Accompanied by massive and sustained pressure towards the deregulation of all markets and stock exchanges in particular, what had been originally created as relatively crude instruments for hedging loan exposure developed rapidly into far more sophisticated instruments to feed the voracious demand for capital fuelling the non-inflationary continuous expansion (NICE) era of the 1990s. By the turn of the century credit derivatives had multiplied so rapidly in type and extent and capital capture that they constituted a market of themselves, and the fall of Enron and what that had to say about the risk associated with credit derivatives was effectively dismissed by markets, institutions, academics and professionals alike. As an editorial piece in Risk magazine implied, shortly after the fall of Enron:
"Credit derivatives proved to be resilient [. . .]. The episode, and the fact that the exercise of the Enron credit default swap contracts was done in an orderly manner without controversy, showed that the market had come of age."
Derivatives had been weighed in the balance and not found wanting; added to which of course the amounts of capital now invested in them plus the maturity of what had become a market of central importance meant that, barring a disaster like the current one, they could not be allowed to be perceived as having failed, as having an essential flaw.
This "coming of age" of the market was accompanied by an acceleration of the amount of money invested in this market. As we now know, whereas banks in particular were important participants in this market from the beginning, hedge funds became increasingly involved as they too became important players in global capital markets. Financial derivatives became somehow synonymous with the buzzword "globalisation" exotic, powerful and barely understood even by the most unquestioning fans. So representative had they become as part of the market fantasist discourse that they were accepted almost universally (with a few notable exceptions such as George Soros and Warren Buffett) as what they have become fatal to the securitisation of risk. Derivatives were institutionally accepted as a marker of good health to the extent that (with exceptional irony) by 2004 the credit default swap (CDS) market was accepted as an accurate measure of credit quality.
What had also become clear, however, was that no one state had the capacity to understand, much less supervise, the CDS market, whether it be through the more formal regulatory approach of the USA or the "light hand", self-regulatory approach of the UK proprietors, respectively, of the most important financial centres in the world, i.e. the New York and London stock exchanges. In the market fantasist view, however, not only was this not seen as a disadvantage but, given the apparently "perfect" functioning of derivative markets this was one more proof of the superiority of market over state and over state-channelled democratic oversight the markets were themselves become democracy in action.
At the same time that the international financial institutions (World Bank, IMF etc.) were demanding more transparency, openness and accountability from the governments of countries in development, the globalising financial services sector was lauding the development of markets of increasing obscurity and impenetrability, over which regulation and oversight were all but impossible. The full scale and surreal nature of this market and its critical importance become apparent only when one looks at Bank of International Settlements estimates for the total monitored trade in derivatives some $680,290,700,000,000 for 2007-2008.
Continuing faith in market fundamentalism, however, means that in all of the current talk of "bail-outs" and "rescue packages" the concentration of governments around the world has been overwhelmingly on easing the short-term liquidity crisis, which is to say examining the symptoms of the illness whilst doing little to examine the long-term causes. It might (for instance) be thought that the massive state intervention which the crisis has occasioned, the nationalisation of banks and the loans of taxpayers' money to failing institutions should be accompanied by task forces not only to investigate the exposure of each and every recipient of public money to the "toxic" instruments, but in working out how to defuse the global market in derivatives, how to regulate such instruments effectively and how to licence very strictly their future development. Despite lip-service being paid to regulation of these kinds, the emphasis is strongly on bail-outs and interest rate cuts "recapitalisation" is the order of the day. The bankruptcy of this particular way of thinking, however, is obvious in phenomena such as the gap between the LIBOR inter-bank lending rate and central bank interest rates banks know very well what they've been up to and they also now know that they can't trust the value of their assets.
They f * * * you up your markets do, but they were built to, just by you . . .
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