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Derivatives

David Harvie on finance

“The financial markets, and in particular those arcane instruments known as ‘derivatives’, are all about measure, measuring the production of value, measuring capital accumulation. Financial derivatives allow all the different ‘bits’ of capital (across time, across space and across sectors) to be priced against – or commensurated with – each other. Derivatives even turn the very contingent nature of value – its contestability – into a tradeable commodity. […]The performance of a Detroit car-worker can be compared not only with that of his neighbour on the production line, or even with her counterpart in Alabama or South Korea, but with garment workers in Morocco, programmers in Bangalore and cleaners on the London Underground. Competition is intensified, as is class struggle. […] Our ‘performance’ as debtors is measured by the global financial market and is yoked to that market, and through it to the performance of all other ‘assets’ – the programmers and the cleaners, the farmers and the garment workers. In short, we become – in our reproductive activity as well as our waged work – subjects of competitive calculation.”


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Fantastic This American Life radio show on a ProPublica and NPR investigation into Magnetar, a hedge fund which made billions after helping to create the CDO market, whilst betting on its collapse. Collaterlaised Debt Obligations (CDOs) are the (sub-prime) mortgage backed securities which went toxic and brought down the financial system.

“Magnetar had figured out how dysfunctional the system had become – and was going to exploit that dysfunction.”

Clear article by John Lanchester in the London Review of Books on Greek debt and the threat posed by Greece’s default:

Any abrupt form of Greek default, caused by the lenders’ failing to lend or the Greeks’ missing a bond payment, would be what is known as ‘disorderly’, an eventuality that would play out as anything from a mild local spasm to a full-scale continent-wide meltdown, featuring the collapse first of the euro and then of the EU itself. The collapse of Lehman Brothers in September 2008 was one of these ‘credit events’. It is in their nature that they are chaotic and unpredictable, and all the more so because the fundamentals of the economic order, as constituted in 2008, are still intact. Who owns that Greek debt? As I’ve said, mainly French and German banks. Yes, but banks insure their debt via the use of complex financial instruments. Insure it with whom? Don’t know: some of it is insured with British banks as counter-parties to the risk, but that risk will be insured in its turn, so that the identity of the person holding the parcel when its last layer of wrapping comes off is a mystery. That mysteriousness was the thing that made Lehman’s collapse turn instantly into a systemic crisis.

Whilst some EU governments push for further loans and austerity, and further-reaching crisis, non-compliance and resistance within Greece is spreading like wildfire. The Greek people know that they face decades of sever austerity, working harder for less with removed social security, and that the extreme interest rates (5.2%) imposed for the so-called ‘bailout’ loans do not simply provide some insurance for lenders. They are also helping to keep French and German banks in business. Banks which the same EU governments have provided taxpayer-backed guarantees against Greek default to..

“the outstanding Greek debt is mainly owned by French and German banks. This is why the Western European governments are especially keen on the ‘bailout’: it’s helping to keep their banks solvent…

German savings go to German banks to lend to other countries so that they can buy German goods from German companies who then save their earnings in German banks who lend it to … and so on.”

Great article by Ramaa Vasudevan, an economist from Colorado State University, originally published in Dollars & Sense in August 2008, explaining ‘financialisation’: “the increasing importance of financial markets, financial motives, financial institutions, and financial elites in the operation of the economy and its governing institutions” (this definition is from University of Massachusetts economist Gerald Epstein).

Vasudevan argues that traditional conceptions of finance as the ‘mediator’ of capital – ensuring its allocation to production within the ‘real economy’ – have been dramatically transformed by processes of financialisation. Instead, finance increasingly operates to transform “future streams of income (from profits, dividends, or interest payments) into a tradable asset like a stock or a bond.” For example, the packaging of multiple mortgage contracts into a new financial asset (a collateralised debt obligation) which is sold to investors – who hav essentially invested into the future income stream of the household who have taken out the mortgage contract. This has elevated the economic, political and social power of ‘rentiers’ (those who make profit from ownership not production):

“The arena of finance can at times appear to be merely a casino—albeit a huge one—where everyone gets to place her bets and ride her luck. But the financial system carries a far deeper significance for people’s lives. Financial assets and liabilities represent claims on ownership and property; they embody the social relations of an economy at a particular time in history. In this sense, the recent process of financialization implies the increasing political and economic power of a particular segment of the capitalist class: rentiers. Accelerating financial transactions and the profusion of financial techniques have fuelled an extraordinary enrichment of this elite.”

Secondly, financialisation means increased consumer debt – “credit as an individualistic means of addressing wage stagnation” – which results in a form of “social coercion that erodes working-class solidarity”.

Read the full article here.