What exactly is "money"?
[I]n most conventional analysis, there is an association of money with the state: indeed, in the tradition of Keynes, there is an understanding that money is ‘state money’, as opposed to ‘commodity money’ such as gold. State money is bits of paper, or entries in a balance sheet that are themselves valueless, but trust in state guarantees gives them effective value; commodity money is valued in itself.
But there are not just two absolute forms of money: there is a spectrum of moneys. There is (generally) safe, low-return money, which is state money in the form of cash or money in the bank. There are also highly liquid assets which are serving money functions, but they are not state money. They are derivative forms of money.
The financial crisis explained:
It seems to me very significant that the first intervention of the governments and central banks was not about shoring up financial institutions directly, it was to say to financiers: bring in your mortgage-backed securities and we will convert them into state money.
It's a signal to me that these securities were indeed being treated like money, in the sense that when their moneyness suddenly disappeared, the state sought to convert them into another money form. The initial response to the crisis of governments and central banks was not to say, as the stock markets fell, 'bring in your shares and we'll convert them to cash.' Nor did they say to banks 'bring in the titles to your properties and we’ll lend to you against your physical assets.' They said 'bring in your securities, and we'll convert them to cash.' It is, to repeat, a signal that the initial liquidity crisis, when securities markets crashed, was about a crisis of money.
Mortgage backed securities and the collapse of the housing bubble:
With mortgage-backed securities, what got sold into the market is not the mortgages, but claims on the income stream from the mortgages. And what is critical about derivatives is that they are financial exposures to an asset without ownership of the underlying asset.
With an oil future, you own exposure to the price of oil, but without owning any oil itself. So it is with mortgage-backed securities: you own exposure to the performance of a bundle of mortgages, but without owning the mortgages themselves.
And that separation is critical, for the mortgages themselves are illiquid – they last for 20 or 30 years, but the securities on the mortgages were highly liquid – they could be repackaged with other sorts of securities, turned into fancy products, and on-sold and re-sold. Further, the derivative dimension – the difference between ownership of the asset and ownership of an exposure to the performance of the asset was precisely what made sub-prime lending so profitable – as long as it lasted. The financial markets could separate out the performance of mortgages from the performance of house prices. They could sell the former, but retain the latter.
That is the reason that mortgage originators could keep lending to people who would buy houses that were expected to increase in value, even though they would almost certainly not repay loans: it was possible to hold the exposure to the prices of houses and sell off the exposure to the repayment of mortgages. It was a smart strategy for capital as long as house prices didn’t fall!
The nature of money (this is the home run in the interview in my opinion):
What's gone wrong in the markets is partly about regulation, a loss of order and morality in markets. Those things are now being widely criticized.
But there is another element here, about the nature of money. What concerns me in left and liberal debate is the strand that says that if we can make markets more efficient, more transparent, more ethical, then markets will not be volatile. That seems to be a basic premise, and it's basically wrong.
Money is itself the expression of a social relation. The concept of value is contested. The concept of equivalence is contested. We see that most starkly in exchange rates. What is one currency is worth in terms of another? There is no real answer. The neo-classical economists want to talk about fundamental value, but we know that doesn't work.And it's not just at the level of exchange rates. Within a currency, equivalence is a contested concept. As Marxists, we should be pointing that out -- that there is social conflict expressed in the money form.
Any suggestion that once we have better regulation, money will become harmonious as a social unit, and then we can enter into debates about good or bad monetary policy, misses the point that money is always contestable. It has never been objective.We have played out little social myths to construct money as objective. We had gold. We had Bretton Woods. We have "fundamental value" provided by neo-classical economists. They were all trying to tell us that money is an objective measure, and what we have to learn is that money is not an objective measure. Money is capitalist money, and it is money within capitalism.
Where do we go from here:
And central to that politics is new ways of resistance to the way in which the finance system, for all its fancy trading of risks, has systematically shifted risks onto labor -- until, that is, labor (in the form of house buyers) itself financially imploded, and the risks were suddenly thrown back onto capital. But, of course, it was then passed on to the state, which in turn will pass it back labor, but at a slower pace than was done by financial risk shifting, and in ways where labor’s implosion will not be at the cost of capital.
The point here is to analyze what’s happened so as to clearly identify the risk-shifting process and the best points of resistance to it; not to join the search for a clever set of state regulations which will somehow tame finance and place it at the service of production. ...
The state has always fudged on the issue of "moral hazard" -- of the extent to which the state should intervene to mop up for capital when capital stuffs up, and whether such mopping-up puts bad incentives into the market.
In all the financial sector reforms, and not just in the financial sector, there has always been a fudge about the question of whether there will be bail-outs. We've found something out. We've found that the state will always bail out big capital, in particular big banks. ...
What becomes most interesting in this is, how much of a watershed is this in the concept of markets, and how the states regulate markets? The moral hazard issue, historically framed as a dilemma, is now solved. What does that say about the virtue of profitability and entrepreneurship -- those moral virtues of the market, let people enjoy success because they also face the threat of failure? If that threat of failure is now going to be qualified, what is the constraint of the upside? If we are to have the carrot of profit, but not the stick of loss, how is that going to play out in wider social circles?
Okay so a few thoughts from all of this:
First, a bit of a tangent: It's interesting to watch (and participate in) the political debate in the U.S. since the invention of blogs, Facebook, and Twitter. Now it is so much easier for new ideas from any part of the world to enter the debate. And what's really striking to me is that Naomi Klein and Ian Welsh are almost always correct and both usually about 2 to 3 years ahead of the curve. They are like goddamn Nostradamus in predicting how political decisions will play out and in understanding exactly where the economy is going (and who the likely economic winners and losers will be).
It's like Klein and Welsh are looking into a crystal ball that none of the rest of us have. And in fact they are. What I realized is that they are both Canadian and they both still read marxist economic analysis. Thus the reason Klein and Welsh are so consistently correct is that they both have access to a set of analytical tools that most Americans have lost the ability to use. The range of the political debate in the U.S. is so insanely small -- we argue over corporatism (Obama) vs. more corporatism (the Republican Party) as if that were any choice at all. Even on a good day, the most informed Americans are only exposed to half of the debate -- completely ignoring labor, class, poverty, race, gender, sex, ecology, and any discussion of power. So then when someone like Naomi Klein, Ian Welsh, or Dick Bryan comes along it completely blows our minds because we have been conditioned and mentally colonized to ignore those facets of the debate.
Okay but here's the larger idea I want to rap down:
It seems to me that the analysis put forward above by Bryan actually points us to a startling political theorem that goes something like this:
1. The state issues money;
2. Trust in state guarantees gives money its effective value;
3. Trust in state guarantees is only as strong as our trust in the state's ability to remain solvent;
4. In order to remain solvent, the state must be able to withstand threats from within and without -- usually through military power;
5. In order to remain solvent, the state also must balance its books (or come close);
6. Low prices of foreign inputs and high prices of domestic outputs help to balance the state's books;
7. It appears that violence is INTRINSIC to money.
Said differently: if money is always the expression of a social relation and the concept of value is always contested; then, it seems from the evidence of history that the way that that (hierarchical) social order is maintained and the way that contested values (particularly currencies) are negotiated and resolved is through military force.
Now at first glance that theorem seems absurd. But play out the argument for a minute and I think you'll find it's not as absurd as it seems at first blush:
[Just to be clear, I would be HAPPY to be wrong about this. Furthermore, I am NOT saying this is a good thing -- but rather that this is a realpolitik look at the way things are.]
Imagine if you will that worldwide, workers in all coffee plantations suddenly joined the United Farmer Workers Union and went on strike for better wages. Overnight coffee prices double, Starbucks franchises go out of business, stocks of coffee and restaurant companies plummet and drag the wider stock market index down with them. But in the U.S. this would not play out as a debate about workers rights in the third world. In the U.S. we would never even see a single coffee picker on TV or hear any of their legitimate requests for fair compensation -- but we would see endless interviews with hot baristas who had just lost their jobs. The Wall Street Journal would editorialize on the "Specter of Inflation." Political pundits on cable T.V. would cluck cluck on how "the President looks weak and ineffective." Republicans would rush to the floor of Congress to make speeches about how the President "has lost control of the economy." Debates about inflation in particular but also debates about masculinity and the "health" of the economy (read the health of the Dow Jones Industrial Average) are all smoke screens to put pressure on elected officials to use violence to maintain our wealth.
So the U.S. (over the last 200 years) [and European countries over the last 500 years] have maintained a policy of proactive violence to maintain the value of their money.
- Banana workers want a raise in Guatemala? We overthrow the democratically elected government of Jacobo Arbenz. (1954)
- Chile wants to nationalize copper mines that the U.S. relies on for cheap bullets to fight the Vietnam War and cheap phone cables to fund ITT's global expansion? We overthrown the democratically elected government of Salvador Allende. (1973)
- Coffee workers and manufacturing workers in Colombia want a raise, the U.S. (and Dole Fruit) fund death squads that have killed 2,500 union leaders in that country since 1986.
It's always been a little strange to me that so-called "rich" nations -- the U.S., and Europe also have a long history of violence and genocide. Indeed as Eduardo Galeano shows in Open Veins of Latin America (and as Eric Williams shows in Capitalism & Slavery) it is precisely the violence of Europe and the U.S. that produced the enormous capital accumulation that fueled the industrial revolution and further enriched those nations. And it is precisely the permanent state of preemptive violence, that we are loath to acknowledge, that reinforces our trust in the state guarantees of U.S. paper money and gives our currency continued value over time.
Update #1: I just want to add a quick note about the mechanics by which the U.S. makes the decision to overthrow a democratically elected government (or any other government for that matter). I don't necessary think anyone in the Nixon White House for example, necessarily made it their mission to figure out how to hold down wages in other countries per se (although there may have been some who thought like that). For the most part, I think the decision-making process is so much more subtle than that. It's more likely that the head of ITT or the global conglomerate that owned the copper mines in Chile went to college with Kissinger or other senior administration officials. They were roommates, buddies, they had dinner in the dining hall together and now they vacation together and their kids are growing up together.
When Allende announces he's going to nationalize the phone company, the head of ITT feels like something important is being stolen from him personally. So he gets on the phone with the highest ranking buddy he can find in the administration and says, 'Hey, you've really got to help me out, the crazy President of Chile is trying to steal my company from me.' And so the senior administration official makes some calls to help out his friend and they find some military planners who never did like the democratically elected government down there in the first place and they call the political folks who know for sure that they don't want Nixon 'to look soft on communism' (because that never plays well with the base) and it all just snowballs from there. Politics isn't rational, it's tribal -- it's about groups of friends looking out for each other. But the net effect of elites looking out for each other (and using military force to do it) is the perpetuation of a system of injustice that has existed for over 500 years.