to the crisis up to September of 2008.. This will be elaborated and filled in throughout the following week, we will work up to the Dodd-Frank Bill to create a linkage to our own normative ‘long term recommendation’ section.

Alexey made a document regarding relationship between Commercial Banking and debt investment in the form of asset backed securities (specifically mortgage backed) and their mobilization in Special Purpose Vehicles (--->CDOs), clarifying fundamental concepts. Antonio and Alexey have found that the best way to address policy responses is according to the (approximate) formula: “X did Y in order to Z” ; where X= government entity, Y is a policy recommendation or response, and Z is the alleviation of a problem or the attainment of a particular outcome. This is usually the way inquiry reports have presented the complicated regulatory scenario.

Elisabeth, Caitlin, and Lauren wrote a narrative form ‘Background’ and ‘Diagnosis’ section because they found it necessary to understand the broader socio-economic context of the crash. Moving forward, the diagnosis will isolate the financial agents/instruments that any  given policy 'Y' was intended to address. We will attempt to draw a linkage all the way from concepts such as 'assets/liabilities' to commercial/investment banks, to mortgage backed securities to CDOs to injections of liquidity by the Federal reserve. This is how we hope to draw a causal line from a 'sub-prime' mortgage to systemic risk and credit collapse.

Ha-Joon Chang spells out a logical and in some sense indisputable call for significantly more regulation of the financial system. There are a couple of things I would like to go through here. The first is Chang’s explanation of deregulation and the 2008 crash, then some of the cultural implications of financialisation in the shareholder value approach, and finally Chang’s justification for regulation.

Chang looks at the emergence of structured assets and derivatives, and their proliferation in the 1980s in the US and the 1990s-2000s in Europe, alongside financial deregulation during these periods. The growth of these markets is astounding. He states that in Europe where there was in the 1990s almost no proliferation of asset-backed securities and collateralised debt obligations, by 2010 the market for these types of products was estimated at $2.7 trillion, while in the US it was nearer $10 trillion. The growth of derivatives is even more impressive, having been insignificant in the 1980s, the value of these contracts globally is close to $27 trillion, with the estimated value of the ‘bets’ involved in the region of $648 million. Like Scott, Chang stresses the complexity of these products, and claims that the scale of the 2008 crisis was a direct result of bank managers, financial regulators and experts inability to understand what they were dealing with. The mathematical models developed to keep track of this complexity failed too in this regard, and he states; “According to these models, the chances of what happened in 2008 actually happening were equivalent to winning the lottery twenty-one or twenty-two times in a row.” It is this complexity which Chang concludes needs to be regulated if we are to avoid the type of global crises we have experienced alongside deregulation.

The second interesting aspect of this article is the extent to which financialisation has affected the way firms operate. In this regard changes in the way that these institutions are financed, through public share offerings, brings with its short term shareholders solely interested in profit maximisation, which managers must oblige. Along with the threat of hostile takeover, this promotes a short-term, shareholder value focus, over the longer term interests of stakeholders. On top of this, when a firm comes into difficulty, whether because of unsustainable practices, a lack of investment in the right areas, or irresponsible behaviour, the managers and shareholders responsible are usually long gone. In this sense then as the problem of complexity in derivative trading boils down to an issue of information, here financialisation creates an incentive problem. Regulation would seemingly be the only way to tackle these problems, by providing better information in markets for structured assets and derivatives, by restricting financial actors abilities to create infinitely complex products, and by providing the right incentives to promote more sustainable financing and management practices.

Sources of “short term liquidity” for businesses, banks, and governments who need capital ahead of some sort of financial activity. There are money markets for each currency, because there are different interest rates for each currency set by a central bank. The instrument value of these markets has risen throughout the 90s and early 00s. In the early 1980s money was held in commercial banks predominantly, where even investments had long maturities, mostly held as ‘Time Deposits’ (see typology below). Deposits were thereby the main method a bank's’ capital acquisition and it meant that money was of low ‘cost’ to a bank. Consequently, commercial banks were the main credit source for businesses and consumers alike. In the 1980s, deregulations, such as the Monetary Control Act of 1980 in the United States, allowed “market forces rather than regulators to determine interest rates”.

Trading on a money market means trading in “debt instruments maturing in one year or less” (38). In this sense money markets facilitate DEBT INVESTMENT, in that (like bond markets), they are selling debt claims rather than equity (ownership) claims. But whereas bond money is usually used for projects that have long term effects (business innovation, government projects, etc) and this is taken into account when calculating interest, money markets are used for satisfying financial obligations. The spread between rate funds pay investors and rate at which they lend is smaller than banks because they don’t have to maintain physical offices or offer small individual accounts.

METHODS OF INVESTMENT IN MONEY MARKETS:

Individual Sweep Accounts-

Where individual account asset REMAINDERS (those left after investment by stockbrokers in mutual funds, etc) are ‘swept’ into short term money markets in order to earn the highest possible return.

Institutional Investors-

All banks and pension funds hold a small percentage of their assets in money markets in order to comply with short notice client demands for liquidity without being penalised for compromising the long-maturity securities.

MONEY MARKET INVESTMENT INSTRUMENTS:

Commercial Paper-

-Debt obligation of a commercial firm.

-Overwhelmingly used by financial firms.

-Euro denominated commercial paper has increased in market share after 1992: (no currency risk).

-Companies often use new issuance to repay principal on old, thereby getting long term loans at short term rates.  (Risky due to potential downgrading of credit rating ---> lack of cash source.)

Bankers’ Acceptances

Non-financial company issues a ‘promissory note’ in exchange for a loan from a bank. The bank resells the loan at lower price and guarantees repayment. No interest collected, just redeemed at full face value. Rests on bank’s good credit standing.

T-Bills

Treasury bills issued by national govts with a <1yr maturity; hence- usually safest. Popular with emerging markets who are not trusted with longer maturity debt.

Government Agency Paper

As above but issued by govt agency (Tennessee Valley Authority, an electric utility, and Sallie Mae)

Interbank

Many short-term securities issued between internationally located banks. Interest rates tied to LIBOR or EURIBOR

International Agency Paper

Issued by World Bank, etc.

Time Deposits

Have penalty for early withdrawal.

Repos or repurchase agreements, are agreements in which the owner of a security (such as a bank) agrees to sell it to an investor and buy it back within a short period (usually maturity of few days) for a higher price. (or the reverse)

-In money markets - this is usually done with government securities, overnight.

How is this different from options?

Futures contracts can also be used to guarantee that the short term security is sold in a particular (above/below) relation to the underlying asset?

The relationship between these instruments and agents is contingent upon ratings, interest rates, and spreads. “One important set of spreads is that between uncollateralised loans and repos. As repos are fully collateralised, there is almost no risk that repayment will be disrupted. Uncollateralised loans among banks, however, are at risk if a bank should fail. The spread between these two types of lending thus reflects perceived creditworthiness.”

One interesting thing to note would be the extent to which insurance plays a role. As most short term securities belong to large firms and governments, they did not suffer the same crunch during the 2008 crisis as highly rated high-risk (but uncollateralized, insured by companies like AIG) shares in SPVs held by pension funds. And yet, if these instruments are used by financial firms to raise large profits on a daily basis, to what extent does a lack of collateral matter?

Focusing on the changing nature of the liquidity and solvency problems inherent in Middle America, this article attempts to approach the 2008 global financial crash from a new and interesting angle. Arguing that financialaisation, rather than being a cornucopia for the American middle class, purposeful sought to trap them in revolving door of debt in order to ensure its own liquidity and growth. By taking the middle ground between the arguments of Political economists, such as Robert Boyer. And Cultural Economists, such as Paul Langley, the author presents a well rounded argument that presents an intriguing interpretation of the causes of the crash.

The theory is presented though a series of key arguments. Firstly that the asset backed securitisation  enabled the rapid growth of easy consumer credit that fuelled a credit boom. That this boom became reliant on the continual indebtedness of the American Middle class to fund it. Secondly that rising unsecured debt exacerbated levels of inequality within the system fuelled by an increasing reliance on unsecured debt to fund an assumed 'middle class lifestyle'. As well, this increasing reliance on unsecured debt created new frontiers of financial insecurity within the American Middle class and has lead to their closer integration into capital markets.

Johnna Montgomerie compellingly traces the way in which assset-backed-securities (ABS) were used to recapitalise loans, allowing new loans to be issued from the same financial stock. By focusing on them as a process, rather than isolated financial product, she argues that this trend became reliant on the continued indebtedness of consumers. This process created a large amount of capital that could be relent and fed back into the system, essentially feeding  off itself. The one of the causes of this is the increasing dependency of financial capitalism on stable sources of income on which to construct new asset streams. It is this reliance, and its effects on the loan market that lead to the rapid expansion of private consumer credit. Dismissing arguments that this process of securitisation is to mitigate risk Montgomerie argues that this need to re-capitalise is fundamental to modern financial capital and has made it reliant on substantial numbers of individuals with unpaid debts.

Adrienne Roberts

In this article Adrienne Roberts discusses the void in economic literature on housing finance and addresses how the deepening of mortgage debt has become part of a greater effort to individualise and reprivatize relations of social reproduction, for present and future generations in a neoliberal US. Roberts explains that Americans have fallen into deeper and deeper debt, with the main contributor being debt secured by residential real estate. She highlights that the highest increase in borrowing, in the way of subprime loans, has occurred amongst the poor and working class.

The US state has supported the expansion of mortgage debt through social and fiscal policy reforms that have limited the availability and attractiveness of social housing, while at the same time offering highly regressive fiscal subsidies for private homeownership. Roberts follows that instead of equalising the playing field and democratising credit, in the US mortgage loans have been used merely as a safety net of last resort for the poorest borrowers. Instead, wealth is redistributed upwards, from single women to men, from poor to rich and from racial minorities to white men and their families.

Roberts uses the feminist argument in filling the literature gap in international political economy literature on housing finance. The fundamental feminist argument follows that the reproduction of capitalism depends on more than the activities associated with production and exchange of commodities. On social reproduction, the argument follows that, many of the costs associated with social reproduction have been shifted from the state or their employer, onto the family or the private sectors. Thus, this has negative implications for women who carry out the majority of social reproductive labour. On debt and the privatisation of social reproduction; Roberts details how debt has been used as a private, market- based form of social policy. She credits the upward redistribution of wealth, with the privatisation of social housing, the subsidisation of homeownership- crucially through the MID tax credit, and most importantly: the huge increase in subprime lending, which has been conditioned by these processes. The increasing of mortgage debt has caused an offloading of the social reproduction costs onto those individuals and families who have used it to finance their consumption, in paying for education and health care costs.

Roberts assesses the role of class, gender and race in determining an individual’s access to credit. She reports on how direct forms of racism and sexism play a part in conditioning a person’s relation to financial markets. Roberts states that the historical exclusion of racialized minorities, the working poor and women has now been replaced by integration on arbitrary and vulturous terms. Roberts accredits MID, the largest federal subsidy for owner occupied homes, as a social policy which reinforces this discrimination, which extends existing patterns of wealth inequality to future generations, through its regressive taxation.

In her concluding reflections, Roberts stresses the importance of developing alternative approaches to the crisis of social reproduction. One way, offered by feminists, involves creating gender budget initiatives, which would analyse the differential impacts of the allocation of state funds on women and men. This information could be used to calculate equitable budgets and to facilitate the ability of equity seeking groups to make claims on public resources.

Introduction

Adrienne Roberts argues that accumulation within financial markets was based on the continual divisions and inequalities between social classes. In the introduction Roberts highlights that Americans were falling deeper and deeper into debt. She argues that the poor and working classes were the largest group at fault pinpointing that sub-prime lending was the greatest reason for this.

Market Citizenship and Social Reproduction

Roberts defines social reproduction stating that it can be understood to involve three processes. These are biological reproduction of the species; the reproduction of the labour force (education, training etc.); and the reproduction and provisioning of caring needs that may be either privatised or socialised. The presence of social reproduction allows one to understand capitalism to involve a wide range of social relations that although are highly important for accumulation they are not natural – any consideration that they are is false. Market citizenship is the foundation upon which the promotion of home-ownership as a right for all have been built. This right has been extended to minorities, women and working classes. Bill Clinton wanted the right extended to the lower classes. Despite the attempt to make society classless and genderless, the labour force is still divided by sex and is still riddled with the gender-based pay gaps.

Debt and the Reprivatisation of Social Reproduction

Debt finances social reproduction. Froud demonstrates this in his study of car loans and credit card debt which exemplifies the link between debt and social reproduction. Froud argues that within an unequal class-based society credit extension and asset ownership is an unfair form of social provisioning because lower classes will manage the inherent accumulation of debt but not necessarily assets. This argument can be placed within the framework of women and racialised minorities. Leonard Seabrooke argues that housing finance reflects a ‘welfare trade-off’ (Roberts 2012, 8). One can either opt to rent their homes whilst receiving better welfare services, or, opt for lower taxes which would enable citizens to accumulate and store capital in their homes. This decision is a result of social wants based upon context, social conventions and norms at the time, as opposed irrational behaviour. In this respect however there is little engagement with the gender biases of social provisioning.

MID as Social Policy

The MID is the Mortgage Interest Deduction tax benefit which is a highly regressive form of taxation, but is supported by a large percentage of the population. The MID is a federal subsidy for owner-occupied homes; housing tax subsidies became part of ‘the American dream and an untouchable aspect of American fiscal policy’ (Roberts 2012, 11) under the Reagan administration in the 1980s. This tax benefit is aimed at the wealthiest members of society accentuating the presence of social inequality in the United States. There is little evidence that the MID will be altered in the future.

The Role of Class, Gender and Race in Determining Access to Credit

As well as fiscal and monetary policies highlighting and reproducing inequalities so to can sexism and racism be utilised to influence one’s relation to the financial markets. Recent studies on sub-prime lending are perfect examples of these discriminations. In the past women, racialised minorities and the working poor have had restricted access to credit, but not have integration on inequitable and predatory terms. Eliminating discrimination in credit markets could be highly progressive. Single women were finding it increasingly harder than single men to access credit. Despite the Equal Credit Opportunity Act of 1974 subprime lending demonstrates the continuing presence of discrimination n the credit markets.

Concluding Reflections

Roberts highlights the feminist solution of the creation of gender budget initiatives which would examine the differing impacts of the allocation of government funds boys, girls, men and women. Consequently, the results acquired from such analysis can then be utilised to create equitable budgets and facilitate those seeking equity to be able to make claims on public resources.  She further accentuates that the current recession is fuelling social inequalities as a consequence of cuts on social spending for the poor being unaccompanied by any financial regulations for the wealthy.

2020 will see China as the largest economy in the World. Will China’s monetary unit become the leading international and reserve currency? In this piece Barry Eichengreen widely explores China’s policymakers’ moves towards the Internationalization of the Chinese currency of the renminbi.  What I have found particularly interesting and useful in this article is, firstly, the explanation of the international-currency status and reserve-currency status and, secondly, the deep analysis of China’s pathways in encouraging the international use of the renminbi.

 The international-currency status can be understood in a multi-dimensional way: from the simple monetary unit that is used in cross-border transactions to its role as a vehicle for international investment. However, the crucial aspect of the international-currency status is the reserve-currency status. Indeed, central banks hold reserves of currencies that are being used in trade between importer and exporters and in international financial transactions between investors.

 Nowadays, the dollar stays as the dominant international and reserve currency. However, China is trying to challenge it by encouraging the use of renminbi on an international level. The internationalization of the renminbi would not only mean cutting the costs in cross-border transactions, but it would also be fundamental to develop new financial markets and to move Chinese economy away from export-oriented manufacturing.

 The internationalization of renminbi has been planned in three major stages. The first stage consists in involving renminbi in cross-border trade and in start using the currency for investment overseas. The second stage will expand the lending of renminbi. In conclusion, the third stage will be based on the removal of many restrictions on investment in Chinese stocks and Bonds by foreigners. I found this stage particularly interesting as taught me something I ignored. Indeed, in so-doing China would achieve what is defined as the “basic capital account convertibility” a status in which restrictions on trade-related and investment related transactions are completely abolished.

 Another important element to highlight from the article is that China has already begun these processes on many fronts making real and consistent the threat to the hegemony of the USD. However, there is the need to consider many limitations for the expansion of the renminbi. I have found two of the many indicated in the article quite enlightening. Firstly, the fact the China has one of the largest economy does not mean that its financial markets are equally large and developed. Indeed, Bond market capitalization in China is only a tenth that of the United States. Secondly, another fundamental element is China’s political system; the unstable political situation in fact would make feel foreigners uncomfortable in holding financial instruments in a country in which their investments could become far too risky. Leading international currencies have always been the ones of countries in which a democratic system is well-rooted where creditors are represented and where stable international alliance could be created. Consequently, China would have to move towards a “democratization” of in order to achieve its monetary purposes.

(POSTED ON WRONG BLOG EARLIER)

Derivatives are essentially bets on volatility in the price of a continuously traded something.

FORWARDS- are contracts that set the price for something to be delivered in the future

OPTIONS- “contracts that allow, but do not require, one or both parties to obtain certain benefits under certain conditions. Option’s contract value- takes into account the possibility that this option will be exercised.” - the price of every option is based on some UNDERLYING INSTRUMENT whose price is external to the market on which the option is being sold.

OPTIONS are EXCHANGE traded rather than traded OTC- (referring to dealer networks of ‘broker-dealers’ who buy and sell directly to one another)

EXCHANGES- are no longer physical places since the advent of electronic , bid and offer prices on a security or derivative. Have LISTING REQUIREMENTS: e.g. “one of the listing requirements in the NYSE for public companies is that the company must have at least 1.1 million publicly-traded shares outstanding that are worth at least $100 million.”

There are two types of options in terms of ‘buyer’-’seller’-’underlying instrument’ configurations:

PUT OPTION- the BUYER pays the WRITER (seller) of the option a PREMIUM (upfront cost) which entitles the BUYER to SELL the UNDERLYING INSTRUMENT at STRIKE PRICE X for Y amount of time.

BUYER hopes that the price of the UNDERLYING instrument falls to X-N within Y, thereby the BUYER can sell it at X and make N profit over market price.

CALL OPTION- the BUYER pays the WRITER a PREMIUM which entitles the BUYER to BUY the UNDERLYING INSTRUMENT at STRIKE PRICE X for Y amount of time.

BUYER hopes the price of UNDERLYING will rise to X+N within Y, thereby BUYER can buy it at X and save N.

Option trading is inextricably tied on EXCHANGES to the UNDERLYING INSTRUMENT being traded. This is also what determines the kind of option that it is:

EQUITY options: give the right to buy or sell (usually 100) shares in a company. It has nothing to do with the actual equity shares until the option is exercised. Owner of company shares might want to purchase a PUT option to hedge against losses if the share price falls.

INDEX options: are tied to the price of an index (like the S&P 500). The option is valued at some multiple of the index (x250). The buyer and seller then make a profit or loss on the difference between the STRIKE and MARKET price. Obviously one cannot OWN an index so the transaction is settled in cash between the BUYER and WRITER.

INTEREST RATE options:

BOND options- set to price of government bond. Economist guide states this moves ‘inversely’ to interest rate

YIELD options- are based on the interest rate itself. Again, because profit is made only from the difference between STRIKE and MARKET price, the interest rate is subtracted from 100 and that is the NOMINAL price. Yet, proportionally this rate does decline and the interest rate rises.

COMMODITY options- usually based on FUTURES market prices because most commodities are not continuously traded while the futures are. In the end either the commodity or cash is exchanged.

CURRENCY options- nominal value determined by amount of one currency needed to purchase the other. Not very popular and usually traded OTC.

NEW OPTIONS- LEAPS (long term equity participation securities...long term options) and FLEX (offers flexibility with expiration date and strike price)

Zero sum game- buyers gain is writer's loss.

AMERICAN style options can be exercised whenever at any price, EUROPEAN style options can only be exercised near or at the date of expiry, and CAPPED options have a cap with relation to the STRIKE price.

Besides speculation, as in the example of the EQUITY shareholder above, options can hedge against losses - protect against falls and capped Income. What’s more, it allows the Buyer to protect themselves against certain kinds of risk- for example in the trade if COMMODITIES, it allows them to exercise the option of purchase, without actually having to worry about keeping the large amount of physical commodity.

What’s important to take away is that options exchanges have transformed due to technological innovations; have been forced to merge (e.g. Euronext exchange houses

UK, Portugal, Netherlands, Belgium, and France). Because of the pliability of the terms associated with the OTC derivatives market (unlike the regulations for exchanges), they have largely taken over as the constituent primary in the trade. See post on derivatives.