Marxists on the capitalist crisis 6. Dick Bryan: The inventiveness of capital

Dick Bryan is the co-author of a recent book, Capitalism With Derivatives, and of several articles, in which he argues that the recent rise of financial derivatives marks a fundamental new stage in capitalist development, and especially in the development of what functions as "money" in capitalism. He is a professor at the University of Sydney. He spoke to Martin Thomas.

Much of the current discussion of global finance focuses on massive growth in credit. We get stories about the huge growth in fictitious capital, about speculation, and about how money and finance have grown out of proportion to the ‘real’ economy. But there is more to finance than the credit system – recall that this is how Marx depicted money all of 150 years ago.

If the current financial situation were just a story of big financial growth it would be of no great consequence. We would find, and we are finding, that the credit bubble will burst, there will be losses (amounting to personal hardship), but no systemic challenge.

The really significant change of the last 20 years is not growth of the credit system. It is the fact that money has increasingly taken the form of financial derivatives and securities. In other words, money has in a sense moved into the sphere of commodified risk. It has invited us to consider the possibility that we may need to change our understanding of what money is in modern capitalism. In the current financial crisis, for instance, it is securitized debt, not debt itself, that has been at the heart of the problem. This is important, not incidental, because to understand money and finance, we now need to go via derivatives and securities, as much as via ‘the over-expansion of credit’, ‘speculation’ and ‘hot money’. The latter are really just cheap, moralistic jibes.

To get to what this means, we need some historical context. The state used to oversee the stability of the money system. The state linked the present to the future. It controlled interest rates. It controlled exchange rates. It controlled agricultural prices.

As the state withdraws from doing these things, people, and financial markets, face a lot of risks and uncertainties. As the state has withdrawn, the market has come in. The market is now linking the present to the future, and this is done in a competitive and contestable way that doesn’t produce stable prices. For some this is a signal that capitalism is in trouble because it can’t trade at fundamental values, with stable money. But this is only one possible interpretation.

The contestability of prices may also be understood as adding a new competitive dimension to capitalist accumulation. Indeed, a whole new range of products have emerged to compensate, as it were, for the absence of state guarantees. They are products that specialise in price contestability. Things like futures and options and swaps are the market's alternative to what the state used to do. So we find that financial derivatives, relating to interest rates and exchange rates evolve to provide insurance against financial contingencies (including the risk of financial failure: credit derivatives). What’s more, when we see these financial futures, options and swaps trading exposures to interest rates and exchange rates, they themselves start to look very much like money. More precisely, they start to blur the distinction between what is money and what is capital.

This explanation could go further, too. The state used to oversee lending practices for housing. Now it doesn’t. Instead, we see subprime and securitized debt as the market takes over the risks of home lending. Debts become commodified in highly liquid markets – and they start to play a money-like role. But these are a very different sort of money from the way we usually think about money as cash and bank deposits. And the notion of ‘credit’ doesn’t capture what is important here.

In an article in Historical Materialism 14:1, Costas Lapavitsas responds to your idea by writing: "The commensurating function {of derivatives} is nothing more than the carapace of the commodity form placed over hedging and speculative strategies involving several underlying financial assets. Derivatives have no obvious hoarding and paying functions in the world market, and they are certainly not 'the anchor of the global financial system'. In so far as such an anchor exists today, that is the US dollar..."

Indeed Costas is quite hostile to this interpretation. But we need to clarify what is misunderstanding and what is disagreement. Costas wants to draw all money back to ‘credit’, as if this it the ultimate descriptor of capitalist money, and anything not looking like credit is ipso facto precluded as money.

Even within a functionalist definition, derivatives do play a money function. They are a store of value in volatile markets. They aren’t like a bank vault, though, because they store very large amounts of money for very short periods. Take for instance a futures contract on wheat: it is an alternative to storing wheat in a silo. It is in a very immediate sense a store of value. Financial derivatives on say exchange rates are no different in this specific sense: they preserve value. They reflect the money uses of capital (capitalists), where a store of value means not preserving something, but benchmarking its value to competitive processes. They store across time (when interest rates change unpredictably) and they store across currencies (when exchange rates change unpredictably). The problem, I think, is that when, like Costas, you start with functionalist definitions of money (money as means of exchange, store of value, unit of account, etc), then financial volatility, such as we are currently seeing, is posed as a threat to the functionality of money, and hence as some sort of ‘crisis’. And it leads simply to arguments that we need better regulation, so that the functionality of money can be safely restored.

This is a view that has respectable support within and outside of Marxism. And one need not disagree with the benefits of such regulation. But Marxists must surely have more to say about the changing nature of money itself. Perhaps here also is the problem that money is posed as only a product of the state, so the state is the only one that can fix it up.

But as a Marxist, I start form a different position – not from the premise that all money emanates from the state; rather that there can be no presumption that the financial system ‘should’ be stable or in some sort of proportion to production, or any of these ‘balance’ sorts of premises. Hence, I think we have to start by saying that financial instability is not itself an issue of crisis. The left seems so keen to call everything volatile a crisis!

If you start from the presumption that money embodies contradictions, and they can play out as volatility, different questions arise from those of how to regulate to restore stability. The first question is to frame the contradiction, and how it plays out. The next issue to ask is how does capital itself deal with volatility, and one answer, I think, is that it uses financial derivatives. This is the sense in which derivatives are a monetary anchor. The US dollar wins the popularity contest as the world’s most used currency, but when the value of the dollar itself is not anchored (such as to gold under Bretton Woods) and it is of uncertain value (as it is right now), it cannot be called an anchor. Anchoring has to be about the commensuration of value, not popularity, and in that process, the critical issue is not ‘can everything be converted to US dollars?’ (for that is trivial), but how do we deal with discrepancies when there is no single stable measure of equivalence. The answer I give is that non-equivalence has itself been turned into a commodity to be bought and sold. By creating financial derivatives, capital has made it profitable to solve its own problems of non-equivalence!

Those are the sorts of questions we need to pose. The current so-called subprime crisis will pass. It will play itself out. The regulations may or may not change. But the changes to finance through derivatives and securitization are here to stay. We will always have derivatives and securitisation within capitalism. They may be recent innovations, but they describe an essentially capitalist way of calculating the relative values of different parts of capital and different forms of money.

Notice also, that the way I’ve framed this issue, we don’t have a disjuncture between money and the ‘real’ economy. Derivatives and securities are part-money and part-capital, so we don’t need to frame these spheres as separate. So the analytically-impoverished observation that finance has grown out of proportion to the ‘real’ economy – as if there are correct proportions, and as if there is a clear dichotomy (following Friedman and the monetarists!) – does not arise. As an aside: who would have imagined 20 years ago that the mortgage-backed securities would have the liquidity of treasury bonds, or that, as their liquidity dried up, central banks would be exchanging mortgage-backed securities (of indeterminate value) for cash. It’s a sign that the world of capital and the world of money just can’t be separated.

Having said that, liquidity always brings its own particular disturbances because where assets are easy to buy and sell, rumour and perceptions can drive trading decisions. Perceptions can always turn down. There can always be some flow-through from financial aggregates into trade and investment. Keynes got this right, though it is a particular politics that says that the state should take over and manage, and that the outcome is a remedy. The possibility of that Keynesian remedy was contingent on a whole set of conditions that were only in place for a relatively brief period. It’s time to look more closely at the conditions that characterise our age.

I don't see the current disturbances as a fundamental crisis. Company profit rates are high. In general, companies aren't exposed to significant debt. Investment levels are high. The world economy is booming. But we have found that risk has been underpriced in the last few years. The pricing of risk is being recalculated. Companies that want to borrow now have to pay more to borrow, and that's probably as it should be. In the foreseeable future, capital will be funding investment increasingly out of retained earnings and share issues. Leveraged buyouts (private equity deals) will be fewer. What's happening is a not an unreasonable adjustment. But it's an adjustment with collateral damage. The odd bank will go broke. Individuals lose their houses. Bad things happen. And there is an important class dimension here, as many of the costs are borne by an organisationally weakened working class, where risks are being transferred onto individuals and households.

You say that we should not overestimate the role of the dollar in the world economy. Would you also say that the role of the US state in the world economy more generally is overestimated? You have said that the state is withdrawing from many economic functions. Does this mean that the international markets are becoming much more important than the formal international institutions in which the US is still hegemonic?

At the World Economic Forum in January, George Soros announced the end of the dollar era. Soros has made many correct calls – indeed he has just published a book crowing about his recent successes in volatile financial markets. But this one was a big call, and there is no immediate answer. He may have won shorting the dollar, but I’m not sure what alternative money unit he’s gone long on.

The US dollar is far and away the world’s most used currency. The Bank for International Settlements data show that the dollar is on one side of 86 percent of financial transactions. The Euro is on one side of less than 40 percent (think of 100 transactions – with 200 ‘sides’ to those transactions). It is anyone’s guess whether there will be diversification away from the dollar and indeed also from the euro.

But on the specific role of the US state and its role in managing global finance, I think US hegemony should not be so closely tied to an idea of the elevated status of the dollar. The City of London is the predominant world financial market for currencies, but it doesn’t rely on the predominance of the pound. I can imagine a world in which the dollar is a much less important currency, but it wouldn't necessarily preclude US institutions being hegemonic within the global financial system.

But I think we need to disentangle a few issues here. One is the global authority of US institutions. I don’t feel an expert on this, but I always find Panitch and Gindin persuasive.

Another is an evaluation of the strength of the US economy itself, and whether there is evidence of an economic decline that might itself precipitate a loss of US hegemony. In this context we often see cited the huge US current account deficit, and the idea that the US economy has something unsustainable about it. It is argued that this is the Achilles’ heal of the US economy, and undermines its global standing.

I think concerns about the deficit are out of place. The Federal Reserve recently put out a document which I think is absolutely right. It says that the US makes up about 30% of world capital formation. About 30% of mobile international investment is going to the US. If you were a financial adviser, you would describe this investment spread as a balanced portfolio (there’s that word again). It so happens that when the rest of the world puts 30% of its mobile assets in the US, that materialises as a huge current account deficit for the US economy. Put another way, the question is why so many people and organizations what to put their assets in the US; not why those actions generate a net deficit.

There are two different logics at play. One is the logic of individual investment and competition between investment alternatives- where will people put their assets; how will capital perform - and the other is the national logic - how does it look on national balance of payments data.
As Marxists, we should be saying that it is the former logic that really drives development. We should look at what impels capital to locate where it does. The national aggregations which show that the capital flows lead to a huge current account deficit, or to a huge debt position for the US economy, should be very much a secondary consideration. It remains important only because a lot of people think it is important. Its importance has no profound material basis.

And internationally, US companies are highly profitable. It is worth remembering that the US produces two sorts of balance of payments data – the conventional one, based on geography, which measures activity of the territorial space; the other based on ownership, which compares the performance of US (owned)companies (at home and abroad) with foreign companies (within the US and outside). We may have reservations about how ownership is measured, but it shows consistently that while the US space is in deficit, US companies globally are in surplus. If we are talking about US global hegemony, this latter fact would seem important.

A lot of central banks are buying US Treasury bonds and, because of the decline in the dollar, losing quite heavily on them...

Coming out of the subprime crisis, what we can expect to see, and do see, in the financial markets more caution and conservatism. What does conservatism mean here? It could mean treating the US dollar as a safe haven. That has been the conservative position for the last 50 years.

Another version of conservatism is to hedge against the dollar and acquire a diversified portfolio. You don't just hold US assets; you hold euros, Australian dollars, renminbi... You spread your assets around a range of currencies (and different forms of assets) because each individual one will go up and down.

The battle is going to be about which of these conservative positions is dominant. One possibility here is that we will find that the hedge funds and the pension funds are likely to go for the diversified portfolios, and the big banks are more likely to go for the US dollar. The fact that the banks have a bias towards the dollar is in itself a sign of continuing US hegemony. These banks are big institutions. They look to the US economy as their engine-room. They have a lot of investment in the US economy. It is a world they understand. There is something conservative about big banks, and they "grew up with" the US dollar. Hedge funds and pension funds on the other hand, looking for rates of return, will want to spread their assets to give constant returns to their investors. There are different financial cultures in the different institutions. I would not play it up too much; and it's not a clear dichotomy. But there are different tendencies that are worth considering as we look in the crystal ball.

Then the question becomes: are we going to see, as some people argue, a "re-intermediation" of finance?; that is, more and more transactions and asset management going through the big banks? In that case, there will be more likelihood of people buying US Treasury bonds and relying on the integrity of the US dollar. Or are we going to see continued disintermediation, because the big banks are seen as high-cost, cumbersome, and so on, and more money going through hedge funds and pension funds and more diversified portfolios? I think that is too hard to call at this stage.

Costas Lapavitsas has stressed the degree to which finance has come to feed more off consumer revenues than off loans to business...

Yes, I think this is an important point. One of the corollaries of that is that capital is having a second dip at surplus value. You put a worker on a loan and part of their wages come back to capital in the form of interest payments.

But the process should be seen as broader than just the second dip at surplus value. It's not just about interest payments coming out of wages. In the last 20 years or so we have seen labour being treated like capital, the household being treated like a small business. History has asked households to take on a lot of financial decision-making. One aspect here is servicing the mortgage, but more than that. It requires households to decide whether to have a 20 year or 30 year mortgage, and at fixed or floating rate; how to balance the car loan with the credit card etc. These are complex financial calculations that require taking positions about an unknowable future. It comes back to the issue of the state withdrawing from guaranteeing the future. And it’s not just decisions about interest-payments. It's about deciding whether or not and how to ‘invest’ in a range of things. Education is no longer sufficiently provided by the state, so it has to be a personal investment. How much do I invest? Where do I borrow, etc?. For my telephone and electricity, which provider will I use?; which contract will I sign? Which superannuation fund or pension fund do I join; what risk profile do I want it to adopt? The list is long, and you don’t really have the choice of not playing. So being working class now means engaging in competitively-driven risk calculation and management.

Also, because the interest payments are contracted before the wage is earned - if you don't work that week, you still have to make the interest payments - you lock workers in socially and culturally to the capitalist production system. Workers don't want to go on strike. They can't afford it. They have the interest obligations they have to meet.

But on the other hand, workers today have easier access to credit. If they don't get paid for a while, they can let their credit card bill mount up. And they can put off mortgage payments for a month or two...

Perhaps, although there is a lot of evidence of low income people being ‘maxed out’ on credit – the multiple credit card problem, of borrowing to repay debts. The evidence shows that the best predictor of working class financial insolvency is not so much low income, but irregular income; in particular, a period out of work. That’s when a difficult but viable debt-servicing becomes non viable, leading to re-financing on worse and worse terms, etc. And the reality is that to strike itself makes income irregular.

But let me put this matter more broadly as a class issue, not just an income issue. The IMF has, perhaps surprisingly, described households as the global financial system’s depositories of risk of last resort. Households absorb all sorts of risks to underwrite capital, the most important being flexibility in employment contracts. In terms of risk analysis, capital has devices to hedge its risk. I’ve talked about them earlier. For workers, labour power cannot be hedged – it can’t be securitised, because it cannot be separated from the worker him/herself. For capital, financial insolvency means the company goes under, but limited liability means that personal assets go untouched. Investors in Bear Stearns lost their investments, but they did not have to put their wealth into covering the company’s losses. But for labour, where labour power cannot be separated from the worker, insolvency means personal insolvency. In the subprime crisis, insolvent mortgagees have not just lost their investments; they have lost their homes.

Some other aspects of families can be hedged – through things like insurance on health, car and home, through going to the dentist for checkups. But the evidence is showing that poor families are bailing out of these sorts of forms of risk management – they need current income to keep the family going and repay the debts. So the risks households are exposed to mount and mount. Sickness, a car crash, a toothache can lead to insolvency. And not because of poverty per se, but because of financial over-commitment. These are the ways in which households are the risk-absorbers of last resort.

Can we discern the limits and contradictions of what you see as this new expansionary regime of capitalism?

I don't know that it has any contradictions that are different from the fundamental contradictions of any capitalist economy - between production for use and production for profit.

We are seeing a system of accumulation that is getting bigger and bigger, and in a sense also more and more efficient. Capital is increasingly able to turn things into commodities. It can increasingly break down its own bundles of assets into the constituent assets, price each of them separately, and maximise the efficiency with which it uses each asset.

We are seeing a huge intensification of accumulation, and critical to it is the intensification of the performance of capital. In a sense that is a newly discovered phenomenon of the last 15 to 20 years. It is tempting to predict that it can't keep on accelerating at the rate of that recent period.

But we have seen an amazing period of growth in the last 20 years. We know, historically, growth always goes in cycles. It will slow down at some time. Where the slowing is going to come from, I don't know. What staggers me is the inventiveness of capital in finding more and more things to turn into commodities. Perhaps the next wave is the environment - polluting rights are being turn into commodities, and creating a hugely profitable industry. That bubble might burst, just as the dot.com bubble burst, but the inventiveness of capital will continue.

The growth is fragile growth, of course, and it is bound up with accusations of speculation and the like, but it is growth, and it is what capitalism is about. But I think what finance shows us is actually how powerful labour potentially is. In part this shows through the capacity of low income mortgage borrowers to bring down some big financial institutions. Alternatively, the global pool of superannuation funds – labour’s capital – shows how critical labour is to the funding of investment. The broad political task is to move this beyond labour as capital (failed capital, in the case of the sub-prime market) and frame it as the financial form of labour’s capacity to mobilise and transform the world of capital for itself.