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.”
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.
For a clear unveiling of the content behind finance-speak jargon, examining some of the key financial instruments and activities behind the financial crisis check out ‘Understanding the jargon behind the banking crisis’ in The Irish Anarchist Review #2.