Financialization

I was reading a Common Dreams report on the corporation-sponsored financialization of biodiversity concerns. Their effort is being made at the United Nations 11th Conference of the Parties to the Convention on Biological Biodiversity. Both Friends of the Earth International and Food and Water Watch have warned the assembled delegates from 170 nations against this practice as being disastrous for biological diversity and the future of our species, which is dependent upon that diversity.

You may be familiar with the concept of financialization as expressed in the cap and trade “control” of greenhouse gas emissions. The practice puts a polluting value (the cap) on a unit of emissions and companies can purchase the right to pollute from other companies who do not use their alloted pollution rights. This creates a speculative market for the right to pollute analogous to any other commodity market such as pork bellies.

Obviously this process favors the wealthy, including the wealthy nations. In creating one more market, including the inherent speculation, it is also a source for generating more profit from the basic needs of the planet and mankind.

As I read the article, titled 'Recipe for Disaster': Group Says No Financialization of Nature! found at http://www.commondreams.org/headline/2012/10/13 , it occurred to me just how much financialization is a disease of our time, but also what other common denominator can we find that will allow us to exchange our values and avoid engendering value conflicts, the most unresolvable of all conflicts.

Financialization is a relatively new financial concept. Some have traced it to Milton Friedman and his Chicago School of Economics. Financialization is not quantification, which had a somewhat similar effect during the Industrial Revolution and was heavily criticized by those who resisted the quantifying of qualities. This concern is illustrated in John Galsworthy's narrative essay titled Quality about a bootmaker who was known for the high quality of his boots, but who was losing customers who bought cheaper factory made boots. The work revolves around the bootmaker's loss of self-worth.

Quantification leaves whatever was quantified untouched. The quantified object, whether boots or bricks remains itself and is simply counted. Financialization transmutes the object into a financial instrument that can be sold and purchased like any other real commodity. As a security it can enter markets it had never seen before and therefore establish values it had never seen before. This, in effect, is what happened in the recent subprime mortgage fiasco. Mortgages are very old, established, instruments of debt and enjoyed a greater repayment likelihood than many other forms of debt. Mortgages were financialized by breaking them up via computerization and repackaging these parts into securities to be sold in the financial markets. It was argued that this process minimized risk because a single mortgage default would affect only part of the security's value that contained it. The common mortgage was turned into a financial instrument no longer thoroughly attached to the property that generated it. Eventually this disconnect sank into the heads of investors generating a massive sell-off and the resulting recession. As securities very loosely attached to anything real the mortgage was subject to the uncontrolled speculation the market is capable of. This financialization led to the practice of subprime loans because the value of a mortgage became what it could generate in the speculative financial market rather than the value of the asset it was based on.

Another liability of financializaton mentioned by Friends of the Earth is the lack of accountability it generates and the games corporations tend to play. For example, Enron set up numerous corporations and then declared as profits the moneys they moved among these entities. Corporations can so dilute relationships that accountability is extremely difficult and expensive to prove, if indeed it can be done.

In my judgment financialization is also an instrument by which power is transferred from government to corporations. Up until the introduction of financialization government determined any exchanges that were to take place in the achievement of public purpose. Indeed, when the matter became serious enough, as in World War 2, government simply rationed materials such as gasoline. The market was not used because the market always favors the rich. During World War 2 everybody had to get to work, not just the wealthy. If you had an emergency or other extremely important job your ration would be commensurately higher. There was, of course, the usual attempts to misuse ration cards, but the system itself responded directly to the need. The profit motive exploited by the market approach of financialization exposes critical decisions and processes to the whims of speculation.

Financialization is a form of abstraction, about which I have expressed my concerns before. Abstraction has been a, if not the, fundamental instrument of human development. It has taken humans from the concern with the immediate and mundane world of the hunter-gatherer to the world of planetary exploration. But it is a two edged sward that can destroy with equal ease and efficiency. The reflective precautionary principle should apply to the use of abstractions, especially in areas critical to human well-being. In short, Alan Greenspan should never have been “shocked” by the collapse of the mortgage market as he testified before Congress. That he was, betrays how much his economic understanding was little more than the doctrine of Milton Friedman that the market will always correct itself and, therefore, government should have no role in regulating it. As philosopher Alfred North Whitehead said of science Seek simplicity, but distrust it, so we should say seek abstraction, but distrust it.

Bob Newhard