Derivatives and the Wealth of Societies
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Overview
To answer that question, the contributors to this book draw upon their deep backgrounds in finance, social science, art, and the humanities to create a new way of understanding derivative finance that does justice to its social and cultural dimensions. They offer a two-pronged analysis. First, they develop a social understanding of the derivative that casts it in the light of anthropological concepts such as the gift, ritual, play, dividuality, and performativity. Second, they develop a derivative understanding of the social, using financial concepts such as risk, hedging, optionality, and arbitrage to uncover new dimensions of contemporary social reality. In doing so, they construct a necessary, renewed vision of derivative finance as a deeply embedded aspect not just of our economics but our culture.
Product Details
| ISBN-13: | 9780226392974 |
|---|---|
| Publisher: | University of Chicago Press |
| Publication date: | 11/02/2016 |
| Sold by: | Barnes & Noble |
| Format: | eBook |
| Pages: | 312 |
| File size: | 2 MB |
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Read an Excerpt
Derivatives and the Wealth of Societies
By Benjamin Lee, Randy Martin
The University of Chicago Press
Copyright © 2016 The University of ChicagoAll rights reserved.
ISBN: 978-0-226-39297-4
CHAPTER 1
The Wealth of Dividuals
Arjun Appadurai, New York University
Finance and Dividualization
One of the pernicious effects of the era of financialization has been the erosion of the status of the individual. By this I do not mean simply that the individual has been alienated, dispossessed, exploited, mystified, or marginalized, though there is some truth to each of these claims. But there is nothing new about this order of social cost paid for the benefits of industrial capitalism.
I am referring to a more radical and less visible process whereby the broad social canvas in which the Western individual (both as category and as social fact) dominated society has been eroded and thinned out in favor of a more elementary level of social agency, which some have called the "dividual." The dividual is not an elementary particle (or homunculus) of the individual but something more like the material substrate from which the individual emerges, the precursor and precondition of the individual, more protean and less easy to discern and to name than the individual, which is one of its structural products.
I hope to show that the erosion of the individual and the rise of the dividual is largely an effect of the workings of financial capitalism since the early 1970s and in particular a collateral effect of the spread of the derivative form as the quintessential tool of making money out of uncertainty in this era of financialization. The form of dividualism produced by financial capital is ideal for the masking of inequality, for the multiplication of opaque quantitative forms that are illegible to the average citizen, and for the multiplication of profit-making tools and techniques, which can escape audit, regulation, and social control. In short, the dividualism that financialization both presumes and enhances is counter to the interests of the large majority of society. But it is also irreversible. Thus, rather than argue for a return to the era of the composite (or canonic, or classical) individual, I propose a new form of politics, which can create radically new forms of collective agency and connectivity that can replace the current predatory forms of dividualism with truly socialized dividualism. To make this journey, one needs a fuller understanding of the idea of the dividual.
To think the dividual, we must unthink the individual. This is no easy task, but one way to understand the post-Enlightenment conception of the individual, on which much ink has been spilled, is to see it as the crystallized product of many centuries of gradual convergence, in the West, between the idea of the actor, the agent, the person, the self, the human soul, and the human being. Each of these categories can be provided with a distinct Western genealogy, composed of elements that can be traced back variously to the Greeks, the Romans, the Christians, the Jews, and a multitude of subtraditions, countertraditions, and hybrid traditions that have grown up around these major traditions. With Descartes and his idea of the cogito and its resident "I," the basis was laid for these ideas to be amalgamated to the point of mutual fungibility. Starting in the eighteenth century, it became hard to set apart ideas of humanity, agency, personality, and selfhood, which only recently have begun to reveal their contingent and composite architecture. This was all the more forcefully naturalized as the dominant Western ideas of property, political voice, wealth, and market interests all began to reinforce the idea that some sort of individual was the isomorphic site of agency, natural rights, biological coherence, and moral value. The individual became the invisible condition of possibility for all Western political, economic, and moral thought.
Anthropology as a discipline was well situated to unravel this composite idea of the individual at the beginning of the twentieth century, as its practitioners encountered ideas of soul, technique, religion, and politics that appeared not to revolve around the idea of the individual that Western ethnographers and scholars had come to view as natural and universal. Still, it was fairly late in the twentieth century when two very different anthropological giants, Marcel Mauss (1985) and Meyer Fortes (1973), dealt separate blows to the common sense about the universality of the individual. Mauss was the most important pupil (and nephew) of Durkheim and is arguably the single most important thinker of the founding period of anthropology for all anthropologists today. Fortes was a giant in the midcentury context of British social anthropology, whose primary concern was with the ways in which individuals and collectivities were formed through other entities that he, for the first time in the history of anthropology, used the term "dividual" to describe, in 1973. Mauss deserves the credit for distinguishing the category of the person from that of the self, the latter in his view being not a social artifact but a moral one. But Fortes identified the "dividual" as a more elementary and foundational element of agency (both human and animal) than the individual. For this he deserves credit.
But the most important figure, and the least remembered, at least in this regard, is McKim Marriott, who in the early 1970s at the University of Chicago formulated a theory of the "dividual" that was the most explicit, radical, and generative statement of the relativity and parochialism of our own naturalized idea of the individual in the West. Marriott, in collaboration with a younger historian at Chicago, Ronald Inden, wrote an important essay (1974) that built upon the earlier work of David Schneider on "code" and "substance" in American kinship, to offer a radical new theory of South Asian caste systems, which had hitherto been seen as extreme versions of Western social forms such as class and race. Synthesizing a vast array of empirical ethnographic studies of rural South Asia, as well as a variety of historical, philosophical, and religio-legal sources from the archive of Indic civilization, Marriott and Inden argued that South Asian social systems were built on a wholly different architecture from those of the West, whose foundation was the "dividual," an agent of action and transaction that was continually transferred by contact with other dividuals to create new arrays of rank, purity, and potential liberation from the material world. This idea emerged as part of a debate between Marriott and Louis Dumont, whose pathbreaking study of caste, Homo Hierarchicus (1970), had made the case for a radical contrast between Western individualism and Indic holism, without any reference to the idea of the "dividual." Much later, Marilyn Strathern (1988) made an ostensibly independent discovery of the idea of the "dividual" and generated a substantial Melanesian dialogue about this category, which was oddly indifferent to its earlier anthropological lineages.
Entirely outside of the anthropological tradition, we have another emergent line of thought, best articulated by Gilles Deleuze, who developed a radical cosmology of rhizomic networks, man-machine assemblages, and nomadic social forms with its roots in Bergson and Spinoza (Deleuze and Guattari 1987). Deleuze's thought, partly developed in collaboration with the psychoanalyst Felix Guattari, ranged from studies of ecology and biopolitics to studies of cinema and the unconscious, which were regarded with the greatest of respect by his major contemporaries, such as Foucault and Derrida. The implications of Deleuze's ideas about energy, machinic forms, and human agency are only now beginning to be fully explored, notably in what are now referred to as the "new materialisms." Deleuze's ontology may be described as dynamic, vitalist, and processual, and constitutes a radical metaphysical critique of the Cartesian world-picture. Especially in its linkage of the vitalist tradition of Spinoza and Bergson to current interests in machinic agency and ecopolitics, Deleuze is the crucial link. It is noteworthy that the only explicit reference to the "dividual" in Deleuze's oeuvre occurs in a short and prescient article published in English in 1992, where Deleuze distinguished what he calls the emerging societies of control from what were earlier disciplinary societies (with explicit reference to Foucault). Deleuze draws the distinction in many dimensions but especially when he says:
We no longer find ourselves dealing with the mass/individual pair. Individuals have become "dividuals," and masses, samples, data, markets, or "banks." Perhaps it is money that expresses the distinction between the two societies best, since discipline always referred back to minted money that locks gold as numerical standard, while control relates to floating rates of exchange, modulated according to a rate established by a set of standard currencies. The old monetary mole is the animal of the space of enclosure, but the serpent is that of the societies of control. We have passed from one animal to the other, from the mole to the serpent, in the system under which we live, but also in our manner of living and in our relations with others. The disciplinary man was a discontinuous producer of energy, but the man of control is undulatory, in orbit, in a continuous network. Everywhere surfing has already replaced the older sports. (1992)
Though this statement by Deleuze is even more compressed and aphoristic than is usual for him, it allows us to recognize the momentous way in which contemporary finance has produced (or at least catalyzed) a dramatically contemporary form of the dividual, which is directly linked to quantification in all its pervasive forms, one of which is monetization. What contemporary finance does is to monetize all the other forms of quantification that surround us today, by taking advantage of the dividual forms that such quantification continuously produces. To move from the idea of the dividual to an argument about contemporary finance requires three steps: (a) examining the way in which finance has created a predatory mode of dividuation; (b) showing how the idea of the dividual illuminates the workings of ritual in precapitalist societies; and (c) demonstrating that this dividualized ritual logic underpins the social form of the derivative and can be used to move from predatory dividuation to progressive dividuation. These steps are the subjects of the next three sections.
The Subprime Mortgage and Predatory Dividuation
Let us now look at housing mortgages in the United States. The bizarreness of this form of mediated financial materiality has only risen to public attention because of the meltdown of 2008, in which new forms of bundled mortgage derivatives played a massive role in the market collapse, the effects of which are still very much with us.
Housing loans (mortgages) are an essential part of the material life of financial objects in the United States because they take a mythic element of the contemporary cosmology of capitalism, in which your "own" house is treated as the mark of financial adulthood and security, all housing values are always supposed to rise, and though what you own is a piece of paper, you are led to believe that you actually own a house. The bizarre materiality of the mortgage-backed American house is that while its visible material form is relatively fixed, bounded, and indivisible, its financial form, the mortgage, has now been structured to be endlessly divisible, recombinable, saleable, and leverage-able for financial speculators, in a manner that is both mysterious and toxic.
The fact is that this financial rematerialization of the American home is made possible not merely through the mechanism of the mortgage (which is, after all, simply a particularly complex long-term loan) but through the most complex form of financial mediation the world has known, the derivative. The global financial crisis of 2008 was in no small part created by the crash of housing prices (of the underlying commodity, in other words), which had been leveraged into a complex and massive set of traded derivatives whose values were out of all proportion to the actual value of homes. This yawning gap between home values and derivative prices was in large part due to the creation of certain derivatives, which allowed a large number of subprime mortgages to be made to first-time homeowners. The big question about the mortgage crisis of 2007–8, which was a primary driver of the financial meltdown of that year in the United States, is: Why did so many banks make so many weak or risky loans?
The answer is that in the decades that preceded the global financial crisis, and especially after 1990, the housing market was identified by the financial industries as being capable of yielding far more potential wealth than it had historically done through the mediation of new derivative instruments. The principal two new instruments that allowed banks to do this were mortgage-backed securities (MBS), which are a specific form of something called asset-backed securities (ABS). These securities allowed "bundling" of large numbers of mortgages into a single tradable instrument whose value depended on different ideas about the future value of such bundles between buyers and sellers. This bundling also had another feature: subprime mortgages could be bundled together with mortgages with superior credit ratings and, with the connivance of the credit rating agencies, toxic loans were in effect laundered by bundling them together with better loans, disguising them under an overall superior rating. This meant that many lenders could make money by originating subprime loans so that they could be bundled and resold by being mixed in with higher quality loans. A second derivative instrument that enabled this dangerous alchemy was called a collateralized default obligation (CDO), which allowed these bundles of mortgages to be divided into tranches, or levels, that had different credit ratings. What is important, though technically a shade more obscure, is how the higher value tranches were used to bury, obscure, or disguise the more toxic tranches.
Imagine selling a house with a beautiful view from the upper floor and a leaky basement, which is hidden from view by some mysterious financial instrument that groups all the houses and uses the grading of the top stories to disguise all the leaky basements. This is what allowed the trading of mortgage-based securities and collateralized debt obligations to be a roaring business through the first few years of this millennium, riding the wave of belief that the rising value of all housing would indefinitely postpone the flooding of many millions of basements. Well, housing prices did eventually fall precipitously and the metaphorical basements did flood, leaving hundreds of lenders holding toxic assets and hundreds of homeowners holding mortgages (rightly called underwater mortgages) on which they owed more to the bank than the house was worth at that time. And because these and other derivative instruments connected the massive collapse of the mortgage market to all other credit markets, the entire financial system of the United States was on the brink of disaster until the government pumped in a vast amount of public funds to secure this avalanche of bad loans and debts, in the first weeks of the new Obama administration.
So what is the moral of this story for our purposes today? The moral is that the derivative is above all a new form of mediation. What it mediates by the endless exploitation of the spreads between emergent prices and the unknown future values of commodities is the always-evolving distance between the commodity and the asset, the latter being the commodity as its unrealized potential for future profit. In this process, derivatives are not mere financial instruments (however exotic). They are practices of mediation that yield new materialities, in this case the materialities of the asset, which are potentially available in all commodities. Notice how far this chain of mediations has brought us from the house as a simple materiality. Mediated in the capitalist market, the house becomes the mortgage; further mediated, the mortgage becomes an asset, itself subject to trading as an uncertainly priced future commodity. Mediated yet again, this asset becomes part of an asset-backed security, a new derivative form, which can be further exchanged in its incarnation as a debt obligation. At every step, the financial form serves as mediating practice, which produces a new order of materiality. Notice that in our current financial world this iterative chain of financial derivations also affects other materialities, apart from housing, such as food, health, education, energy, the environment, and virtually everything else that can be mediated into new forms of materiality. So the home — as a material fact — does not exist in our highly financialized world apart from its availability to the mediation of the derivative form. Conversely, it is only by materializing new wealth out of assets such as housing, food, health, and education, among many other assets, that the mediating powers of the derivative become realized, and real.
(Continues...)
Excerpted from Derivatives and the Wealth of Societies by Benjamin Lee, Randy Martin. Copyright © 2016 The University of Chicago. Excerpted by permission of The University of Chicago Press.
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Table of Contents
Preface Introduction Benjamin Lee and Randy MartinPart I.
Chapter 1. The Wealth of Dividuals Arjun Appadurai Chapter 2. Ritual in Financial Life Edward LiPuma Chapter 3. From Primitives to Derivatives Benjamin Lee
Part II.
Chapter 4. Liquidity Robert Meister Chapter 5. From the Critique of Political Economy to the Critique of Finance Randy Martin
Part III.
Chapter 6. Remarks on Financial Models Emanuel Derman Chapter 7. On Black-Scholes Elie Ayache Chapter 8. Mapping the Trading Desk: Derivative Value through Market Making Robert Wosnitzer
Acknowledgments
Notes
References
Index
What People are Saying About This
“The idea that financial derivatives can be used to reveal new ways of framing social wealth and struggles over the distribution of that wealth is as inspired as it will be controversial. This collection of exceptional scholars from diverse disciplines may well be turning the study of finance and social change on its head.”
“Derivatives have been a transformative financial innovation but have multiplied risks and complexities. Lee and Martin make an important contribution tracing the history of derivatives, how they work, and why they are important beyond technical finance.”
“A very ambitious effort to not only understand the derivative logic of financial markets through concepts of anthropology, sociology, and philosophy but also to understand the social through the logic of the derivative. It stands out not only as a truly interdisciplinary engagement with finance but also as a reversal through which derivative logic itself is used as a theory reflecting back on the social, which allows the authors to arrive at new and curious insights into their ‘native’ disciplines. The book strikes a rare balance as a critical engagement with finance and derivatives while at the same time not simply dismissing these as just another element of ‘evil capitalism.’”