"Virtually every aspect of conventional economic theory is intellectually unsound; virtually every economic policy recommendation is just as likely to do harm as it is to lead to the general good. Far from holding the intellectual high ground, economics rests on foundations of quicksand. If economics were truly a science, then the dominant school of thought in economics would long ago have disappeared from view (Steve Keen, 2001, p. 4)."
In the full flood of the current credit/financial crisis there appears to be no shortage of people and organisations to blame short-sellers in the market, profligate home-owners in the USA who signed up for mortgages that they could not afford, Fannie Mae, Freddy Mac, the executives of investment banks and their million-dollar bonuses, hedge funds, the Fed, etc. Whilst the desire to find a culpable victim is perfectly understandable, it is also obvious that there is no "silver bullet" causal mechanism for this rapidly developing systemic failure. This article looks at the political and cultural determinants of the current crisis, using three intertwined themes:
(1) the development of financial derivatives themselves;
(2) the subversion of risk analysis by globalising capitalism; and
(3) the co-opting of the concept and analysis of fair value by the big accountancy firms and banks, through which financial derivatives were valued.
It will be the suggestion of this article that the development of an enculturated, fundamentalist, market-orientated economic discourse since the 1970s has acted as a stalking-horse for the development of new, powerful, unrestricted and unregulated markets in the financial services sector, a stalking-horse which is by its very character anti-democratic. Thus far nothing particularly new except that, with the development of financial derivatives and CDOs, such is the power of this supremacist ideology that a massive global market has developed in products which are essentially imaginary.
Whether we're talking about democracy underpinned by law or constitutional framework, the liberal democracies of Western Europe or the constitutional democracy of the USA, democracies work on the basis of the refreshing and realistic precept of the inevitability of human frailty all power corrupts and democracy is the politics-made-flesh of that acceptance. There can be no end-state to democracy, it is and will always be a process undergoing continual fracture, revision and change. To paraphrase the quote about art often attributed to Mussorgsky, any given form of democracy is not an end in itself, but a means of addressing humanity; it is a process whose development is characterised by endless subversion, thwarted and side-stepped by constant attempts from within and without to turn its frail authority into forms of power to be used against it.
Democracy by its very nature both hosts and is vulnerable to a limitless range of counter-narratives, ranging from tiny political movements to global meta-narratives which, in being given freedom to thrive, may at any time metastasise into the illness that kills the host. Ideological fundamentalists of whatever kind (Christian, Islamic, nationalist/populist or left/populist, for instance) whose core beliefs may allow them to use democratic mechanisms to achieve power within a given democratic type, may then use those same mechanisms to restrict or even close down democratic practices as being inimitable with contradictory core beliefs.
Not all core belief systems have arisen under democracies, of course, and many of them predate the earliest democratic ideas by thousands of years, but Western liberal/constitutional democracies are presently threatened by one of the youngest. The Trojan horse of theoretical market fundamentalism that has been made flesh since the 1970s has carried within it a market fantasist belief, the presumption over and above the theoretical dominance of market forces that a market exists simply because we will it to be so and that its workings will be self-correcting and tend towards healthy equilibria, under no matter what circumstances.
The theoretical dictates of market fundamentalism have long been more dangerous than any other core discourse for different reasons. Amongst the most important of these are because it has become a core belief directly contradicting the central precept of democracy discussed above it represents the idea that the unheeding self-interest of billions (in reality, of course, no more than a few thousand elite worldwide) acting together will lead to a universally prosperous and orderly society. In the late-twentieth and early twenty-first century mutation of the Classical economic school of the late nineteenth century, self-interest and conflict of interest have been inverted into virtues and internalised as good for the health of the body politic human fallibility and the tendency towards corruption become in this reading essential motors for a prosperous society.
It might seem a long step from a discussion of democracy and markets towards the present credit crunch (plus housing market collapse, plus banking collapse) and yet the connecting thread is firm and direct. Market fundamentalism contains a further anti-democratic core belief, which is its claim to scientific status and from that an objective, "truth-giving' capacity; to quote the then-Chief Economist to the World Bank, Larry Summers, at an IMF summit in Bangkok in 1991: "The laws of economics, it's often forgotten, are like the laws of engineering. There's only one set of laws, and they work everywhere". There is no alternative under this reading of the laws of economics, and market fantasy has become one symptom of this delusional illness that the body democratic has become host to.
The current theological mutation of market fundamentalism is not alone in this, however; there are (for instance) significant numbers of Muslims, Jews and Christians who believe that their core religious beliefs are quite literally true and the only valid explanation for the world in which we live; these core essentialists from each religion would advance the argument that since they are the unique possessors of an incontrovertible truth, ideally all countries and all people should live under the rules dictated by that core discourse. Since the turf fights between Islamic and Christian belief systems from the seventh century onwards, few core belief systems have come as close to being accepted on a global basis as market fundamentalism has after the collapse of the Socialist Bloc in 1989. Market fundamentalism comes close to being the first universal modern religion; a core belief system that is still just a belief system, but which has overcome the traditional limitations of religion by asserting the coloration of scientific inevitability from which springs the market fantasist mindset.
"Monetary forces, particularly if unleashed in a destabilizing direction, can be extremely powerful. The best thing that central bankers can do for the world is to avoid such crises by providing the economy with, in Milton Friedman's words, a "stable monetary background" for example as reflected in low and stable inflation [. . .] I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again (Bernanke, 2002).
Whilst the Socialist Bloc existed, the governments of liberal Western democracies needed to be politically restrained in their approach to market freedom; the threat of an alternative belief-system existed (however imperfect) and the governments of the Western Bloc had to exert caution over permissible amounts of volatility and instability (the central concern was of course the mass unemployment such volatility might incur and the resulting social/civil unrest that might accompany it, a more direct challenge to the system).
Financial derivatives began a new era with the deregulation of foreign currency exchanges in the 1970s and the introduction of standardised options in 1973. By the 1980s, at the same time that it no longer seemed probable that Western liberal democracy would succumb to the global advance of Soviet Socialism, increasing confidence in the supremacy of globalising capitalism overthrew any perceived need for regulatory caution, especially during monetarist regimes of Margaret Thatcher in the UK and Ronald Reagan in the USA. The terminal decline of the Socialist Bloc came accompanied in globalising capitalism by an increasing boldness in the development of market instruments. Two of the more important amongst these, the packaging of US mortgage bonds from the 1980s onwards to create collateralised debt obligations and the selling of default protection as credit default swaps from the 1990s (after the fall of the USSR) became two key actors in the current crisis.