How Financial Derivatives Have Reshaped the Assemblages Of
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Tracing the Performativity of Financial Practices: How Financial Derivatives have Reshaped the Assemblages of Global Finance1 Draft: Please do not cite without permission Marcel Goguen Department of Political Science McMaster University 1280 Main Street West Hamilton, Ontario, L8S 4M4, Canada [email protected] Keywords: Financial derivatives; performativity; Networks. Scholarly work on the 2007-8 financial crisis has given much attention to the role of financial derivatives. While most scholars are careful not to place blame for the crisis squarely on these “exotic” financial instruments, they are widely held to have significantly contributed to the scope and intensity of the crisis. Despite the importance of these insights, the significance of financial derivatives goes beyond their impact on the probability of financial crisis and their scope and intensity once they occur. While scholars have begun to address these concerns, the extent to which financial derivatives have altered the complex array of networks that are involved in the payment networks and apparatuses of valuation that enable and condition the organization of the global political economy remains relatively underexplored. Drawing primarily on three broad literatures, ranging from the theoretical debates on the nature of money to recent critical work on the performativity of financial practices as well as aspects of Actor Network Theory, this paper will contribute to the development of a better understanding of the “long chains” of human and non- human actors that constitute the international payment and valuation systems and how these have been significantly transformed by the use of financial derivatives. Through this investigation, it will highlight the degree to which the massive use of financial derivatives has created concrete links between the value of variety of previously unrelated activities and commodities. In doing so, they have changed how different aspects of the global political economy relate to each other. 1. Introduction Since the 2007-2008 global financial crisis (GFC), many scholars and journalists have drawn attention to the role played by the relatively complex and novel financial instruments – derivatives – that were used by banks and other bank-like entities to hedge risks as bearing a significant part of the blame for the severity and scope of this crisis, 2 even if their role remains poorly understood (Stout, 2011). The history of the GFC and its causes it complex and contested, but it would be difficult to find an account which did not identify unregulated over-the-counter (OTC) derivatives as an important factor in explaining the scope 1 Paper to be presented at the Canadian Political Science Association Annual Meeting in Calgary, June, 2016. A much revised version of this paper was also presented at the International Studies Association Meetings in Atlanta, Georgia, March, 2016. 2 On the role of derivatives in the GFC, see Helleiner, Eric and Stefano Palgiari (2009), Biggins and Scott (2012), Story (2010), and Stout (2011). 1 and intensity of the crisis (Biggins and Scott, 2012)3. However, while there has been much attention given to the historical development of financial derivatives and the feasibility/desirability/capability of state regulation of these financial instruments, this paper is interested more in what derivatives do and how they do it. This paper is meant to contribute to this effort. As this is a primarily conceptual exercise, the paper will be structured around explorations of some of the central relevant concepts: money, markets, economic value, financial instruments, and derivatives. Breaking Finance to its parts Finance can be defined narrowly as a set of instruments—loans, securities (bonds and equities), and insurance—that facilitate the transfer of savings across actors and time in exchange for payments. (Tony Porter, 2010: 2) When most people speak of finance, they understand it to mean something close to Porter’s above definition. Finance is about the organized transfer of accumulated money (or capital) from those who have more than they need to those who need more than they have in exchange for payments (interest). In a similar but differently formulated definition, Germain (1997) has proposed that “finance refers to the organization of credit and the management and commodificaton of risk” (qtd in Aitken, 2011). Here, while the focus is on credit, which is a form of money, and risk, which determines the payment rates and flows of money, the underlying is the same: it is about how and to whom money flows. In this sense, as Bryan and Rafferty have noted, “[f]inance has often been presented as a passive vehicle of capital’s social and economic relations” (2008: 125). However, as this paper will argue, this conception of finance is fundamentally inadequate for understanding the complexity of the global financial system. In order to address this theoretical weakness, this paper is devoted to a theorization of the three primary concepts contained in this definition of finance: money, accounting, and risk management. 1. What is money? While it might sound surprizing, the concept of money has received relatively little attention from the one discipline from which we might legitimately expect to find the most: economics4. Indeed, as Ingham recounts of his own experience thinking about the significance of money, [f]ollowing initiation into the ‘Sociog’ tribe (Leijonhufvud 1973), I lived for many years among the ‘Econ’, working as an underlabourer on what was referred to as the ‘social context’ of economics. During this time, I 3 In a useful summary of the dominant reading of the causes of this crisis, the authors note that: “t]he ultimate roots of the GFC are multifaceted and traceable to a multitude of festering structural and cognitive deficiencies in the international financial system which eventually fused into a catastrophic chain reaction of events […] broadly speaking,” […] the GFC owes its immediate trigger to accelerating mortgage defaults in the US. This, in turn, led to a collapse of the speculation-dominated market for securitised mortgage products and contingent derivatives. Systemically important institutions such as Bear Stearns, Lehman Brothers, and American International Group (AIG) began to realise losses on securities and derivatives portfolios, resulting in a slew of credit ratings downgrades, in turn triggering a crisis of market confidence and freeze in inter-bank lending. This generated a self-reinforcing liquidity crisis which interplayed with a solvency crisis at major institutions, resulting in a full-blown financial crisis.” (Biggins and Scott, 2012: 320-1) 4 As Ingham has noted critically, “Money – as an economic phenomenon sui generis – does not command a significant analytical status in the dominant traditions of economic orthodoxy.” (2001: 307) 2 became interested in London’s capital markets and asked some of the ‘Econ Bigmen’ for guidance (Ingham 1984). I wanted to know, in simple terms, what money was. They seemed amused by my naivety and explained that money, as such, was not really as important as common sense might suggest. But, I was not convinced, and lacking a thorough grounding in microeconomic analysis, found it difficult to accept the counter-intuitive ‘neutral veil’ conception. General equilibrium theory’s inability to provide an essential place for money in its formulations was even more puzzling (Hahn 1982). I dropped the matter for quite a time. (Ingham, 2000, p. 16) In neoclassical economics, the most academically and institutionally dominant approach within the broader field of economics, money is understood to be essentially a kind of `veil’ that merely facilitates barter or market exchange relations between nominally independent, free and rational individuals.5 More explicitly, as Ingham has noted, “[t]he metatheory of the ‘real’ economy that underpins (neo)classical analysis is concerned almost exclusively with money as a medium of exchange. The other functions (unit of account, means of payment, and store of value) are taken for granted or assumed to follow from the medium of exchange function. (2000, p. 17) From this perspective, he continues, [a]s either a commodity itself, a medium of exchange can have an exchange ratio with other commodities; or, as no more than a symbol or token, it can directly represent ‘real’ commodities. In this conception, money can only act as a ‘neutral veil’ or ‘lubricant’. Money is not an autonomous economic force—it does not make a difference—rather, it merely enables us, according to Mill, to do more easily that which we could do without it. (Ingham, 2000, p. 17) In the same broad direction, J Benjamin Cohen has noted, drawing approvingly on the work of, in his words, “a once-prominent British economist,” who “wryly” noted that [m]oney is one of those concepts which, like a teaspoon or an umbrella, but unlike an earthquake or a buttercup, are defined primarily by the use or purpose which they serve" (Hawtrey 1928: 1). Money is anything, regardless of its physical or legal characteristics, that customarily and principally performs certain specific functions. (Cohen 1998, p. 11) The widespread adherence of this understanding of money is exemplified by the definition given by Leyshon and Thrift in their influential edited volume, Money/Space. In the introductory chapter to this volume, despite approaching the matter from a self-consciously critical and unorthodox lens, they still end up positing, as the starting point for their inquiry, that [i]n theory and in practice money can be, and has been, a wide range of physical objects, from shells to porpoise teeth, from precious metal to stones (Angell 1930; Davies 1994; Einzig 1966; Galbraith 1975). But it is not the materiality of money that matters so much as the ability of money to perform two key roles in the process of economic exchange, namely to act as both a medium of exchange and as a store of value. In performing these roles, money necessarily takes on two additional roles, as a unit of account and as a means of payment.