Volatile financial markets and the ghosts of capital

In the end, even Alan Greenspan was confused. The former head of the Federal Reserve, and one of the radical defenders of unbound financial markets, had to confess in October 2008, that his world view did no longer work: “Those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity are in a state of shocked disbelief … What went wrong with global economic policies that had worked so effectively for nearly four decades?” Even if Greenspan’s disbelief is surprising given the recurring disasters on global financial markets since 1987, his perplexity is shared by most of the economic opinion makers. Every new crash, it seems, represents a new situation, it lies outside of all expectations, yields fatal consequences, forces a retroactive search for explanations, for reasons and rationality.  Apparently, this is the result – in Greenspan’s famous phrase – of “irrational exuberance” that challenges the system of economic rationality itself.

Economics – the theology of our times – provides two different interpretations for the actual troubles in the financial markets. One is orthodox in nature and originated with the Chicago School of Economics and its central “hypothesis of efficient markets”. In this interpretation, the financial markets represent the markets as such and in greatest purity. Unburdened by transport and production, they are ideal venues to set prices, to perfect competition, and to let rational, i.e. profit-seeking and reliable actors interact. That is why the movement of prices on these markets reflects immediately all available information. Insofar as all actors under these optimal conditions of competition have access to all relevant information, prices always express the truth of underlying economic events; the corresponding equities are never over- or undervalued. The oscillations, the up and down movements of the market are either due to annoying impediments to the free movement of markets, or to new, unforeseen information.  Crises are nothing but steps in the process of adaptation; they document the ineluctable march of economic reason. The market is rational.

The other interpretation is less conservative, but no less orthodox. It understands crises as bubbles, in which speculative investments have become detached from the real economy. It registers dangerous over- or undervaluations on financial markets, which originate in external, non-economic factors, like mass behavior and manias, dilettantism, gambling, or simply greed. From the Dutch mania for tulips to the present collapse, financial and stock markets wrestle with a problem of inclusion: they contain too many or incompetent players with sinister motives who cause irrational movements and from time to time cause economic states of exception.

Doubts, however, remain. Is irrational exuberance really the exception, or rather the rule in capitalist economies? Is the distinction between rational and irrational behavior sufficient to capture the effects of the system? Is it really just greed that motivates actors? Or is economic rationality here confronted with its own limits? Does the system really work in a rational manner?

These questions touch upon a distinction that has a long tradition in economic thought, the distinction between real and fictitious values. From Aristotle’s condemnation of money markets to contemporary programs of market economies, this criterion remains intact in various guises: as just price, as natural, true, or real value that – in one way or another – represents the requirements of the market. Unfortunately, the traditional oppositions between real and fictitious, true and virtual economy do not help to understand the flow of capital and pricing under capitalist conditions. This is not only because at the latest since 1971 – with the cancellation of the Bretton Woods arrangements – currencies are no longer pegged to the gold standard and thus abandoned the illusion of being covered by a ‘real’ substance or value. Rather, capitalist economies as such can only be understood as an economy of credit, and money only as credit vouchers.

Already the first theories of public credit at the end of the 18th century were conscious of this fact. According to them, liquidity, i.e. the circulation of capital, can only be guaranteed if the tokens of money are not immediately covered, if they cannot be converted into material values such as gold or silver. Modern money issued by banks is a promise of money, and this represents a serious problem for economic analysis: it requires us to think that we cannot ride on the promise of a horse, but that we can transact business with the promise of money. Money conjoins two absolutely contradictory perspectives: on the one hand, it is a substitute for circulating metals; on the other hand, it documents the lack of a corresponding equivalent. On the one hand, it vouches for the existence of deposited sums and values, on the other it functions only when the demand for conversion is not honored. Modern money, in other words, emerges as the promise of a certain value substance, and as the lack of the value it promises. Money – until today – is not really money but the unredeemed promise of money; it manifests itself in a paradoxical self-reference, in the unity of solvency and insolvency. As credit money, modern money is a creation from nothing; it caches its own material reference and makes the distinction between real and fictitious value obsolete.

This means also that payments are always promises of payment. The system escapes its own bankruptcy only because it programs itself towards an always-open future, towards its own infinity. The paradox of solvency and insolvency is broken only through the consistent temporalization of the system. If the circulation of an essential lack is the condition of capitalist credit economy, then its function can only be explained through the efficacy of an infinite deferral. Every payment appears as the anticipation of a payment, and thus dissolves the closed circuit of reciprocity, of exchange and counter-exchange. Solvency and insolvency circulate in equal measure; they guarantee the stability of the system insofar as every transaction opens up the prospect of the next transaction.

This means – as Karl Marx had already noticed – that the sphere of circulation becomes autonomous; it detaches itself from production, and cannot be converted by means of simple exchange. The exchange value becomes the moving force, but in contrast to the circulation of mere money | in the circulation of credit money and capital every payment is only an advance that initiates a new, infinite movement. This means that the system is characterized by a fundamental tendency towards the future. It is the future that is productive and that makes financial markets into the measure of economic innovation. At the heart of this economy, then, is the principle of an unmet promise; its functioning is guaranteed by an unpayable debt.

The perplexity expressed by economic dogmas suggests that financial markets are efficient when chaotic, omniscient when ignorant, rule-governed when aleatory. They are governed by rational irrationality.

It is for this reason that analysts could claim that futures trading, options, and derivatives are as old as capitalism itself, and that the tendency toward the future had been an essential motor for the development of ever-new financial instruments. On the one hand, futures are trivial and an old element in the functioning of a stock exchange: they are contracts about the buy-off of commodities at a future date, but at a determined price; a contract, that is, that binds both parties to the acceptance of a contingent future. On the other hand, the history of futures trading shows that it implies a non-trivial detachment of time trading from commodities exchange. Futures trading avoids the physical conditions of production and dissolves the identity of commodity and price. In other words: somebody who does not posses a commodity and neither expects nor wants it, sells this commodity to someone who does not want it and never gets it.

The dynamics of futures trading, the motor of capitalist economy, rests on two main conditions. First, on a self-referential communication: prices do not refer to commodities and goods, but to other prices such that present prices for absent goods are determined by the expectation of future prices for absent goods. This kind of trade is freed from all material ties. It performs an act, which is no re-presentation but the de-presentation of world. Secondly, transactions of this kind rely on what we can call gambling contracts – contracts that pertain to transaction with unclear outcome, to unclear future events. This leads to the indifference between trading, betting and gambling; and the name for this phenomenon is ‘speculation’. The risky bet, the gamble with the future is at the very heart of all economic activity. Speculation is the norm of all financial transactions.

These elements: the economy of credit and capital that obviates the distinction between real and fictitious values, the tendency towards the future that loops back present activity with expectations, and a financial normality that cannot be other than speculative – these elements have given rise to the dynamics of financial capitalism and pledged the present to the future. This becomes particularly evident in those futures that since the beginning of the 1970s trouble financial markets. For after the end of the Bretton Woods arrangements and the beginning of floating currencies it seemed appropriate to stabilize the risk of unsteady exchange rates with currency futures contracts, and thereby to create a market for new financial instruments, as Milton Friedman had suggested in a well-known memorandum. This causes new forms of risk management, the so-called hedging: futures contracts with currencies, stocks, and mortgages. On the one hand, this meant an extension of the market and allowed trading in goods that previously had been unknown, such as the value of entire national economies, pension funds, medical careers, or climate changes. On the other hand, hedging follows the principle of dispersing risk; it is based on the hope to manage risk through spreading risk, to insure speculative transactions through speculation. This principle presupposes the future as an inexhaustible resource. Where markets for new risk are created to insure other risk, present risk is insured through future risk, and these through the risks of future futures.

Here perhaps it is necessary to recognize the simultaneous increase in security and insecurity, which can be limited only by a further escalation of security and insecurity, and hence by unlimited futures. This puts one of the favorite ideas of liberal economy into question: the presupposition that markets tend towards self-correction, and follow a model of balance and equilibrium. Rather, it is more pertinent to talk about dynamic imbalances, as some insiders have recently done. Futures and derivatives markets are characterized by the fact that in their self-referential structure they do no longer gravitate around fixed or real values. Actors in these markets do not rely on known quantities, but attempt to judge a contingent future according to how the market judges it in the present. The market works as a system of anticipations that oblige economic behavior to guess what the market might think of the future. This makes reliable factors, like supply and demand, not only unrecognizable but also unknowable.

Keynes already had attested to financial markets the logic of a beauty contest where jurors guess what other jurors guess what other jurors might guess. Not was has been determines the logic of events but what perhaps, possibly or likely will be. George Soros, the successful investor, has called this the “reflexivity” of financial markets: present expectations not only anticipate future events; rather, future events are shaped by the expectations for future events. This is why bubbles and positive feedback loops are not catastrophic exceptions but functional elements of the system. Rising prices increase rather than decrease demand.

The crash of the US housing market was from this perspective a trigger, but not the sufficient reason for the ensuing worldwide financial collapse.  At the beginning there prevailed a kind of economic reason: subprime mortgages were bundled by lenders and sold as securities to investment banks which repackaged them into funds and bonds and sold them on the market in order to increase liquidity. When in August of 2007 borrowers began to default on their mortgages and housing prices fell, this same reason retreated symmetrically backwards: credit became expensive, derivatives could not be sold, funds and bonds lost their value. What remained were the notorious black holes of liquidity. Every one of these movements increases  the harmonic oscillations in the system. Such catastrophes of resonance are entirely rational.

What this means, in sum, is that uncertainty – the potential of our future – is in this context not simply the object of expectation and foresight, but effects our present and determines its course. Its uncertainty is what now, at this moment, intervenes. If once modern societies were formed to convert danger into risk, and to domesticate contingency, now the accidental, the dangerous, the untamable has returned into the heart of society. If once the idyll of the market place harbored the hope that the egotism of its actors could be converted by an invisible hand into the rationality of the system, now the pursuit of economic rationality produces uncertainty and irrationality. Just as capitalism cannot be described as a program of rationalization, speculation and speculators cannot be described as pathological exceptions. Such critique of capitalism would be too shortsighted and reproduces, at best, a prejudice against usury and lending that is reminiscent of scholastic theology.

Nonetheless, we must recognize here a new development in which states of exceptions have become the norm. The perplexity expressed by economic dogmas suggests that financial markets are efficient when chaotic, omniscient when ignorant, rule-governed when aleatory. They are governed by rational irrationality. What has returned is the old danger inherent in figures of sovereignty: uncertainty has become arcane and makes decisions that, because of their unbound character, turn into fate. That is the wilderness and the perfidious future into which our society has financed itself.

Joseph Vogl is a culture- and literature scientist and lectures in Berlin and Princeton