Monday, 20 July 2009

Total Bankers

Fictitious capital: that’s what Marx called "money that is thrown into circulation as capital without any material basis in commodities or productive activity” (the quote is from David Harvey). You can’t knock ol’ Karl’s gift for phrase making, can you? Even now, I’d hazard a guess that the label – if not the content of Marx’s idea - conjures up something very important about popular understanding, or lack of it, of the financial markets. Many of us think they’re just playing silly games with pretend money.

Now this isn’t quite right of course. & every now and again one of the Masters of the Universe will descend from Mt. Olympus to haughtily explain to us that it isn’t like that at all, it’s about the most efficient allocation of capital and of risk which is A Very Complex Matter, & Probably Beyond The Ken Of We Mere Mortals. But Gillian Tett ends the very readable Fool’s Gold with this observation,

“In many ways the craft of finance is not so very different from that of the water industry: both exist in order to push a commodity around the economy for the benefit of others. If those pipes are wildly inefficient, leaky or costly, then everyone suffers.”

In any case, a rather basic question does suggest itself: efficient allocation of capital and risk for what? On this subject, it seems to me, theorists of financial markets are very largely silent. Or they just snort with derision at such a silly question. Risk is the risk of gaining or losing money. Efficient allocation of capital is making sure that that risk ends up in the hands of those most prepared to entertain the possibility extremes of winning or losing. Or so the theory has it.

But that’s not reality. Those with wealth but the wrong balance of capital ‘risk’ may sometimes lose on the market, but those without substantial capital assets, or whose few capital assets have effective ownership rights exercised by others of a different class (cf most pension funds), always lose in comparative terms. That's why inequality has been been growing at such a rate for the last generation.

And what if, actually, inequality made us ill? Or more likely to go mad? Or less likely to trust each other? Or just simply fucked up our kids? Would that suggest that capital wasn't being 'efficiently' allocated?

Marx spoke of 'fictitious' capital. But, having read Tett, what I'm left with is a sense the cleverest people in the the financial markets have developed a range of 'fictitious' risk avoidance techniques, akin to the image I've illustrated this post with (note the small text at the bottom). Yes, CDOs and all the rest of the architecture can, if not used to extreme, moderate the risk of losing money. Yes, those who argue in favour of 'financial innovation' and 'not throwing the baby out with the bathwater' have a (slender) point.

But this is not the issue. The issue is capital is being used to fuck most of us up, most of the time. It's got to stop. That 'risk' has to be controlled for. Let's start with with bankers 'wages'.

To be Candide about it, perhaps it is time we should shoot some of them to encourage the others. Failing that, if it is status they're worried about, can we organise a national laugh-in at these overgrown Pru salesmen? Can we just make it seem ridiculous that people who ensure a continual supply of water, and guard against the risk of water failure, get normal wages whilst bankers get paid fortunes?

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