The End of Finance

Massimo Amato, Luca Fantacci

• Publisher: Polity
• Year: 2013
• ISBN:
  9780745683652
• Edition: 1
• Topic: Business
• Subtopic: Finance
• Index: Business

This new book by two distinguished Italian economists is a highly original contribution to our understanding of the origins and aftermath of the financial crisis. The authors show that the recent financial crisis cannot be understood simply as a malfunctioning in the subprime mortgage market: rather, it is rooted in a much more fundamental transformation, taking place over an extended time period, in the very nature of finance. The 'end' or purpose of finance is to be found in the social institutions by which the making and acceptance of promises of payment are made possible - that is, the creation and cancellation of debt contracts within a specified time frame. Amato and Fantacci argue that developments in the modern financial system by which debts are securitized has endangered this fundamental credit/debt structure. The illusion has been created that debts are universally liquid in the sense that they need not be redeemed but can be continually sold on in increasingly extensive global markets. What appears to have reduced the riskiness of default for individual agents has in fact increased the fragility of the system as a whole. The authors trace the origins of this profound transformation backwards in time, not just to the neoliberal reforms of the 1980s and 90s but to the birth of capitalist finance in the mercantile networks of the sixteenth and seventeenth centuries. This long historical perspective and deep analysis of the nature of finance enables the authors to tackle the challenges we face today in a fresh way - not simply by tinkering with existing mechanisms, but rather by asking the more profound question of how institutions might be devised in which finance could fulfil its essential functions.

PART I

Phenomenology

1

Do we know what the financial markets are?

The growth of a doxa or general opinion increasingly favourable to financial markets and to their unrestricted liberalization appeared to have encountered no obstacles for years, if not indeed for decades. The objections had died down and the number of conversions increased, also and above all on the left. While subtle distinctions were certainly possible as regards allegiance to the new paradigm of financial globalization, that is all they were. The new order reigned triumphant, and any doubt or opposition could easily be branded as failure to keep up with the times.

In any case, the primary virtue of an ideology is to make things awkward not only for its adversaries, who may be numerous but remain captive to a counter-ideology, but also for the few dissidents. Rather than proponents of critical views, these are made to appear as no more than the advocates of a vanquished and outmoded ideology, who should be left to ‘gnash their teeth’ in silence. If an ideology is to aspire to ‘hegemony’, it is first of all essential that everything should be presented in the light of ideological juxtaposition. So it was that the collapse of an ideology so opposed to ‘the market’ as to feel no obligation even to think about it paved the way for a doxa so favourable to ‘the market’ as to feel no obligation to define it. It is within this self-referential dimension that the financial markets were able to find justification in ideological far sooner than in practical terms.

The outbreak of the crisis momentarily interrupted this self-referentiality. The ability to say something concrete about finance and its economic meaning suddenly became crucial. Was there any advantage taken of this opportunity to think? Has the crisis helped us to know a little bit more today about what finance is? Can we now claim a better understanding of that particular configuration of finance known as the financial markets? In other words, can we, today, base our judgements in this field on more solid knowledge? Nearly two years after the crisis broke out, the answer is no. Why was the opportunity missed? A short chronological history of the predominant attitudes towards the financial crisis can help to find the answer.

The most widespread tendency at first was simply to deny that it was legitimate to talk about a crisis. It was, people said, a ‘temporary setback’ or a ‘technical adjustment’ on the part of the markets. ‘Come on, let’s not get worked up over nothing.’ This was the response. There were indeed explicit warnings not to say too much about the possibility of a crisis in order to avoid lowering the expectations of financial agents.

In time, this approach gave way under the weight of evidence, but not to the point of complete surrender. The crisis was interpreted as a cyclical phenomenon that was bound to pass, and, above all, as nothing so serious as to call for any rethinking of the ruling model. The crisis was the price to be paid for prosperity, a sort of wildly astronomical telephone bill that someone had to pay every so often. But, since there was no certainty that everyone would have to pay, the survivors could still hope to start operating again in the best of all possible worlds.

Then came the Black October of 2008. The apologists maintained a sometimes deafening silence, and ‘posthumous prophets’ made their appearance. It suddenly transpired that everyone had already known that the system was untenable. This is not to say that no authoritative figures had spoken out before the fat was in the fire, to warn against the danger of financial trends that seemed to justify all the trust put in them solely by their apparent capacity for indefinite self-perpetuation.¹ The sudden glut of sages did, however, appear strange, to say the least.

This is, of course, nothing to be too surprised about in a disproportionately media-dominated society like ours, where the moulding of public opinion is no longer even connected with mechanisms of production, but rather with the constant and mobile management of widespread uncertainty – which stems in turn from a growing incapacity to master information that now affects all and sundry, from the simple ‘man in the street’ to the most sophisticated analyst or policymaker. In this society of pure information and widespread expectations, where what is ‘true’ tends to be what is regarded as such, there is a real risk of people reinventing their past in a way that becomes all the more dangerous the less it is recognized.

Thus it is that an article of faith can become an object of ridicule overnight and that swings in opinion can suddenly swing back. This is indeed what happened around the spring of 2009, when the G-20 proclamations and the bailing out of banks and of the market prompted a number of observers, sometimes the very ones who were seeing ‘the dark side’ in the autumn, to glimpse ‘signs of recovery’ or, more prudently, ‘signs that the collapse is slowing down’. Nor did it take long for these signs to become ‘green shoots’. Such is the power of springtime…

And the media were thus able to take up the visions of the ‘springtime prophets’ with the same unreflecting thoughtlessness as they had taken up in the autumn the press releases of the posthumous prophets.

In the autumn the much lauded ‘financial innovation’ had come to be known by the more traditional and sinister name of ‘speculation’. Unswerving faith in the ‘evident’ capacity for self-regulation of the ‘market’ had given way to an equally ‘evident’ need for regulation. It was, we were told, necessary to curb speculation, to restrict the endeavours of the financial system to ‘make money out of money’. Now the tune changed again in the spring. The voices of those who had undauntedly defended the financial markets even during the stormy weather were to be heard again, not least because what they had to say was extremely reassuring. The crisis could only be short-lived. It was just a question of waiting for the negative trend to reverse, possibly with the ‘help’ of some public buffering and further financial innovation. There was nothing fundamental to be reformed. The Anglo-Saxon system of capitalism based on financial markets was in any case the best, and therefore not to be relinquished.² And, while the need for a revision of the rules was admitted in this context, it was immediately added that there was no need to clamp the innovative potential of finance in the straitjacket of public control, the tendency of which to degenerate into a subordination of the economy to politics had in any case provided the basic justification for the deregulation of previous years. Simultaneously passivist and activist, like all laissez-faire attitudes, this one has a very solid basis, not perhaps in theory but at least in rhetoric. Nor is it at all easy to refute it until the deep roots of its apparent plausibility have been discerned.

It is, however, precisely because of this difficulty that it is worth observing the pendulum of expert and public opinion and to investigate the laws of its motion. The question that arises here in fact is whether all the views that have so far competed for the media limelight have anything in common. One thing they certainly do share is the fact of being ideological stances distinguished by the ‘logic’ typical of every ideology: either for me or against me. The financial markets have been judged en bloc, and we have thus missed a possibility that is subtler, but not any less crucial as a consequence of that – quite the contrary. We have been so busy taking sides that we have forgotten to ask ourselves what it actually is that we are for or against.

Regardless of whether it proves to be definitive or temporary, the crisis is not in fact only a setback. It is also an opportunity to ask ourselves, at the very point where every opinion enters a state of potential suspension, whether we really know what we are talking about when we talk about markets and finance, and hence also about financial markets. There is no need to be foresighted in order to recognize the necessity of the present crisis and of its end. If we are to understand its innermost nature and hence also its rationale, we must instead know how to see, and above all where to look.

This is why the book begins with a phenomenology. We need a phenomenology of finance precisely because its underlying features tend not to manifest themselves. Those involved in the general economic discourse – staunch supporters or stubborn opponents, posthumous or springtime prophets – tend in fact not to see what turns finance into something it really should not be. Above all, they are so caught up in the present-day dogma that they cannot even see it as such. They are thus doubly blind. This alone is enough to explain why prophets are two-a-penny, not least because their coats are quickly turned, but explanations are still hard to come by.

If what we are seeking is not a new doxa but some understanding of a phenomenon that closely affects us, our starting point must indeed be a fact that is as simple as it escapes notice. Financial deregulation has been able to elevate itself, in the past few decades, to the status of a tenet that does not admit refutation and is not even open to being questioned, primarily because the very idea of regulation in the financial field has become so hazy that it no longer has anything relevant and essential to say to anyone, not even to those who believed for an instant that the time for rules had returned with the new crisis.

An example may serve to clarify this specific point, namely the phenomenon whereby the concept of rules has become hazy both for the advocates and for the opponents of regulation. Given that our purpose is not doxography but the detection of dogma, it will not be necessary to report extreme views, but indeed far more useful to refer to those of an avowedly moderate character. This is why we have chosen a book written not under the influence of the present crisis, but with a view to answering the question of the nature of crises in general, and hence also the extent to which they can be avoided or managed. The author, Barry Eichengreen, is recognized as one of the greatest experts on financial systems, and not only as an economist but also as a historian. Entitled Financial Crises and What to Do about Them and published in 2002, the book provides documentation, impeccable in its own way, of the dogmatism running right through contemporary economic discourse. What it puts forward with respect to the financial markets is in fact neither a theory susceptible of verification or confutation nor a simple ideology to be espoused or attacked, but a dogma – in other words, something the truth of which cannot be questioned and that is therefore placed above and beyond any ideological endorsement or theoretical proof.

Some months after the end of the Argentinean crisis, at a time when the forecasts admitted the possibility of further crises in peripheral or emerging economies but did not even consider the possibility of the central economies of the world system being affected, Eichengreen wrote as follows:

The prevailing system may be widely criticized but it is not discredited. The dominant view, to paraphrase Sir Winston Churchill on democracy, is that it is the worst way of organizing the allocation of financial resources, except for the available alternatives.³

Since we are not dealing with something said for effect but with the assertion of a dogma, it will be necessary to subject it to precise exegesis, not least with the help of what the author goes on to say.

It is no coincidence that Eichengreen begins with an analogy between finance and democracy. The basic idea is that, just as the last word has been said in politics, the same has now happened also in economics. As Mrs Thatcher said at the beginning of the era of deregulation, there is no alternative to the market.

This reference to Churchill’s historical argument is, however, not unattended by dangers today. His remark seemed extremely clear in the context in which it was made. When the West was in the middle of a lethal fight for hegemony between fascism, communism and the nascent mass democracy, it may have made sense, within certain limits, to be blunt about the latter’s shortcomings. For Churchill more than anyone else, it was indeed the worst system, but only apart from its available alternatives; and that had to suffice. Those alternatives have now been swept away, however, and all that remains of his comment is ‘the worst form of government’ – a ‘worst form’ that nevertheless has the Darwinian merit of being the only one to have survived in the West, and therefore appears capable of making up for any shortcomings of principle with efficiency of fact.⁴

This is not a particularly contorted way of surreptitiously avowing a distrust of democracy.⁵ If there is one thing for which fanatical support makes no sense, it is precisely democracy, which exists through criticism. This is the very least that can be said. A democracy that justifies itself simply on the grounds that there are no known alternatives is already on the point of turning into something unnamed and dangerous. The observation we have put forward here is simply necessary to an understanding of the general ideological context in which it was possible for deregulation to be produced.

Under the influence of a Darwinian image of politics that led to talk about the ‘end of history’, the collapse of communism and of its attendant apparatus of economic planning seemed sufficient grounds in the early 1990s (and indeed from the early 1980s on) to claim that a historical process had come to an end. Capitalism and democracy ceased to appear even remotely antagonistic or incompatible in the West, and it was possible for the spread of capitalism to be presented as the royal road to democratization of the economic and political spheres. The idea that the economic and political development, both of the West and (above all) of the ‘emerging countries’, had to be accompanied by the rapid opening up of local financial markets to the movements of international capital, including short-term flows, was espoused not only by Margaret Thatcher and Ronald Reagan but also by left-wing reformers, not only by the ‘Washington consensus’ but also by the European countries, which accelerated the process of the primarily economic and secondarily political unification of Europe in the 1990s. Financial protectionism, to be understood as limitations on the movements of capital, was quickly and rashly equated with commercial protectionism and, ultimately, with ‘political protectionism’, understood as the efforts of the ruling classes of emerging countries to defend their privileges against any process of democratization. Refusing, or even simply resisting to open up financial markets was flatly interpreted as proof of an obscurantist determination to preserve political systems actually constituting the basis of systems of privilege for castes or bureaucracies. Capitalism, and specifically the movement of capital on open financial markets, was regarded and dogmatically imposed as paving the way for democracy.

In other words, the ‘financial revolution’ of the 1980s and 1990s presented itself as the best and most efficient concentrate of the doctrine of modernization, which was in turn the more or less unwitting heir to the concept of ‘permanent revolution’. Financial deregulation was therefore not simply presented in negative terms, as a process designed to eliminate a suffocating system of control, but also as a way of making it possible to establish a ‘new world order’ based on the indefinite growth of transparency and power, the latter to be understood first and foremost as the constantly increased capacity to improve the performative efficiency of the economic system. This is the basi...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright
• Contents
• Introduction
• Part I Phenomenology
• Part II History
• Part III Politics
• Notes
• Index