Equity capital and loan capital diffrentiated
The Role of Financial Risk in Privatised Keynesianism - Colin Crouch
Extended consumer credit, especially through home loans, has enabled the working population of the UK, USA and some other countries to sustain consumer confidence during years of increasing job insecurity and (at least in the USA) flat wages. As such it has been neo-liberalism’s answer to Keynesian demand management: instead of (or in practice as well as) government sustaining demand through its own debt, the population has been encouraged to take on private debt for the same purpose. Much of this happened through sheer market forces, but there has been public policy support through such measures as relaxing rules on loans and generally deregulating the financial sector. It became clear how private credit was playing a public policy role when governments and central banks moved to shore up the system after it started to collapse. Beneath the system lay increasingly sophisticated markets in risk-sharing and in derivatives, but it became clear during the sub-prime crisis that one aspect of the success of the system was not so much sophistication as carelessness. Or is carelessness a form of sophistication? Given the continuing dependence of governments on privatised Keynesianism, the moral hazards involved in the answer to this question are intriguing: has irresponsible lending become a public good?
Financial Innovation and the Conjunctural Politics of Intermediary Opportunity - Ewald Engelen, Ismail Erturk, Julie Froud, Adam Leaver & Karel Williams
Since the credit crunch began in 2007, a consensus has been building which represents the problems in the financial markets as a crisis of financial innovation. The spread and upscaling of practices like securitization, coupled with what are now seen by almost all commentators as systems of unfettered incentives, provoked a crisis in financial innovation which now requires some correction via regulation and markets. In this paper we argue that the current financial market problems can also been seen as a crisis for the concept of financial innovation. Our aim is to interrogate this concept and its metaphorical appropriation of new financial products as the outcome of a process that, by association, is assumed to bring social as well as private benefits. The first part of the paper explores how the coupling of finance and innovation created positive associations for the development of products and markets using literatures from mainstream finance, innovation and social studies of finance. The paper then considers the facilitative conditions under which the activities widely considered as financial innovation have thrived, distinguishing the current era of financialisation from pre-1914 financialised capitalism. The third section of the paper provides a conjunctural analysis of financial innovation as a form of bricolage which offers opportunities for enrichment, as highly-incentivised intermediaries operate and refine business models. The absence of property rights and the ongoing processes of commodification require financial firms to deliver a stream of new products. But, while innovation in finance is disruptive, we argue that developments in retail and wholesale finance represent a form of innovation which is quite distinct from that associated with epochal transformations of product and process because its potential to deliver social benefits is open to question. The paper concludes by arguing that financial innovation needs to be understood as political and conjunctural, rather than simply as a technical or socio-technical process.
Asset-Based Welfare and the Financialisation of the Citizen - Alan Finlayson
This paper argues that an important aim contained within a number of policy areas developed by the new Labour governments, has been the embedding of an everyday culture of financialisation: the development within individuals of an orientation towards perceiving the economic nature of more and more areas of their life, including the necessity of investing in and realising the value of the self as well as of property.
The paper considers the Savings Gateway and Child Trust Fund as examples of policies that have opened up opportunities to cultivate ‘financialised’ individuals involving not only government organisations but also banks, building societies and advertising agencies. It concludes with reflections on how the sub-prime crisis might affect this wider government-business-media culture of financialisation.
Good Inflation, Bad Inflation: The Housing Boom, Economic Growth and the Disaggregation of Inflationary Preferences in Britain and Ireland – Colin Hay
This paper presents a comparative analysis of the determinants, sustenance and broader macroeconomic consequences of the ultimately unsustainable housing boom in Ireland and Britain in recent years. It examines, in particular, the role played by ostensibly depoliticised monetary policy in both contexts in the development of a house price bubble which has served to fuel consumer-led growth. It assesses the viability and longer-term sustainability of the private debt-financed consumer boom that house price inflation has generated. In the process it draws attention to the increasingly differentiated character of both government inflationary preferences and counter-inflationary performance - with the shift to official measures of inflation which exclude mortgage interest repayments and, in Britain at least, to the covert repoliticisation of monetary policy. It concludes by suggesting that governments may well not have time-inconsistent inflationary preferences, so much as sectorally specific inflationary preferences. This might be summarised in terms of the aphorism – ‘retail price inflation poor, house price inflation good’.
When Credit Becomes Debt: Foreclosure and Forbearance in Sub-Prime Mortgages – Paul Langley
After a decade or so of major expansion in both the scale and scope of credit relations, the current crisis in sub-prime mortgage networks provides a stark reminder of the importance of the meeting of outstanding obligations to the reproduction of those relations. Mortgage networks and credit relations more broadly are embodied through the assembly of financially self-disciplined borrowers, responsible and moral subjects for whom the routine meeting of credit obligations enables freedom and security in liberal society. Those currently unable to meet their mortgage repayments can reasonably expect, then, to be punished, stigmatised and rendered insecure by the foreclosure procedures of lenders and all that follows from them. However, in the course of the crisis - when credit has become debt for a significant number of mortgagors - lenders, policy-makers and consumer activists have all sought to limit foreclosures through forbearance practices. ‘Forbearance’ implies tolerance, moderation and leniency by lenders. Yet, the paper argues that the political-economic implications of widespread forbearance practices are ambiguous. On the one hand, forbearance acknowledges that borrowers are not solely responsible for maintaining credit relations and suspends financial self-discipline. On the other hand, however, the voluntary, temporary and technical nature of forbearance arrangements create the crisis as an exceptional moment that can be solved, thereby closing down wider questions as to the co-responsibility of lenders and borrowers in credit relations.
Buy-to-let, Financialization and the Geographies of Risk - Andrew Leyshon and Shaun French
The growth of the buy-to-let (BTL) market has been a notable achievement of the UK financial services industry. For most of the post-war period the private rented sector appeared to be in terminal decline, but its re-regulation in the late 1980s encouraged the Association of Residential Letting Agents (ARLA) and private sector lenders to develop BTL in 1996, and by 2007 BTL accounted for 12% of all mortgage lending in the UK. While it can be argued that the development of the BTL market has produced social benefits, most notably the revival of the private rented sector widening housing tenure choice, increasingly BTL has come to be primarily understood as a vehicle for speculative investment and as a means for securing long-term financial security through capital gains in the value of property. BTL thus represents an increasingly important socio-technology of financialization, a technology that is helping to call forth new investor subjects (Langley, 2006), subjects and subjectivities that in turn promulgate individualized forms of financial and social responsibility, rely on constant housing market inflation, and are arguably highly vulnerable to macroeconomic shocks. It has also been a profitable income stream for financial institutions in the UK, with many of them setting up BTL subsidiaries to operate in what, until recently, has been a buoyant market niche that has outperformed the mainstream mortgage market. In this paper we report on preliminary research carried out on BTL lenders, regulators and trade bodies in the UK. In so doing we seek to critically assess the sustainability of the BTL market in the wake of the sub-prime crisis. We also seek to determine its viability as a strategy for securing long-term financial security, and to understand the processes by which the BTL investor subject is (re)produced and sustained.
Specter of the Sub-Prime Borrower: Moving Beyond the Credit-Score Analysis - Johnna Montgomerie
The sub-prime borrower has achieved a celebrity status as of late. In this evolving tale of financial woe, the sub-prime borrower has delivered a fatal blow to the global financial markets. Two distinct personalities have emerged from this unfolding saga: the incredulous and financially illiterate subprime borrower pit against the greedy and often predatory lender. In retrospect lending to this group of low-income/ high-risk individuals is now considered indicative of the foot-loose tendencies of financial actors and complacent nature of the financial regulatory environment. Yet, the availability of credit to subprime borrowers was, not to long ago, heralded as a major achievement of newly liberalized financial markets. Risk calculation and balance sheet management techniques showed that markets, without the interference government, were able to democratize access to finance. Up until the summer of 2007, little attention had been paid to the sub-prime borrower and their experience of the ‘roaring 90s’ and past seven years of financialized expansion. The term ‘sub-prime’ refers to credit status that encompasses a wide range of socio-economic grouping. Using existing qualitative accounts of the causes of rising consumer debt, coupled with the limited quantitative data available on sub-prime borrowers, this article moves away from the linear (and coherent) account of credit as a transaction between borrower and lender. The attempt is to engage with the lived experience of these groups of the past seven years to understand the role that consumer credit plays in their everyday life. By drawing together the outcomes presented in existing literatures on labour market reform, rising education costs and declining state subsidies these trends are contextualized as factors contributing to the broader consumer credit boom. In particular, how these groups have lived on the frontier of receding state subsidies and advancing credit products.
The Global Credit Crunch as the Crisis of Artificial Liquidity - Anastasia Nesvetailova
Since JM Keynes noted the problem of ‘liquidity illusion’ back in 1936, a number of commentators have used the concept of ‘artificial liquidity’ to describe a temporary, and progressively fragile, state of a financial market which develops, paradoxically, during a period of economic boom. For these critics, artificial liquidity tends to be one of many symptoms of an unfolding financial crisis. In contrast, I argue that today, in the environment of deregulated finance and thriving financial innovation, artificial liquidity has become a central driver of the crisis. To illustrate this, I propose a conceptual framework for analyzing the role of artificial liquidity in the current credit meltdown. Focusing on the three waves of the current crisis - the American subprime fiasco; the credit crunch in the Anglo-Saxon credit markets, and the crisis of securitisation – the paper examines the mechanisms that had sustained artificial liquidity during the boom years, and the mechanisms which contributed to its evaporation in times of stress.
The Social Sources of the Sub-Prime Financial Crisis: The Everyday Politics of Progressive Rights and Predatory Markets – Leonard Seabrooke
What gave international financiers confidence to effectively invest in American mortgagors with poor credit histories? Current theories within the fields of comparative and international political economy do not provide many clues in helping us to understand this most recent international financial crisis. For starters, the crisis began within the US, as opposed to crises in the 1990s that were often triggered by the reception of US interest rates spikes on international carry-trade markets. Also, the range of institutional players involved in the sub-prime crisis challenges a state/market dichotomy by reminding us not only of the power of private authority in the international political economy, but the range of quasi-public institutional innovations that mediate the interests of private capital and public social values. This paper explores the social sources of the sub-prime financial crisis, and stresses that to explain international investor confidence in this market we need to understand the institutions upon which the sub-prime market was able to piggyback. Particularly prominent here are institutional innovations that grew from everyday rights discourses following the Great Depression in the 1930s and 1940s, and the Civil Rights movement in the 1960s and 1970s. Discourses from these struggles assisted innovations for institutions that underpin American mortgage bond markets through Fannie Mae, Freddie Mac, and Ginnie Mae. These siblings’ status as ‘government sponsored enterprises’ (only Ginnie is public) has been justified by an assets-based welfare ideal for the American working and middle-classes, as well as minority groups. Until 2000 the siblings were overwhelmingly responsible for the American market for mortgage-backed securities. The sub-prime market emerged in the late-1990s, and flourished in the early-2000s due to the U.S. property boom, general international confidence in mortgage-backed securities and, especially, a failure to regulate new predatory players offering mortgages to sub-prime borrowers. The fallout from the sub-prime crisis reminds us of the need to support quasi-public institutions that can mediate the interests of private capital and public social values, the importance of understanding choice and risk in an assets-based welfare society, and the prominence of rights discourses in shaping financial reforms.
Find the Culprit: Regulatory Panic and the Subprime Crisis – Timothy J. Sinclair
One of the remarkable things about crisis is the way it generates the distinctly political process of finding a culprit. In the Asian Financial Crisis of the late 1990s the culprit was ‘crony capitalism’ and rich country institutions pursued these targets zealously, deflecting any blame for the financial euphoria and catastrophe that in turn afflicted that region. With the return of dramatic financial volatility in the summer of 2007 again the hunt was on for an institution to cast as the perpetrator of this disaster. This paper evaluates the case for a culprit in the subprime crisis, highlighting problems in the case and suggesting instead that moral panics serve a key political purpose in the context of systemic crisis as a tool in trasformismo of competing social forces with alternative accounts of the dynamics of crisis.
Headlong into the Polanyian Dilemma: Reaction and Overreaction to Banking Sector Distress – Matthew Watson
The housing market has for some time been at the centre of the changing configuration of credit and debt in modern Britain. But it has become a more intensely politicised issue only in the wake of the credit crunch that immobilised inter-bank money market functions in the summer of 2007. New forms of political awareness resulting from the fallout of banking sector distress have given rise to pressures to incorporate new demands in the political process. There have been clear attempts to pander to the construction of a middle-class moral panic around the sub-prime phenomenon, where the moral subject of the crisis discourse often slips from the ‘reckless’ lender to the ‘irresponsible’ borrower. The substantive part of the paper is based upon a review of the main dimensions of this discourse. I show that the construction of the middle-class moral panic infers regulatory reforms which contain the threat of social disapprobation, even social exclusion, for households who find themselves in the ‘wrong’ segment of the mortgage lending market. The theoretical part of the paper reflects the discussion of the enveloping moral panic back onto what I call the ‘Polanyian dilemma’. Polanyi is often misread to suggest that the economy reaches a critical juncture when free market logic obliterates all other forms of economic organisation in the first element of double movement dynamics. His real point, though, was that the social formation experiences heightened chances of implosion when a clearly faltering free market logic is patched up by any number of increasingly coercive regulatory interventions as both elements of the double movement come together. This is the situation that overreaction to the middle-class moral panic threatens to bring into existence. In Polanyian terms, society remains embedded within the banking sector to the extent that the flow of funds which drives the mortgage lending market is socially derived. Yet, the pricing structure of the mortgage lending market is decisively disembedded from society, leaving open the possibility of negative equity and home repossession when that pricing structure ceases up. The combination of embeddedness and disembeddedness is always a potentially unstable mix, but the current ‘sticking plaster’ approach to banking sector regulation promises to make it even more so. The reaction to the credit crunch has been aimed at reassuring Britain’s middle classes that their aspirations of wealth through homeownership are safe. However, the clear overreaction threatens the reproduction of the social formation if it manifests the Polanyian dilemma.
Risk Transfer and Crunches: Global Finance Victorious not Vanquished – Duncan Wigan
This paper explores the response to the ‘credit crunch’ to argue that rather than embodying an inevitable denouement for an accelerated and destabilising process of financial innovation, the reaction to the crisis from central banks and regulatory bodies constitutes a victory for global finance. The problem for regulators seems to have been construed as how to quell instability, while refraining from dismantling the architecture of contemporary finance. The shift from a central concern with solvency to that of liquidity thinly masks a profound redistribution of power from the public to the private. By swapping private assets that cannot be valued for government bonds of various durations, central banks have effectively recognised that the products of innovation in the private sphere are global money. Further, by calling for greater levels of transparency and disclosure regulatory authorities imply that innovation is inherently perfecting and market exogenous regulation regressive. Key to this victory is that while the financial system is rendered immanently fragile through the specificity of the structure of liquidity, this structure in turn ensures the subjugation of governance to the exigencies of private actors. The result is the institutionalisation of a novel form of property denoting the ownership of risk. In this guise, property contests the abrogation of linear relationships between nationally based authority, volatility in the ‘real economy’, and financialised accumulation.
