Tuesday, February 10, 2009

A Change in the Order

Since early January, I have been working on Vols. 4 and 5 of Speculative Capital, putting hundreds of pages of disjointed writings into a recognizable manuscript form. This is the most time-consuming part of writing a book for me, where the broad outline of the book, the title and order of the chapters, takes shape. The process involves incorporating hundreds of “notes to myself”, references to books and newspaper articles and random thoughts jotted down over the years into a coherent ensemble with well-defined chapters. The last part is especially challenging because many thoughts, at times expressed in tens of consecutive pages, could be placed under different headings with equal justification. It requires long, concentrated hours to determine the chapter headings and the text that should come under it.(It is said of Andrew Lloyd Webber’s music that the scores in all his musicals are interchangeable. I would take no offense at similar charge pertaining to the text in Speculative Capital and would in fact welcome it as a sign of the coherence of the theory; the entire Speculative Capital series is logically but one book.) Dialectics precludes arbitrariness. Each chapter of Speculative Capital must logically lead to the next. It is the progression of these “means” in the dialectical method that is precisely the end. (It was the enforcing of this logical progression a decade ago in a book supposed to be on derivatives that led to the Theory of Speculative Capital.)

I bring up this background because in streamlining the manuscript of Vols. 4 and 5 I realized that their order was wrong. Systemic Risk, planned as the final Vol. 5, must come before Dialectics of Finance, currently slated to be Vol. 4. Therefore, the next book in the Speculative Capital series will be Systemic Risk. It will be followed by the 5th and final Vol., Dialectics of Finance.

Before settling on the decision, I had to convince myself that it was not influenced by the “opportunism” of rushing a book on systemic risk to market in the midst of a systemic crisis, however unconscious and subliminal that influence might be. This was especially pertinent because Systemic Risk could be completed and published sooner than Dialectics of Finance. But I think that my decision was independent of these considerations.

Systemic collapse is an historical event created from the self-destructive movements of speculative capital, the latest and most developed form of finance capital. The development of finance capital is the subject of Dialectics of Finance, which subject “contains” the systemic risk.

The Theory of Speculative Capital helps us see and understand the mechanical aspects of the current crisis. In the 10-part Credit Woes series and several other entries in this blog I have broadly described the various dimensions of the collapse. Vol. 4 will provide further details.

But what explains the price fall – collapse is really the word – across all markets? Why did the prices collapse?

Those with monopoly on high quality thoughts who monopolize the Op-Ed pages and the TV air time inform us that the reason is Bubble. Bubble explains everything. The economy has bubbles as the water has, they tell us. And economic Bubble has popped. That is the answer.

In reality, the price collapse we are witnessing is due to the transformation of values to prices. You do not hear about this topic because it is difficult!

Say, you pay $200k for land, spend $200k on the material and pay $200k for workers to build you a house. The value of the house is $600k. The offer you get, in line with the market price, is $420. The “whereabouts” of the $180k loss is the subject of this transformation, which takes us to realm of value – the exchange value, to be exact. The value is a social concept. Like other social concepts such as honor or morality, it has no meaning to man on a desert island. To understand value, then, we have to go beyond the technical description of the financial events and study the social relations as well. That is precisely the realm of Dialectics of Finance, where the movement of finance capital is investigated in the entirety of its social interconnections. The works of writers of our time, the philosophers of our time and the justices of our time are thus relevant to our investigation.

When I began the Speculative Capital series more than a decade ago, the collapse of the financial markets seemed its logical end, the terminal point for the self-destructive movements of speculative capital. What else could there be after the system-wide collapse of the financial institutions?

But that view is mechanical because it sets an arbitrary ending point for the investigation. A systemic collapse, of however unprecedented scope and intensity, does not spell the end of finance capital. It merely begins a new phase for it. Speculative capital is self destructive, but it is also self reinvigorating and self reconstructing. (Such is the nature of dialectical attributes!) After each crisis, it rises again in a new form to declare: En ma fin est mon commencement. No serious student of finance could ignore these developments.
Truth, the cognition of which is the business of philosophy, became in the hands of Hegel no longer an aggregate of finished dogmatic statements which, once discovered, had merely to be learned by heart. Truth lay now in the process of cognition itself, in the long historical development of science, which mounts from lower to even higher levels of knowledge without ever reaching, by discovering so-called absolute Truth, a point at which it can proceed no further, and where it would have nothing more to do but to fold its hands and admire the absolute Truth to which it had attained.
I would not be finished after the delivery of Systemic Risk. I have barely begun to write.


Erwin Streumann said...

Dear Mr.Saber,
Already in the first volume you described systemic risk associated with the functioning of speculative capital the illustration of which is provided now. Today you made an important point:
"Speculative capital is self destructive, but it is also self reinvigorating and self reconstructing".
So,after the crisis all will revert to the same condition grosso modo, probably, on a new level. Apparently that is what is in mind of regulators in financially developped countries and international financial institutions. But this would mean the repetition of progressively more intense crises with a prospect of a final blow annihilating the contradictions together with their agents. That picture leaves little room for rational interference with financial developments. And this is hardly compatible with the conscience of the modern man:
"The philosophers have only interpreted the world, in various ways; the point is to change it."
One would recall that a legal gimmick saved capitalism from accelerated monopolistic decline in early 20th century - antitrust laws. People like Stiglitz in UN, UNCTAD, ILO think it possible. However, G-20, IMF, WTO, WB are less convinced of the need of "social justice for a fair globalization" (2008 ILO Declaration).
"International" managers apparently believe that it would be possible to create favourable conditions for the expansion of speculative capital while limiting its destructive potential. Its integration with ruling elites leaves small chances for any radical socially innovative change however desirable it may seem to the majority of mankind.
At the recent meeting in Berlin of the German Chancellor with heads of international organizations it was stated:
" Despite today’s troubled state of the global economy, all countries have a duty to resist protectionist tendencies, work towards tangible further opening of world trade and ensure that their stimulus packages do not disrupt trade. Open trade and openness to cross-border investment are the best preconditions for ensuring that economic momentum is regained on a global scale." (http://www.bundesregierung.de/nsc_true/Content/EN/__Anlagen/2009-02-05-presseerklaerung-merkel-io-eng,templateId=raw,property=publicationFile.pdf/2009-02-05-presseerklaerung-merkel-io-eng)
Isn't it close to your description of what should be expected from the agents of speculative capital?
Could you still imagine international decisions that would change the nature of speculative capital?
Or at least minimize its impact on social environment?
Kind regards,

Nasser Saber said...

Dear Erwin,

You summed up my points well. Speculative capital is self-destructive but it is not suicidal. The conflicting attributes of phenomena -- self destructive and self reinvigorating in our case -- are all around us. Every second, the moon falls about 2.5" towards the earth but then it is thrown out by the centrifugal force of the motion. Falling and being pushed back -- such is the nature of the circular motion. Speculative capital has these conflicting tendencies as well except that the relations keeping moon in the orbit are stable; those produced by SC are not. So the system crashes only to repeat what it "knows", which is search for profitable arbitrage opportunity, on a new level and scale which, of necessity, is more intense and therefore, brings about the next crash in an even shorter. Hence the "100 year flood" that, having started in 87 market crash, keeps hitting the financial markets in every decade.

You cannot, however, take out the "bad" attribute and keep the "good" one. That is how these attributes seem to us. To the phenomenon in question, they are "neutral" and, more to the point, a defining characteristic of it. If the earth's gravity is "turned off", the moon will shoot away to the eternity. If the centrifugal force is turned off, it will crash into the earth. Recall that famous dialectical saying that you cannot have your cake and eat it too!.

You are also right that the entire jockeying in Washington is about resuscitating the system without changing the business model. So the New York Times informed us in its front page on Feb 10 that "Geithner said to have prevailed on the Bailout". Geithner himself was probably led by the nose by the Goldman executives. (See my Jan 21 entry on "Why was Lehman allowed to fail"). That gives us the direction and limitation of the rescue plan.

(Parenthetically, just to see how much the CEO of Goldman knows about crisis, read his Op-Ed page piece -- "Do Not Destroy the Essential Catalyst of Risk" -- in Feb 8 FT. It is astounding how little the man knows. Here is a quote.

"If more institutions had properly valued their positions and commitments at the outset, they would have been in a much better position to reduce their exposures."

This is akin to saying that if Napoleon had a mechanized division and an air force, he would have been in a much better position to reduce his losses in Russia.)

Nevertheless, we have to come to terms with that rescue plan because that is the "we have no option if we are going to get credit flowing in this country other than to work with the existing institutions" (NYT, Feb 11).

The question before us and the question you are asking, is whether the actions taken by the U.S. and Western governments are sufficient to neutralize the crisis. And if not, what are the alternatives? Allow me to take on this subject in the next entry.