Sunday, June 22, 2008

Keeping Our Eye On the Ball

Speaking of Harvard, in today’s New York Times William C. Apgar, a “senior scholar” at the impressively named Joint Center for Housing Studies at Harvard University said, “People are beginning to understand that home ownership can be a very risky venture”.

The context of this story is the rise in foreclosures and the decline of the homeownership in the US during the presidency of George Bush, whose one stated goal was the creation of an “ownership society”. Yet, Harvard’s senior scholar speaks of home ownership risk in the same vein that one would speak of the risk of say, deep water diving. The social context of the event, if noticed at all, is completely cast aside.

A day before, two Bear Stearns fund managers were indicted in relation with the collapse of their funds in June ‘07. The near simultaneous collapses triggered the systemic crisis we have been witnessing for over a year. The indictment was given wide coverage; ex Bear executives in handcuffs being led to the federal court. The message was that unscrupulous individuals who had gamed the system were now being called on the carpet.

In these two stories we have the perfect example of the binary system of explanation that I have been writing about: the failings of fallible humans, and/or the can't-do-anything-about-it nature of things. Nothing else is entertained. Nothing else is permitted. The philosophy of philosophers of our time or the indictment of failed fund managers all serve to reinforce this message.

I am familiar with the funds in question and how they imploded. Without defending the propriety of the actions of the managers or denying the commonness of petty crimes in finance, their collapse was the proverbial Exhibit A in the subjugation of men to the laws of finance. For those not sufficiently convinced, the $200 billion plus losses that some of the largest and most sophisticated global financial institutions have suffered in the past year – institutions that by virtue of their presence tend to game the system – offers yet a more compelling evidence.

This brings me to Speculative Capital. The central point of my theory is that the crises of various form and intensity that we have been seeing since the mid 1970s are not a one time – or two time or three time aberrations – but the necessary consequences of the growth of speculative capital. Speculative capital is self-destructive; it tends to eliminate the opportunities that give rise to it. Hence, only a conscious change in policy would avert the crippling systemic failure that is in the offing. But any such change in policy, while in the realm of the possible, borders on impossible. Recall from the Credit Woes series that broker/dealers, for example, need to operate with a 30-to-1 leverage, or their business model would not be viable. But a 30-to-1 leverage is inherently unstable, as Bear Stearns found out and Lehman is in the process of finding out. That brings us to the inner contradiction of the system: to function, the system has to be unstable.

All this is detailed in Vol. 4 of Speculative Capital, The Dialectics of Finance. I have returned to the manuscript with a sense of urgency. That is why the blog entries might at times be delayed. By way of compensation, I will occasionally post excerpts from the manuscript.

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