The Regime Under the Microscope (continued...)
Part 2.4: Neoliberal Financial Markets
A thesis reminder and a transitional marker
I advise students that when you’re writing a thesis-driven, evidence-based argument, it’s a good idea somewhere just past the middle of the piece to drop in what I call a thesis reminder. This rhetorical device is just what it sounds like. A helpful reminder to your reader of just what you’re on about. An aide-mémoire of the central assertion of your argument. Here goes.
Thesis reminder:
My past four posts have been part of an extended series titled “The Regime Under the Microscope.” In them, I examine—what else?—The Regime. By The Regime I mean the predominant and damaging ideologies at work in current-day American society (and around the globe) that, in my view, need to be understood and resisted (to include ranting against them).
The central assertion of my argument is that the dominant belief system—Regime—currently the most dangerous to our happy existence involves a combination of neoliberalism and neoconservatism. Moreover, these two doctrines work dangerously and destructively in tandem in the following way.
Neoliberalism, as an economic theory and practice, generates—indeed, requires—what amounts to dystopia. Neoconservatism, as a political viewpoint and exercise, wages war against that result.
And there you have it. A thesis reminder.
I also advise students to install what I call a roadmap at the outset of a piece of persuasive writing. That is, a clear explanation of the organization of your upcoming argument. After all, you don’t want reader minds wandering off course during your cavalcade of dazzling points and spot-on evidence.
Along with a clear-cut roadmap at the start of your argument, though, you also need to place useful structural road signs along way. These cues keep the reader oriented within your line of argument. I call such road signs transitional markers. They help readers know when one part of your argument has come to an end and now you’re moving on to the next part of your argument. Again, here goes.
Transitional marker:
At this point in my multi-part series, “The Regime Under the Microscope,” we have:
1) examined Neoconservatism (28 February 2024)
2) been introduced to Neoliberalism (13 March 2024)
3) ventured deeper into the Neoliberal Weeds (27 March 2024)
4) inspected the Neoliberal Workplace (10 April 2024)
Two parts remain in this investigation of The Regime.
First: evaluating Neoliberal Financial Markets (this post)
Second: scrutinizing Neoliberal Ideology (the post two weeks from now)
And there you have a transitional marker. You’re welcome.
Now onto the expository task at hand.
Neoliberal Financial Markets
The most important thing you need to remember is that neoliberalism is Robin Hood in reverse.
Neoliberalism gives money to the rich by stealing money from the poor—but even more so from the middle class (where there’s the most money to be had).
David Harvey’s phrase “accumulation by dispossession” describes perfectly this economic heist. As the rich swell into the superrich by the accumulation of wealth syphoned to the top, everyone else—the 99%—dwindles into ruin by the dispossession of living wages, retirement savings, affordable healthcare, affordable housing, affordable insurance, affordable childcare, affordable eldercare, public education, public services, public works, a livable environment—well, you get the financial picture.
Over my past three Rants, we’ve explored how neoliberal policies work this dispossession by way of fostering an abusive workplace and constantly pushing tax cuts for corporations and the wealthy.
Now we’ll look at a third great robbery taking place: the neoliberal financial marketplace.
However, to understand this abuse, we must understand some of the current practices of finance capitalism.
WARNING: Buckle up. This stuff gets complex quick. Sorry about that. I’ll do my best to be plain and simple with my explanations.
BUT: Please know that this COMPLEXITY is a big part of the ROBBERY taking place. Those with the power, the specialized knowledge, and the cash to run this scam count on the rest of us being unable or unwilling to understanding exactly what’s going on.
Finance Capitalism—a brief definition and historical sketch
Whereas industrial capitalism makes money from the production and sale of things, finance capitalism makes money from money.
Basically this happens by the channeling of money held in savings into various investment mechanisms. The process of channeling is termed intermediation and generally is carried out by banks or other financial intermediaries that bring together people who have money to invest with professional investment firms. Those professional investors (of many sorts) then pursue profit via the purchase and sale of financial products such as stocks, bonds, futures, and other derivatives; currencies are also investment options, as can be the lending of money at interest.
That’s finance capitalism defined in a nutshell.
However, to state it mildly, the markets and instruments of finance capitalism tend to be convoluted and readily can turn into altogether mystifying contraptions.
Since the early 18th century, stocks have been a financial arena rife with foolish decisions by investors and subject to deceptive if not outright fraudulent behavior by brokers. Historically, finance capitalism started out as subordinate to industrial capitalism as an engine of growth, that is, the money a company could muster from the sale of its stocks enabled that company to expand its physical business.
Toward the end of the 19th century, however, finance capitalism began to grow in importance as a source of profit in its own right. People already possessing a good deal of money (that is, mainly the industrial capitalists) began to make even more money through investment schemes.
In the 20th century, financial markets grew to play a central role in economic developments and political affairs.
So what’s the problem with this expansion of finance capitalism?
Rich people started holding and increasing their liquid assets through market investments rather than that money being used to finance the employment-creating investments of industrial capitalism. Put more radically: the idle rich took to exploiting their capital toward no public good. (If you really want to get hardcore about this, see Keynes, who wanted to thwart those idle rich from dabbling endlessly in their little stock schemes and, instead, get that money out into the real economy working toward full employment.)
After a goodly period of idle-rich self-indulging during the later-19th and early-20th centuries, the Stock Market Crash hit in 1929. The ensuing Great Depression sobered up people considerably. Franklin D. Roosevelt’s New Deal (1933-1938) and then the post-World War II era set in place financial market regulations in an effort to prevent misuse. Legislation such as the Glass-Steagall Act (1933) kept separate commercial and investment banking, and programs such as the Federal Deposit Insurance Corporation (FDIC) guaranteed a specific amount of checking and savings deposits for its member banks.
When Reagan took office in 1980, however, such regulatory safeguards started to be chipped away. Neoliberals worked steadily to deregulate financial markets, their biggest revision, perhaps, coming with the repeal of Glass-Steagall in 1999.
As a result of this deregulation, currently more profits are to be made in the financial sector than through manufacturing (see Chang 234-237). As one might expect, money has followed the money.
Since the late 20th century, then, finance capitalism has become the dominant force in the global economy. Obviously, this volte face has had much to do with the tremendous accumulation of wealth by the elite over the past several decades—and with the astronomical growth of wealth inequity.
And so here we are today.
YEEHAW!!!—deregulated rootin’-n-tootin’!
I think it no exaggeration to characterize the financial sector these days as the wild west. Not only is federal oversight weak (there’s no real sheriff in town), but those running the financial markets—central bankers, fund managers, insurance brokers, traders and fixers of all kinds—play only for the quick-draw kill of profit. There is no long game, no plan, no thought of a common good. As Margaret Thatcher opined, there is no such thing as society—only money to be had. Richard Dienst describes these financial gunslingers thus:
They are generally indifferent, even ignorant, about the global system they help to animate. Their sense of history is calibrated by the split seconds of arbitrage, the volatile turnover of portfolios, the slipstreams of interest, the fitful jockeying over exchange rates, and the implacable arithmetic of the actuarial tables. In striking their deals and hedging their bets, they aspire to achieve a kind of bootstrap transcendence, suspended for as long as possible between “too soon” and “too late,” long enough to seize a good chance but not long enough to face the fallout or the blowback. (3)
This situation raises critical questions. Is there anyone in charge of the global economy? Or are there only its most powerful players? Can anyone maintain meaningful oversight, let alone real management, of instantaneously linked worldwide financial markets swarming with abstract instruments? The 2015 film The Big Short aptly portrays the fog of greed and markets run amok as well as offers a clear answer to the question of who is in charge of the neoliberal financial world: No one.
Dienst pushes this point a step further, calling the link between financial markets and the media reporting on them a misleading blend of “scientific discourse and showbiz hucksterism” (4). The “science” isn’t firm and the showbiz is extreme. The two bounce off one another to the point of being difficult to distinguish. Cautions Dienst: “This sloppy feedback loop instills quick decision-making and permanent uncertainty at the same stroke” (5).
The global economy, then, seems to be creating us more than we are creating it.
The neoliberal finance capital cowboys galloping amid this stampede of profit-taking—driving it on with their six-shooters in the air blazing away—are dealing just fine, so far, with the clouds of dust. Meantime, everybody else is getting trampled.
The Myth of The Market—invest or die
Alex Preda has explored the boundaries mediating the relationship between financial markets and society. He shows how from the mid-19th century onward financial writers in New York, London, and Paris (authors who were also active brokers and speculators) sought to create the myth of a market that behaves rationally and of brokers who are like scientists engaged reasonably in market transactions. By the beginning of the 20th century, this promotional campaign was able “to contain criticism, doubts, and ethical questions” about financial markets (22).
Today, Americans both believe in this myth and are exhorted constantly to trade and to invest. One’s economic well-being—one’s very survival, runs the message—depends on engagement with the market. Leading this harangue is the figure of the “expert broker” who can guide the common investor to stock market riches and retirement savings security.
However, the problem with this myth about the market, warns Preda, is that it obscures the fact that financial markets are “a double game, in which rational and irrational features coexist and feed on each other” (23). Moreover, most people are woefully undereducated about how markets work, and markets now are sophisticated technological systems of high-speed transactions.
Foremost among these baffling, blink-of-an-eye financial instruments-cum-swindles is the derivative. Derivatives are perplexing financial instruments that appear to be simply mechanisms of market profit without social or political bearing. In fact, they open up all kinds of opportunities for fraud, deception, and manipulation.
The infernal complexity and obscure mathematics of derivatives make them the ideal device for evading government regulations as well as popular understanding. Those same attributes qualify them perfectly as a method for high-risk, high-stakes, high-speed speculative investment. In short, derivatives have become the financial plaything of the superrich, and it is impossible to comprehend the global flow of money without knowing how these instruments operate.
I will not pretend here to explain fully the many ins-and-outs of derivatives (for expert help, see LiPuma and Lee). Instead, I will supply some basic concepts and, more important, characterize the destructive financial hucksterism at work. (Nice transitional marker, eh?)
Just What the Heck is a Derivative?—huh?
A derivative is fundamentally a form of gambling, that is, a bet on the outcome of a future action. Here are the basic rules of the bet:
1) no money exchanges hands until the outcome of the bet is known
2) winning or losing the bet depends on the price of whatever is bet on going up or down
3) the bet has a specific finish date in the future
I know that rule #2 is the most confusing, so here’s an example. It comes from early forms of derivatives in the 19th-century commodity markets, particularly in Chicago.
The price of pork bellies is currently $2 per pound. (I’m just making this shit up—as do derivative brokers.) I place a bet with a commodities broker that the price of pork bellies in 6 months will be $3 per pound. If I’m right—if in 6 months the price of a pound of pork bellies has gone up to $3—I win my bet and get paid whatever amount of money I wagered. If I’m wrong—if in 6 months the price of a pound of pork bellies has stayed the same or gone down to $1—I lose my bet and must pay off the broker whatever amount of money I wagered.
That’s the basic skeleton of a derivative.
Such early commodity trade deals more or less invented the concept of “futures”—that is, separating the future price of a commodity (such as pork bellies) from the current price for that commodity. These early financial instruments were relatively straightforward because the underlying asset of such futures contracts were tangible commodities (again, as in our example above, those disgusting pork bellies).
But hold onto your hat. Things are about to get REALLY abstract and complex.
Thanks to the neoliberal deregulation of financial markets, the underlying assets of derivative contracts today have become separated from real commodities. This alteration means that virtually anything upon which a bet can be placed can become the underlying asset of a futures contract.
Instead of pork bellies, you can place a bet—er, enter into a futures contract—on anything from currency values or interest rates to the price of broadband or electricity. Anything that is volatile, produces risk, and can be given a price can serve as the basis of a futures bet (LiPuma and Lee 36). Such a market environment is anything but straightforward.
To make matters still more obscure, while many now common derivatives are traded on public and regulated exchanges, banks and other financial institutions also engage in devising and marketing more complex, sometimes even one-of-a-kind derivatives for clients. This practice is referred to as “the over-the-counter or OTC market” and is the “larger and more rapidly expanding derivatives market” that also happens to be “private and unregulated” (LiPuma and Lee 34-35).
As a result of these OTC derivatives, huge amounts of money (a transaction under ten million dollars is called a “skinny” trade) are changing hands hidden from regulatory oversight and in ways that exert extraordinary influence on the global economy (LiPuma and Lee 30).
Now grab onto your hat again.
As if all of this complexity weren’t confusing enough, one additional amplification of the concept of the derivative has come about that sends this financial instrument into the stratosphere of the unfathomable. Namely, nowadays the underlying asset of a derivative contract can itself be a derivative.
You read that right. We’re in Wonderland now.
Instead of actual pork bellies being the underlier of a derivative contract, a derivative contract involving pork bellies can be the underlier of a new derivative contract. For that matter, that new derivative contract (that has a previous derivative contract as its underlying asset) can then become the underlying asset for yet another derivative contract. And so on and so on.
In other words, now you can bet on a bet. And this situation produces an ever-growing distance between derivatives and their concrete underlying assets. And nobody’s watching.
Why is this a problem?
Because herein exists the opportunity for massive financial fraud—and the severe social damage that results from such deception.
Derivatives Made of More Derivatives—the subprime mortgage crisis of 2008
Arjun Appadurai explains how the repeated commoditization of prior promises by new promises dilutes and disseminates the force of the promise across many market players. The result is that each trader bears only a tiny portion of the burden of the larger interlinked system of promises, that is, of the overall value of any particular derivatives market. Says Appadurai: “This opens the systemic possibility of failure, breakdown, and collapse even when the bulk of individual trades meet their local conditions of felicity” (8).
In other words, if you have going a long string of linked bets, all made by a long string of different people placing those bets, it only takes a bum deal or two along the way to throw a monkey wrench into the whole business. Say a couple of scamps refuse to pay on their bet. Or a crook or two somehow rigs an agreement. Such weak links could tear apart the paper chain of all those inter-reliant wagers.
Now let’s add outright swindlers into the derivative process.
Creating the subprime mortgage crisis and financial collapse of 2008 was a joining of the already dicey fiscal practices of the derivatives market with the deceptive—if not fraudulent—undertakings of predatory mortgage lending. The combination of these two dubious financial activities resulted in a monstrosity called the collateralized debt obligation (CDO) tranche.
A “tranche” is a common financial device. It groups together several cash-flow generating assets, such as bonds, loans, and mortgages. Leading up to the 2008 financial crisis, however, were bad actors grouping together in CDO tranches high-risk subprime mortgages with low-risk prime mortgages and then selling these flawed fiscal instruments to unsuspecting investors. When the high-risk subprime mortgages started to fail, the entire structure of these tranches failed, leading to the collapse of the American housing market (see Appadurai 10; LiPuma and Lee 33-36).
I know this is hard to follow. As Ha-Joon Chang remarks when trying to explain the subprime mortgage meltdown, “By now even I am getting confused (and, as it turns out, so were the people dealing with them)” (238).
AND THAT’S JUST THE POINT.
Confusion is at the heart of the entire scam. Confusion allows brokers, wheeling and dealing in an unregulated marketplace, to get away with fiscal murder—both to profit themselves and their fabulously wealthy clients.
One final example, then I promise I’ll stop.
In the complicated derivative instrument of the “credit default swap,” one speculator makes money based on the broken contract promise between another pair of speculators. Although it seems capitalistically counterintuitive for contracts to be founded on the breaking of other contracts, at the time of the 2008 crash about $55 trillion was in play in the credit default swap market—almost ten percent of the overall derivatives market (Appadurai 152-153).
Okay, now I’m finished torturing you with all this financial mumbo-jumbo.
Maybe the only way really to get your head around all this derivative stuff is to watch what has become known as the “Jenga Clip” from the film The Big Short.
No, really. Go watch the clip. Watch it right now. Watch it a few times if you have to. Not only is it charmingly acted, but it gives you great visual illustrations of two vital points.
One: the racket and risk of derivatives. Two: the hucksterism and greed of professional financial brokers.
Enjoy.
The Consequences of Neoliberal Finance Capitalism
Speculative finance by the wealthy has become a money-making game indifferent to—but not disconnected from—the actual lives of everyday people around the world.
When the financial shit hit the fan in 2008, it was not the wealthy speculators or their Gucci-shoed brokers who suffered. It was regular people holding actual mortgages who had their lives ruined. And it was the middle-class American taxpayer who footed the bill for bailing out major financial institutions such as Lehman Brothers and American International Group. No wonder pragmatic billionaire and investor Warren Buffet called derivatives—before the 2008 meltdown—“weapons of financial mass destruction” (qtd. in Chang 239).
If this isn’t a runaway financial system, it’s hard to imagine what is.
So what?
Ah, the neoliberal workplace and the neoliberal financial marketplace. What a wonderful Regime to live in...
...if you’re a billionaire.
Next time we’ll survey the dogma underpinning this Billionaire’s Paradise: neoliberal ideology. Bring an umbrella. The bullshit will be flying free.
Works Cited and Consulted
(For a highly readable general description of the problems associated with current neoliberal financial markets, to include derivatives, see Chang’s Thing 22. For a detailed and technical account of the history, workings, and dangers of derivatives, see LiPuma and Lee (in particular, chapter two); Appadurai (in particular, chapter one).
Appadurai, Arjun. Banking on Words: The Failure of Language in the Age of Derivative Finance. University of Chicago Press, 2016.
Chang, Ha-Joon. 23 Things They Don’t Tell You About Capitalism. Penguin, 2011.
Dienst, Richard. The Bonds of Debt: Borrowing Against the Common Good. Verso, 2011.
Harvey, David. A Brief History of Neoliberalism. Oxford University Press, 2005.
Keynes, John Maynard. The General Theory of Employment, Interest, and Money. 1936. Harcourt, 1964.
LiPuma, Edward, and Benjamin Lee. Financial Derivatives and the Globalization of Risk. Duke University Press, 2004.
Preda, Alex. Framing Finance: The Boundaries of Markets and Modern Capitalism. University of Chicago P, 2009.
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