The world economic crisis took a sharp turn for the worse in September 2008. Some of the Marxist economists who had discussed the crisis in our first series of interviews, March-July 2008, have commented again. In this interview: Dick Bryan.
For other interviews in this series, click here.
In your book "Capitalism with Derivatives", you say that derivatives are a new form of money. In this crisis we have seen a flight from derivatives into cash. Doesn't that mean that the derivatives were not in fact money?
It's not that derivatives are money in the sense that they are like state money, or that they have replaced more conventional forms of money. My argument is that derivatives are breaking down the distinction between what is money and what is capital.
It is important to go back a step here. In all sorts of monetary conventions – from orthodox economics to most Marxism, there is a clearly delineated (though poorly defined) category of ‘money’. And in most conventional analysis, there is an association of money with the state: indeed, in the tradition of Keynes, there is an understanding that money is ‘state money’, as opposed to ‘commodity money’ such as gold. State money is bits of paper, or entries in a balance sheet that are themselves valueless, but trust in state guarantees gives them effective value; commodity money is valued in itself.
But there are not just two absolute forms of money: there is a spectrum of moneys. There is (generally) safe, low-return money, which is state money in the form of cash or money in the bank. There are also highly liquid assets which are serving money functions, but they are not state money. They are derivative forms of money.
Let me give you an illustration. A local government has $100,000 spare cash. What will it do with it? Will it put it in the bank? Will it buy government bonds? Maybe it buys some mortgage-backed securities instead. In this case, mortgage-backed securities are being treated as a way to store value – as a direct alternative to putting money in the bank. And – wrongly it turned out – this local government authority believed these securities were as safe as bank deposits. There is definitely a money dimension here.
On the other hand, other organizations – like investment banks – were treating mortgage backed securities as capital – as an alternative to money. So the ‘moneyness’ of mortgage-backed securities depends on who is using them, and for what reason. The point is that there is no single, or universal, differentiation of what is money and what is capital.
And that’s the point in the current financial crisis. It first manifested as a crisis of stores of value (that asset values ‘disappeared’) and in that sense, it has not just been a ‘financial crisis’ pertaining to financial institutions and their solvency, but also a ‘money crisis’, pertaining to what is used in financial markets as money.
But in the crisis, the value of these assets crashed and their moneyness disappeared – that’s what’s meant by a liquidity crisis. It seems to me very significant that the first intervention of the governments and central banks was not about shoring up financial institutions directly, it was to say to financiers: bring in your mortgage-backed securities and we will convert them into state money.
It's a signal to me that these securities were indeed being treated like money, in the sense that when their moneyness suddenly disappeared, the state sought to convert them into another money form. The initial response to the crisis of governments and central banks was not to say, as the stock markets fell, bring in your shares and we'll convert them to cash. Nor did they say to banks bring in the titles to your properties and we’ll lend to you against your physical assets. They said bring in your securities, and we'll convert them to cash. It is, to repeat, a signal that the initial liquidity crisis, when securities markets crashed, was about a crisis of money.
These mortgage-backed securities turned out not to be functional money. But we are not functionalists, and we should not be caught adhering to the conventional, functionalist definitions of money. The dash for cash, for me, means that there was a shift from high-risk, high-return liquid assets to low-risk, low-return liquid assets - from mortgage-backed securities back into state money - and the state wanted to oversee it.
In your book, "Capitalism with derivatives", there's really no discussion of securitisation...
Yes, and I regret that. I think it is that the derivativeness of securities is less emphatic than is the case with more obvious derivative products like options and futures, and the object of the book was to explain derivatives.
If I were writing the book again, I would have no difficulty feeding issues of securitisation into the text. But I don't think it would change the substance of the text.
The securitisation story is directly compatible with the way I've been talking about derivatives for a few years. What Mike Rafferty and I missed in telling the story is that the pointy end of derivatives, which was going to become so conspicuous, was around the securitisation process. We didn't manage that, but our story is securitisation-compatible.
Securities are a form of derivative: indeed it is the derivative characteristic of a security that is critical, and I think a lot of people don’t get that. With mortgage-backed securities, what got sold into the market is not the mortgages, but claims on the income stream from the mortgages. And what is critical about derivatives is that they are financial exposures to an asset without ownership of the underlying asset.
With an oil future, you own exposure to the price of oil, but without owning any oil itself. So it is with mortgage-backed securities: you own exposure to the performance of a bundle of mortgages, but without owning the mortgages themselves.
And that separation is critical, for the mortgages themselves are illiquid – they last for 20 or 30 years, but the securities on the mortgages were highly liquid – they could be repackaged with other sorts of securities, turned into fancy products, and on-sold and re-sold. Further, the derivative dimension – the difference between ownership of the asset and ownership of an exposure to the performance of the asset was precisely what made sub-prime lending so profitable – as long as it lasted. The financial markets could separate out the performance of mortgages from the performance of house prices. They could sell the former, but retain the latter.
That is the reason that mortgage originators could keep lending to people who would buy houses that were expected to increase in value, even though they would almost certainly not repay loans: it was possible to hold the exposure to the prices of houses and sell off the exposure to the repayment of mortgages. It was a smart strategy for capital as long as house prices didn’t fall!
You talk about derivatives markets going "beneath the veil" of the corporation, enabling the corporation to assess the profitability of different assets within the corporation. Isn't securitisation quite central here? And isn't it also the case that securitisation in this sphere is not very far advanced? Corporations aren't selling securities based on the performance of individual operations within their enterprise.
I agree it is not hugely advanced in terms of securities markets trading of exposures to particular assets within corporations and it is somewhat tentative to identify a trend towards the pricing of particular assets or particular exposures within the corporation, rather than of the corporation itself.
In principle they could. But the critical question here is, how do we think about slicing the corporation down into its constituent elements? We could look at the asset sheet of a corporation, read the list of its assets, and ask whether derivatives permit the pricing of individual sites or individual bits of machinery. They are not the sort of things that are being securitised.
But then think about the corporation as a set of risks, rather than a set of assets. It has exposures to exchange rates, exposures to interest rates, exposures to property prices. You're not thinking about the corporation in a physical form. You're thinking about it in a framework of risks. These risks will be aggregated across particular sites. Here we're analysing the performance of the corporation not by sector, or by region, or by site, but by forms of risk.
Perhaps readers will know of Mike Lewis’ book Moneyball – I believe it is being made into a film – about how derivative traders were used to evaluate the risks of a baseball team, and to price ball players in terms of the cheapest way of covering a set of risks. That captures the flavour of what I’m talking about.
There is a bit of overstatement there, and baseball teams aren’t standard corporations. This is still an emerging form of market. I can foresee that derivatives markets are going to start to price many, many more forms of risk. But at this stage, I think these are still ways in which corporations are evaluating themselves and their own performance, and it is from these calculations that the pressures come to labour to increase its performance: because within the corporation, all assets performances are increasingly being measured relative to eachother.
You argue that recent decades have seen not so much deregulation, as a shift to regulation by global market mechanisms in place of states. How would you assess the current talk about new and tighter government regulation?
What I was describing is what a lot of people would call neo-liberalism, although some of them, Leo Panitch and Sam Gindin for example, would explain that neo-liberalism is not about the decline or absence of the state; it is about the state doing certain things on behalf of capital. It is a class agenda, not a free-market versus regulated-market agenda.
Nonetheless, until very recently there was a belief in "self-regulation" - in the state withdrawing from responsibility for the determination of market prices. All those models and textbooks have been torn up. All the textbooks about monetary theory have to be completely rewritten. Intellectually this is a watershed.
The free-market visions of how the world works have been shown to be unsustainable. What concerns me is that the response from those in power will be to re-write new textbooks and central banking manuals that are scarcely different from the old ones - just with extra emphasis on transparency, information, and greater prudence.
But perhaps more concerning is that there is a wish on the left to go back to the 1960s and 1970s, to an era when everything was run by the state - an uncritical swing back to an era which itself was unsustainable, albeit for different reasons.
The big project now is to get people to think about these issues differently, in a way that is not just about saying we've had too much de-regulation and now we need more regulation. What gets left out here are the underlying contradictions of capitalist finance and I think critical here is the breaking down of the difference between money and capital.
Simon Mohun has raised the same scenario as you, of a shift back to the approach of the 1960s. But he saw it not as a worry, but as something hopeful. He says it will open up a debate about what governments do economically, into which the left can intervene, rather than just being told that the market decides and that is that.
In Treasuries and central banks, the intellectual culture has been so uncritical of the regulatory changes that I think there is likely to be no-one around who can think outside the square. The discourse that most people think within is just less regulation or more regulation. The debates over the coming years are largely going to be around aspiring to regulations that will make markets more efficient and more accountable.
As a Marxist, I'm not opposed to markets being more efficient or more accountable. It's not a matter of being innately opposed to the regulatory agenda.
But is that debate going to open up an agenda for the left? Open up a space where new initiatives can develop?
For a liberal, social-democratic left, this is the stuff of life. But is the new regulation in fact likely to take nasty corporatist forms? I'd put my money on that, rather than the development of a space where a Marxist left could get a hearing.
What's gone wrong in the markets is partly about regulation, a loss of order and morality in markets. Those things are now being widely criticised.
But there is another element here, about the nature of money. What concerns me in left and liberal debate is the strand that says that if we can make markets more efficient, more transparent, more ethical, then markets will not be volatile. That seems to be a basic premise, and it's basically wrong.
Money is itself the expression of a social relation. The concept of value is contested. The concept of equivalence is contested. We see that most starkly in exchange rates. What is one currency is worth in terms of another? There is no real answer. The neo-classical economists want to talk about fundamental value, but we know that doesn't work.
And it's not just at the level of exchange rates. Within a currency, equivalence is a contested concept. As Marxists, we should be pointing that out - that there is social conflict expressed in the money form.
Any suggestion that once we have better regulation, money will become harmonious as a social unit, and then we can enter into debates about good or bad monetary policy, misses the point that money is always contestable. It has never been objective.
We have played out little social myths to construct money as objective. We had gold. We had Bretton Woods. We have "fundamental value" provided by neo-classical economists. They were all trying to tell us that money is an objective measure, and what we have to learn is that money is not an objective measure. Money is capitalist money, and it is money within capitalism. We have to keep pushing the politics of that.
And central to that politics is new ways of resistance to the way in which the finance system, for all its fancy trading of risks, has systematically shifted risks onto labour – until, that is, labour (in the form of house buyers) itself financially imploded, and the risks were suddenly thrown back onto capital. But, of course, it was then passed on to the state, which in turn will pass it back labour, but at a slower pace than was done by financial risk shifting, and in ways where labour’s implosion will not be at the cost of capital.
The point here is to analyse what’s happened so as to clearly identify the risk-shifting process and the best points of resistance to it; not to join the search for a clever set of state regulations which will somehow tame finance and place it at the service of production.
Independent of whatever theoretical schemes government economists may propose, do you see such measures now being taken as extensive nationalisations, bail-outs, and so on, as adding up to a serious change in the shape of capitalism?
The longer-term meaning of all this in terms of the shape of capitalist development - that's something on which I just wouldn't want to make a call.
The state has always fudged on the issue of "moral hazard" - of the extent to which the state should intervene to mop up for capital when capital stuffs up, and whether such mopping-up puts bad incentives into the market.
In all the financial sector reforms, and not just in the financial sector, there has always been a fudge about the question of whether there will be bail-outs. We've found something out. We've found that the state will always bail out big capital, in particular big banks.
The role of finance cannot go back to what it was. It would be laughable. The regulatory regimes around finance just cannot be the same. At the moment no-one is talking in big terms because policy circles are too much taken up with crisis management.
What becomes most interesting in this - and I can't think through it, really - is, how much of a watershed is this in the concept of markets, and how the states regulate markets? The moral hazard issue, historically framed as a dilemma, is now solved. What does that say about the virtue of profitability and entrepreneurship - those moral virtues of the market, let people enjoy success because they also face the threat of failure? If that threat of failure is now going to be qualified, what is the constraint of the upside? If we are to have the carrot of profit, but not the stick of loss, how is that going to play out in wider social circles?
That question does open up the space for Marxists to have something very useful to say in popular debate.