Monday, August 18, 2008

Mission Accomplished: The Destruction of Fannie Mae and Freddie Mac (Epilogue)

The destruction of Fannie Mae and Freddie Mac is an example of the self-destructive tendency of speculative capital materialized in the actions of its blind agents. The agents are blind in the sense of being concerned only with facilitating the movement of speculative capital to and from arbitrage relations, no matter what the consequences. If the consequences are ever contemplated, they are shooed away like a fly.

Were we to magically turn into spirits, travel back in time to early 2001 and warn the members of Financial Services Forum by playing a tape of the events that unfolded, each one of them would echo Lady Macbeth who asked the spirits “to stop up the access and passage to remorse, that no compunctious visitings of nature shake my fell purpose”.

It is not a murderous resolve, however, but the instinct to go “with the flow” that would cause the financial executives to dismiss our warnings. The instinct is a practical one. It is a realization of the subjugation of the individual to the social forces, of the kind that create economic and financial activities. In the “advanced” financial markets, the role of the individual is diminished to the insignificance. All CEOs, being practical organizational men, know the limits of their power – as individuals within an organization or an organization within the system.

Chuck Prince’s much maligned comment about dancing as long as music played spoke to that fact. What could he do, in say, summer ‘06, if he had foreknowledge of events? Could he order Citi to dissolve the SIVs and stop buying CDOs?

Such an order would be akin to a general ordering his units to stop fighting in the midst of war. There would serious and certain personal consequences and uncertain systemic implications.

On a personal level, let us keep in mind that the SIVs and the CDOs existed because they generated profit. The prospect on Wall Street is gloomy these days precisely because there is no substitute on the horizon for the lucrative money machine that came to a halt.

If a CEO – always under the gun to deliver better results – so much as hinted at shutting down this business, with all the implications of lost jobs, lost profits and lost bonuses that it implied, he would hauled out of the office. No, better to be hanged with others than singled out and dismissed as a fool.

Then, there would be the question of cause and effect. If, on our imaginary trip, an executive demanded proof that the destruction of Fannie and Freddie would cause a systemic crisis, we would be at a loss to offer one. As a matter of fact, no such cause and effect relation exists, else it would imply that had Fannie and Freddie continued business as usual, there would be no crisis. And that is a fallacy.

Despite the absence of a cause and effect relation in this particular case, however, we are not in a Beckettian labyrinth of disconnects where every event could be said to have “proved nothing, refuted nothing.” On the contrary. Armed with the theory of speculative capital, we recognize the driving force behind the changes taking place in the world of finance and the direction of that change. The current crisis is a systemic shock, the system being the sum total of all the business models and relations, laws, regulations, policies, products and, of course, the financial institutions active in the milieu. Fannie and Freddie, however large, are mere two entities in this complex web.

Their destruction, in accordance with the self-destructive movement of speculative capital, exacerbated the crisis. It gave the system another black eye; it made it more vulnerable. Vulnerabilities are the necessary conditions of collapse. That is the central point of the two-part “Destruction” series.

The nemeses of Fannie and Freddie are rubbing their hands with pleasure. In the mean time, Fannie and Freddie are not the only ones whose future will be different from the past.

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