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«Financialisation and Derivatives: Constructing an Artifice of Indifference DUNCAN WIGAN Centre for Global Political Economy, University of Sussex ...»

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COMPETITION & CHANGE, Vol. 13, No. 2, June 2009 157–172

Financialisation and Derivatives:

Constructing an Artifice of Indifference


Centre for Global Political Economy, University of Sussex

This paper accords derivatives a central role in defining the character and dynamics of

financialised accumulation. Under the guise of financial precision and a progressive

innovation spiral, financial derivatives have instrumentalised risk so that ownership and property take a novel form. The advent of limited liability and absentee ownership in the second half of the nineteenth century marked the start of this process of transformation. At that stage, ownership became fleeting and its relationship to the underlying technical process uncertain, loose and complex. Risk management through derivatives takes this a stage further. Derivatives imply that ownership can take a form wherein there are no direct ties to a particular asset, and therefore no possibility of a conceptual link between property and stewardship. Instead, ownership proceeds on the basis of disengagement and financialisation proceeds via the construction of indifference to the exigencies of ‘real’ economic competition.

Derivatives, Financialisation, Risk, Property


Introduction A dominant dichotomy between functional and dysfunctional has characterised the analysis of derivatives. For the orthodox, the vagaries of circulation have become amenable to precise, private and consequently appropriately incentivised management. Alan Greenspan has been the most prominent advocate of this view: ‘Financial innovation will slow as we approach a world in which financial markets are complete in the sense that all financial risks can be efficiently transferred to those most willing to bear them’ (Greenspan 2003). In this perspective, derivatives play a functional role efficiently, optimally distributing risk and leading to ‘the development of a far more flexible, efficient, and hence resilient financial system than existed just a quarter-century ago’ (Greenspan 2004). The notions of complete and perfect markets are critical here. In a universal and open market millions of immediately executed transactions in derivatives serve, according to this theory, to verify and enforce prices in an underlying economy and ensure that risks are held by those most able and willing to bear them. Simply, derivatives afford specified risks, such as the default risk of a corporate bond, to be isolated and traded so that ultimately that risk resides in the optimal location. Further, arbitrageurs impose completion on markets by deconstructing, replicating and co-joining assets to synthesise a world of infinite Arrow and Debreu (1954) E-mail address: d.e.wigan@sussex.ac.uk © 2009 the Editors and W. S. M

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securities. Product variegation, market depth and flexibility in the over-the-counter (OTC) markets rendered this hitherto theoretical construct an immanent reality.1 Most recently, the advent of the credit derivatives market in response to a burgeoning global corporate bond market has meant that derivatives now trade, in addition to price or market risks, the probability of default. An American regulator commenting on the attitude of regulators to the then nascent market made the underlying assumption of immanent completion explicit: ‘They see the new product as something good, like a new way of exchanging, a way to complete the market in Arrow-Debreu fashion. This is the American way of seeing things and particularly that of Alan Greenspan who has boasted the merits of credit derivatives’ (Ranielli & Hualt 2007: 13). Completing markets promise that all possible future contingent states of the world can be encompassed in a contract and actively managed. Contra Knight’s (1921) unbridgeable distinction between risk and uncertainty, the alchemic propensities of financial innovation ostensibly turn deleterious uncertainties into fungible globules of risk. The issues here are not minor. If derivatives generate complete markets and unequivocally promote the effective management of the myriad financial uncertainties facing actors in a global economy, the market has escaped the double bind of Polanyi’s ‘double movement’ (1944). The promise of ‘pure economics’ has been fulfilled (Walras 2003 [1874]). Simply, in this view derivatives have lent the markets an independent and internal coherency and consequently freed finance from the assumed distorting necessity of exogenous regulation and direct political control (Miller 1986; Silber 1983).

In contrast, critical analyses of derivatives have largely focused on a dysfunctional pathology. A notional $683 trillion (BIS 2008) now rests in financial derivatives markets, more than 13 times the GDP of the entire planet. The sums involved in financial derivatives far outweigh any requirement emanating from the real economy. In this discrepancy is often read anarchy and a measure of the proportions of a global casino. Derivatives have frequently been, and continue to be central to, frauds, market manipulations, rule circumvention and speculative crises. Indeed, they are the ‘wild beast of finance’ (Steinherr 1998). Repeated crises have shown that the plumbing is running awry and a state-led regulatory overhaul is urgent and necessary (Eatwell & Taylor 2000). Derivatives markets are an unregulated and dysfunctional private casino, ‘mad money’ (Strange 1998), the operations of which generate systemic risk which might render the Great Crash a mere footnote in history (Toporowski 1999). Leverage, market concentration and counterparty risk in a regulatory void render derivatives ‘financial weapons of mass destruction’ (Buffett 2002). As derivatives require no upfront payment other than the contract fee, the limits set on risk appropriation by the availability of funds are broken. Further, the ability to synthesise underlying ‘primitives’ translates into an origination capacity unbridled by anything other than fallible credit ratings (SEC 2008). Certainly, the derivatives trade has extenuated the speculative character of financial markets (Saber 1999). The question arises, however, of how far such a depiction based on the notion of finance as host to a parasitical rentier interest opens up the historical reality of a system of derivatives. In this conception derivatives would simply be a means of gaming the system, a perversion that nurtures crises.

Derivatives have a 4000-year history (Swan 2000) and that history is regularly punctuated by speculative excess. The seventeenth-century Dutch tulip mania, disastrous experiments with establishing a national monetary infrastructure in eighteenth-century England and France (the South Sea and Mississippi schemes), fraud and manipulation on the nineteenth-century commodity exchanges and the current ‘credit crunch’ all testify to


the powerfully destabilising propensities of derivatives. But if this were sufficient, the analysis of derivatives might rightly remain in the realm of the technical and be based on a functional characterisation of finance. Derivatives are then merely the latest catalyst, the current trigger in iterative cycles of manias and panics. In these terms, then, contemporary derivatives are simply more, and more, of the same.

I argue that while these perspectives illuminate pressing and now starkly apparent concerns, they fail to open up the question of the historic proportions of a globe-spanning lattice of derivatives. Financial derivatives have affected a significant shift beyond the perfection or perversion of market forces. The historical substance of these innovations lies in how derivatives modify the socio-political content of a financialised world economy as opposed to their role within finance explored as a closed system. Derivatives instrumentalise risk in such a way as to promote financialised accumulation, which abstracts from any linear relationship to underlying processes of real wealth creation. As such, finance proceeds on a novel footing. Under the guise of risk management, financial innovation has generated a plethora of derivative instruments which seem to simply mirror extant volatility, but in reality render volatility or variance a distinct traded asset. In turn, while justified by their ameliorative impact on uncertainty and role in optimising the capital allocation process, derivatives have profoundly altered a host of financial practices so that the financial sphere sits on top of the world economy attempting to profit despite, and indeed on the basis of, the vagaries of competition within it. Risk-based financial practices have re-cast finance as an artifice of indifference. While this artifice harbours a series of contradictions which render it unstable and incubate liquidity driven crises, this inner logic of indifference and the transformations this makes possible, rather than the crises themselves, define the novelty identified here in a global lattice of financial derivatives.

The paper suggests that the contemporary re-emergence of derivatives markets should be understood not solely through their quantitative role in financialisation, but in their qualitative impact on the character and capacities of a financialised world economy. This impact is elaborated through a brief exploration of modern finance theory, which raised the spectre of volatility as a distinct and isolated traded asset. The second section contributes to the financialisation literature that seeks to meet De Goede’s (2004) call to ‘repoliticize financial risk’. Theoretical innovation formed the basis of a shift in the logic of mediation from growth to change. As a system of ideas and calculative rationality, risk embodies a project to align the discourse of finance with the subjectivity of liberalism and ring fence the financial system behind a veil of precision (Bernstein 1992, 1996; Ewald 1991;

Holzer & Millo 2005; Miller & Rose 1990; O’Malley 2000). Additionally, and crucially here, the ‘performativity’ of risk (Callon 1998; Mackenzie 2006) generates novel practices of intermediation and a new object of financialised accumulation. In these terms, this argument aspires to contribute to this strand of the financialisation literature by drawing attention to the links between, on one side, risk as a system of ideas and affective discourse and, on the other, concrete transformations in the systemic character of global financial markets. Consequently, a third section argues that derivatives instrumentalise risk as a novel form of ownership, a new object and means of appropriation and control, which rests in circulation and contests finance as a site of accumulation in and of itself. The conception of derivatives on the basis of risk and property situates this argument on the central terrain of the financialisation literature. That is, the question of how best to interpret and characterise post-Fordist accumulation.


Constructing a Theory of Financial Precision

Modern finance theory is the basis upon which risk as a system of ideas has been instrumentalised in derivatives as a form of property. Innovations in finance theory embody a substantive financial novelty, rather than incremental advance. Essentially this novelty lies in the capacity to isolate various ‘attributes of assets’ (Das 2005) on the principle that finance concerns variance not quantity. A series of innovations have incrementally transformed the object of global finance. Where finance has always to some extent concerned the valorisation of change in, for instance, attempting to exploit differences in the relative value of currencies, finance theory has simultaneously refined the capacity to isolate variation and generated an array of securities which are distinct from underlying credit instruments, or historic primitives. This process of innovation propels risk to the very centre of global financial activity so that global finance increasingly rests in an artifice of indifference legitimated under a mantra of precision. ‘Mantra’ is employed advisedly here.

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