By David James.
The explosion of “meta-money”, derivatives and the absurdities of high frequency trading, is difficult to categorise in terms of more conventional categories such as debt, equity or property. They are really a form of contract, a debauch with rules. It is hard to avoid the conclusion that it is also an explosion of debt. The leverage that is piled on top of derivatives plays and high frequency trades has to be some form of debt, although it is very different to a bank mortgage.
That money is rules seems to be almost never understood, let alone its implications. I was amused by this documentary on SBS about Wall Street. At the end a group of well meaning activists with regulatory experience sit around working out how regulators can set rules to curtail banking power. It is even pointed out that the power play between the White House and banks has a long history. Yet they lament that no matter how much you work on new rules, the banks will find a way round them.
This is the hole you get into when you don’t understand that money is rules. You think that government rules are essentially different from rules made up by private traders. They are not. They are both “money”. The question is how much power do you want to give to private players to make up their own rules of money. Finance is a special case; whereas in other industries what is bought and sold is different from the rules that government the market. In finance, what is bought and sold is rules; the rule setting for the market is no different to what is being exchanged.
Ergo, the issue is about who has the power to set the rules by which we live; government or privileged private players. Courtesy of Obama’s excessive caution bordering on timorousness and Geithner’s belief that it was necessary to leave all the players in place to ensure that “confidence” was maintained, the privileged private players have remained in power. They got a free pass after pulling off the greatest theft of modern history.
I don’t expect this point about rules and power to be understood any time soon. The GFC is still with us and will be for a long time. Until governments get some spine and do some basic thinking. But it is interesting to examine a little more closely what this insane meta money actually is. An article in the London Review of Books reviews a book by David Graeber — a player in the Occupy Wall Street movement, a movement that has no focused agenda but which at least understand that the issue is about who has power – proposes a three part model for debt:
The theoretical core of Debt is a loose schema of three types of human economic relationship. Communism (Graeber admits his use of the word ‘is a bit provocative’), exchange and hierarchy don’t describe distinct types of society but different ‘modalities’ of behaviour that operate to a greater or lesser degree in all societies, monetised or not. Graeber’s communism, which bears a resemblance to Kropotkin’s ‘mutual aid’, covers relationships answering to Marx’s dictum: to each according to his needs, from each according to his abilities. People act as communists not only towards friends and family but often towards guests, neighbours and strangers: ‘What is equal on both sides is the knowledge that the other person would do the same for you, not that they necessarily will.’ Relationships of exchange, by contrast, entail that each party gets from the other a more or less exact equivalent to whatever it’s given. Because exchange ‘gives us a way to call it even: hence, to end the relationship’, it takes place mostly among strangers. Hierarchy is, like communism, a mode of ongoing relationship, but between unequals. Enforced by custom, hierarchy requires that social inferiors make repeated material tribute to their betters in caste or status.
With this tripartite scheme in place, and illustrated with examples from Sudan to Greenland to medieval Europe, Graeber is ready to define the peculiarity of monetary debts. Like other market transactions, a loan is agreed to by formal equals, neither of them legally required to lend or borrow. But so long as a debt is outstanding – and any debt, being ‘an exchange that has not been brought to completion’, extends across time – ‘the logic of hierarchy takes hold.’ Equality is restored only when repayment is made in full. The servicing of debt can meanwhile become a way practically to dominate the formally free, to exact a stream of tribute in societies that recognise no official hierarchies. The implication is that orthodox economics, by presuming exchange to be the source and circumference of economic life, misses something about both the socio-historical environment and the political essence of debt, for relationships of hierarchy and communism historically precede and socially encompass all apparently uncoerced and spontaneous transactions, while monetary debts often smuggle gradations of power into what look like horizontal exchanges.
What are derivatives, or HFT, looked at through this prism? It certainly is not communism. There is no fellow feeling or interest in others involved. It is far too mechanised for that. For traders, it is more like a relationship of exchange, albeit that which occurs in a casino (everyone gets the same value chips, the rest is up to you and your luck).
For everyone else, this world of meta money establishes a form of hierarchy, not unlike a feudal hierarchy. Those in the finance sector are the privileged class. They can make mistakes in the hundreds of millions or billions made without significant penalty, especially when government bail out funds are around (and even when not, because the individuals can walk away from their job).
But mistakes with conventional monetary transaction, such as a mortgage, carry huge and lasting penalties. In other words, those not playing in the meta money sphere, but the conventional money sphere, are becoming an underclass. Subject to the power games of self appointed and unconstrained elites in the finance sector. Which is a form of social violence. Sadly, this is not understood. It is one of the great evils of our time.