The value of the derivatives market in 2006 was estimated at half a quadrillion dollars. That’s a five with 14 zeros on the end of it, or more than ten times the value of the output of every real economy in the world combined.
The usual explanation for its existence is that derivatives are primarily instruments for legitimate hedging. But there is no reason for anybody to hedge more than once. In short, the derivates market is at least 90% explicable by wanton speculation without any semblance of rational economic justification.
Now perhaps hundreds of billions of dollars worth of derivatives have, in the jargon, ‘gone toxic’; nobody knows what – if indeed anything – is the worth of the underlying assets on which they are based. That, at bottom, is what did for Lehman Brothers and Merrill Lynch and may yet fell AIG.
If those institutions had simply been forced to take the hit, that would have been bad enough, but they might have survived. However, these pieces of paper – not least those backed by subprime mortgages - were often put up as collateral for further borrowing. And so we are where we are now, staring world recession in the face.
From any rational political standpoint, rightwing as much as leftwing, the questions that need to be asked at this juncture are fairly obvious. Most urgently, the task is to come up with immediate policies to mitigate the damage. When eventually there is time for reflection, we will need to consider how this situation has been allowed to develop, and how it can be prevented from happening again.
But it is already apparent that Black Monday is an indictment of the free market orthodoxy that has dominated economic thinking for the last three decades.
A handful of economists – most notably the late Andrew Glyn from within the Marxist tradition and the Keynesians Joseph Stiglitz and Larry Elliott – can be credited for seeing in advance where all this was heading.
Interestingly, the neoclassical right simply didn’t see it coming. That, in retrospect, is hardly suprising; the irrational exuberance boys didn’t foresee the October 1987 crash, or the Asian crisis of 1997, or the Russian debt default and the Long Term Capital Management bail out of 1998, either.
Worryingly, there is currently no dissent from the neoliberal consensus at any point on the spectrum of mainstream British politics. New Labour are as much in hock to this pernicious ideology as the Lib Dems and the Tories. That should provide an opportunity to the socialist left.
In the 1970s and 1980s, the left did have ideas to put forward. Whatever criticisms can be leveled at the Alternative Economic Strategy put forward by the Bennites and the Communist Party in this period, at least it was an internally coherent radical platform.
A quarter of a century on, it is not good enough to cut and paste these proposals and advance them as joined up policy thinking, not least because of the many ways in which world capitalism has changed since then. Platitudes and rehashed transitional demands are not good enough, either.
It would be criminal to allow the right to dominate the debate in the years ahead. But unless we come up with some convincing arguments, that is what will happen.
Posted at 13:01, 16 September 2008
Comments (33)
Yes, I agree completely - the most disheartening, though hardly surprising, bit of the last couple of days is that Labour is describing what's going on as 'financial turbulence' (Darling, I think) rather than seizing the opportunity to suggest there may be alternatives buried (now deep) within the party's history. Nor have I seen anything from the Left-and-not-Labour which is anything other than cautious expression of pleasure at what is in fact going to be misery for lots of people.
But don't worry, I've just re-drafted Gordon's conference speech for him at http://www.bickerstafferecord.org.uk/?p=271. It's got loads of nice platitudes for starters, but once his people have seen it and taken note, things will really start to move.
What's this got to do with the Middle East?
I don't know much about derivatives, but: notional value = value of underlying asset. Orange farmer buy derivatives to protect against price risk on next year's crop (call it notional value of $100m). Orange juice manufacturer buys derivatives to protect against next year's orange cost risk (another $100m) same oranges. An investor in an orange juice manufacturer - a pension fund, trying to be cautious - hedges its investment with some derivative linked to future orange prices (another $100m, same oranges). Some of the providers of these derivatives then sell some other derivatives, related to the above, to hedge their exposures. So say we're up to perhaps $500m nominal value of derivatives, against $100m worth of real oranges. But there is no 'wanton speculation' in this story, and everybody is only hedging once. So I don't think your argument in the first two paragraphs is coherent.
As far as I understand it, securitized mortgages, including sub-prime portions, wrapped up into some other product, bought and held by say Lehmans as an asset, against which Lehmans has then borrowed, are something else.
Last time I looked, Larry Elliot was worried about mounting consumer debt, or PFI, I don't remember him forecasting that financial assets held by institutional investors would turn out to be 'toxic'. Nor Stiglitz.
I hope the left's response to this crisis includes finding out what they're talking about.
lecithin, you have confused me!
I just thought the crises was caused by the de-regulation that took place in the 80's and how the greedy bastards took massive risks with other peoples money for thier own finacial gain, and its all gone pear shaped.! I don't know where the oranges come in though.!
But great post Dave.
Lecithin
The point about many derivatives - futures being the classic example - is that they are cash-settled.
You don't actually physically deliver the oranges.
Either you collect the winnings on what is in fact a bet or, if you fail, the most you lose is the price of the contract.
Don't take my word for it, google will make the point amply.
Question: are these institutions playing by rules that have always allowed them to take huge risks, or are they playing by new rules that arose after other forms of risk-taking were regulated out of bounds? Has what they have done always been considered risky? If regulations were once in place to prevent this, when were they relaxed or removed? Is any regulatory system capable of foreseeing new situations of excessive risk?
I know next to nothing about finance, except the fact that capitalism requires risk-taking that never seems to be adequately regulated. This leads me to conclude that captalism is too risky for society to allow it to continue. I also get the sense that easy credit keeps wage earners happy enough to not ask questions about their own exploitation, which leads me to believe that excessive risk is required by the system in order to prevent the people who create the wealth from asking themselves why they are not wealthy.
Dave,
You miss my point. The argument you put forward in the first two paras, about how the notional value of outstanding derivatives is X, but the value of the real economy is only 10% of X, hence 90% of derivatives are speculation because genuine hedging only needs to occur once - is based on a misunderstanding, as my orange based example illustrates. You can quite legitimately end up with derivatives in existence with a notional value many times that of the underlying asset. Cash settlement has nothing to do with it.
Neither are derivatives like options at the root of the current financial crisis, as far as I know - the banks did not hold option contracts as assets ('collateral' as you put it) - they may have lost billions taking speculative trading positions themselves, using options, but that ain't the same thing as sitting on an asset base built out of mortgage CDOs that turn out to be worth a lot less than you thought.
The tragedy of this situation is that it has occurred at a time when the left barely exists as a political force, largely due to the crisis of the 1970s and, above all, the collapse of Stalinism in 1991.
The temptation is to take a fairly nihilistic view on this - as someone put it to me, like the feeling people had watching the Tories get smashed in 1997.
However, with our movement still in ruins on a global scale, we cannot expect to make any political capital out of it. Instead, millions are likely to face unemployment and impoverishment and yet the more likely beneficiaries will be the far-right and political apathy.
I'll admit I was wrong. Can the Left give us a little help around here?
I agree that no-one appears to have the answers right now, but I think everyone agrees that building an economy on debt is a crazy idea and Labour should be ashamed of themselves for claiming success when our economy was growing under these conditions.
Tory,
you can't have capitalism without debt - it would be irresponsible not to max out your debt to the limits that your revenue can service - that's why capitalism is so unstable, you always max out and something always disrupts the revenue streams.
The alternative is to cripple growth, with all the attendent political fall out that would bring.
The Guardian has been asking various leftists what they think:
http://www.guardian.co.uk/business/2008/sep/17/recession.labour
What do people think of the responses?
A left programme? For starters
1/ Comprehensive re-regulation of the global banking and investment entities. This would require one or more global regulatory institutions given legal powers to act by participating states. Clearly priorities for re-regulation would have to include limits on banks' powers to borrow from money markets (as a proportion of their deposit finance base), new rules outlawing speculative "shorting" of stock markets and new terms of reference for the emergence of the new "nationalised" financial institutions obliging them to observe a wider range of social, environment, sustainable standards (along the lines of proposals by Robin Blackburn and others. Radical new transparency laws requiring massively greater disclosure of
transactions by banks and near bank financial institutions.
2/ Introduction of sweeping crisis tax surcharges on higher incomes - notably in the financial sector.
3/ Legislation empowering regulatory institutions to require re-payment of most if not all of the excess compensation payments which bank executives have benefitted from before they "retired."
There is lots more. But a programme should be a concrete as possible.
John, you used to be much better when you understood the relationship between immediate and transitional demands. ('Workers News' had some good articles on the nationalisation of the banks)
re the Guardian article:
Ken Livingstone is a dyed in the wool reformist who believes in capitalism with better international regulation.
Caroline Lucas of the Greens is much the same, just more parochial.
Salma Yacoub is well meaning, but utopian- no real answers.
Ken Loach bigs up the Convention of the Left.
A collection of the usual suspects which has an utterly confused agenda.
They all come together to evade the real issues just as everyone needs to get home.
Planned in Madchester?
Meanwhile, Gordon Brown's authority as LP leader erodes daily, but there is no credible socialist contender!
Harman now admits there's a serious crisis of capitalism.
In some ways the "1930's in slow motion" analysis wasn't so far from the truth.
Unfortunately the SWP has continued to vacillate on transitional demands and dropped its Action Programme.
Now the Respect bodge-up's fallen apart it might need to revive it.
But the earlier version wasn't adequate for use in the mass organisations and unions.
Rather pathetically, the SWP tails the Cruddite left's call for a windfall tax at the very moment the Bush regime has adopted Nationalisation!!
Lindsey at least talks about Socialism. But how is it different from the SPGB's version?
Monbiot - New Deal reformist, politically hopeless as well as being a de-facto apologist for Nuclear power.
Benn - highlights the lack of democracy in the LP conference, but not a threat to Brown
Sheila Rowbotham - Another reformist - past her sell by date.
Galloway - Popular Frontist who wants to avoid theoretical controversy.
http://www.guardian.co.uk/business/2008/sep/17/recession.labour
"Lindsey at least talks about Socialism. But how is it different from the SPGB's version?"
Mmm, I think German's response is radically different from the 'SPGB version'.
A hint: An SPGBer wouldn't come out with stuff like "People have the right to work . . .".
I've written my thoughts on the potential challenge facing the left in the coming economic crisis here:
http://historysrevenge.blogspot.com/
No, no, you commenters on here are wrong. The collapse of our economy is the all the fault of greedy dinner-ladies!
Prianikoff - the Left is full to the brim with people who like nothing better than to sneer at, and denounce other leftwingers, much like you do in your contribution above. Well done. I'm not a big fan of Galloway, but he has it absolutely right at the end of his contribution, when he says that the Left needs to stop arguing about dead Russians.
Prianikof - I have read your comment but fail to grasp what you are on about. If my demands are badly conceived what are your counter proposals?
Congratulations to prianikoff for doing what so many on the Left still do best: the very urgent business of denouncing everyone else on it.
John Palmer:
"...global regulatory institutions given legal powers legal powers to act by participating states"
Global regulation of capitalism from above?
First of all you'd need to control the levers of finance in at least one state.
So I'm glad you mentioned nationalisation of the banking and finance system, even if it was in quotes.
Sounds like a Eurosocialist argument for reform of the EU as an acceptable alternative to the USA, Russia and China argument to me.
Ed:
Sorry I spoke, but the thread was about a dead Russian. (sorry, Ukranian) (Sorry Ukrainian-born Jew) (oh whatever....)
Galloway isn't right, he doesn't have any economic analysis whatsoever.
E10 Rifle:
There are quite a few people on the left I agree with, but they don't usually get interviewed in the Guardian.
Actually, I think prianikoff is, if anything, *too* kind to the miserable shower of reformists, utopians and liberals assembled by the *Graun* as being (supposedly) "opponents of capitalism" and "high profile left wingers."
Jarvis Cocker? Salam Yaqoob?? Ken Livingstone??? Caroline Lucas????
As for George Galloway's smug remarks about how the left needs to "stop arguing about dead Russians": it's a typically smart-arsed crack from this shyster (I wonder how long he's been working on it: and be sure that we'll hear it again), but it is actually a demonstration of his contempt for history and theory. It's saying that we have nothing to learn from the experience of the only workers' revolution to have taken place so far in human history. Also, it's a bit rich coming from an admirer of at least one "dead Russian", Joseph Stalin.
But I agree, It's depressing that the mainstream "left" and prominent supposedly "left" individuals like those interviewed by the Graun, appear to have no coherent programme to answer the present crisis.
Prianikoff/Jim Denham - The different but related approaches you both adopt sum up just why capital - although in a blind panic about so many issues at the heart of this crisis - can afford to ignore your versions of an anti-capitalist left alternative as totally irrelevent.
Jarvis Cocker's provided the best analysis of the current crisis so far I reckon:
http://uk.youtube.com/watch?v=zbGmAKXJoos
Sorry Prianikoff and Jim Denham but I often get the sense that people who make your kind of sectarian remarks are driven more by the desire to distance yourself from everyone else and wrap yourself in some kind of more or less isolationist comfort blanket. In the sadly rather unlikely event that a mass movement of the working class did emerge any time soon you would fall over yourself trying to put distance between you and it (no doubt finding all kinds of handy labels to denounce it with) because your politics are all about admiring yourself in the mirror.
This is by definition a rather solitary pursuit and one doesn't want other people coming along and hogging some of your self-regarding limelight. In fact, having no one to gleefully denounce would constitute something of an existential crisis for you.
Hmm - perhaps I ought to have toned down the anger a bit in the previous message. Prianikoff I have nothing in particular against you and in fact I've a feeling I've agreed with some of your remarks on SU Blog, but I just get annoyed about what I see as a kind of precious isolationist purism on the Left. And I note that above you rather dance around John Palmer's challenge to put forward some of your own proposals.
Ed, I'd suggest you actually read what I've said about the developing economic situation since the Northern Rock crisis developed.
Because I was arguing for nationalisation before Gordon Brown carried it out. To be followed by Bush nationalising AIG!
Who'd have thought it. But I don't recall any of the figures interviewed in the Guardian being prepared to make a firm prediction on anything, nor make that call. Not the SWP, Livingstone, Galloway or any of the rest of 'em.
Now of course nationalisation by the capialist state isn't the same thing as socialism and I've always made the distinction clear. But don't distort my position, call me a sectarian, or blur my positions with Jim Denham's.
I used to have some respect for John Palmer as a speaker (I've actually chaired meetings he spoke at) But he wasn't really involved in trying to keep together those people who were expelled from the IS in the 70's and I don't have much in common with his politics nowadays.
But I'm no sectarian. I've always worked in the mass organisations and have held elected positions for years as well as being a supporter of socialist unity.
But that doesn't preclude ideological clarity.
In fact the true sectarians are the people who are in self proclaimed minority organisations or like Livingstone, refuse to organise a real challenge to Brown and New Labour when the situation demands it.
prianikoff/jim denham - The point is not really whether I have undergone a process of political degeneration (whatever that might mean). The point is that Dave asked a concrete and specific question about what response "the left" should give to the current financial/economic crisis. My response (however inadaquate) was an attempt to formulate specific and concrete demands which - for example - might be taken up and supported for adoption by the trade union movement. However the sectarian left only underlines its utter political marginality by resport to abstract political points and sniping about personalities. If this is unafir - no doubt you will be able to enlighten us about what demands relating to the financial crisis the left should mobilise around at present.
John P: I for one have said nothing about any real or alleged "process of political degeneration" on your part. Where do you get the idea that I have? As a matter of fact I agree with your proposals as short-term interim measures. They have nothing in particular do do with socialism, but are still worth supporting. Similarly, Anatole Kaletsky's proposal (in today's Times)for "the (Northern Rock-style) nationalisation of the entire British banking system" (in the event of continued market attacks upon HBOS/Lloyds): nothing to do with socialism but still worthy of support.
We need a programme of transitional demands to protect workers from the effects of the crisis: a sliding scale of wages, a proper minimum wages (and a maximum wage), a programme of public works and the construction of social housing. We need a much more redistributive tax system and the entire banking system nationalised under workers' control. Contracted-out and privatised public services and utilities must be brought back into public ownership.
All of which is, of course inseperable from the fight for working class representation and a workers' government.
Actually, I would concur with a lot of Jim's points above.
Despite the massive amount of money being injected into the financial system, the mergers and nationalisations, bans on short-selling etc..
, it's clear that the crisis isn't over.
As the woman from the FT said last night on "Newsnight" re financiers and bankers :-
"no one knows the value of anything anymore,no one trusts one another"
There's a mass of dodgy assetts swimming around in the banking system and quite frankly they have become overvalued.
The only answer is for the state to take over the banks and their assets at minimal cost.
Homes and property can be rented out at affordable levels and administered by elected local councils.
The drain of public finances to support bankers must be stopped at all costs because very soon it will lead to a massive crisis in public expenditure. That will affect jobs, pensions, housing benefit and all other areas of state expenditure and lead to a massive real reduction in living standards.
It's a systemic crisis and anyone who claims to be a socialist needs to respond to it as such.
Which means that the lickspittle labour left needs to get its act together and find someone capable of challenging Brown with a socialist programme of action - there's 2 years left to organise this and everything to play for.
Oh good, another tiresome dig.
We, the "lickspittle labour left", need to do something, and your way of persuading us is with insults? What are you doing, prianikoff?
Well fine, Prianikoff - your proposals, however, clearly require the political services of groups you would no doubt call reformist (and in fact the kinds of policies you point towards don't seem a million miles away from the views of say, Caroline Lucas or Salma Yaqoob - who, of course, you had great fun labeling and denouncing above).
So, you want the Labour Left to get their act together and implement a left-reformist economic strategy while, presumably, you have great fun spitting venom at them for being, precisely, left reformists.
Poor, poor Ed. You just can't see the difference between moralising condemnations of the evils of capitalism and having a political programme to deal with it.