Edward LiPuma is Professor of Anthropology at the University of Miami. He is the author of Encompassing Others: The Magic of Modernity in Melanesia and coeditor of Bourdieu: Critical Perspectives.

Benjamin Lee is Professor of Anthropology and Philosophy at New School University and Dean of its Graduate Faculty of Political and Social Science. He is the author of Talking Heads: Language, Metalanguage, and the Semiotics of Subjectivity (published by Duke University Press) and coeditor of Semiotics, Self, and Society.

Financial Derivatives and the Globalization of Risk

By Edward Lipuma

Duke University Press

Copyright © 2004 Edward Lipuma
All right reserved.
ISBN: 9780822334071

Chapter One

Global Flows and the Politics of Circulation

There is a rising tide of discontent about the implications of globalization, a disturbance audible to anyone willing to listen. Among even the most moderate moderates in places such as China, India, Russia, Indonesia, Brazil, and southern Africa there is a growing, gnawing, and amorphous feeling of unease that there is something out there, something happening that is robbing people of a genuine semblance of control over their own destinies. They can see and feel the gyrations of their national currencies, the uncontrollable oscillations in the prices of commodities and capital, and the apparent powerlessness of their governments to influence the course of economic life-or even to understand the jet stream of circulatory forces unleashed by globalizing processes. More and more, frustration contorts the faces of those who reside outside the metropole, people who, however much they may appreciate, sometimes emulate, and frequently enjoy things Western, from technology and music to concepts of freedomand human rights, also realize that there is an unnamed force that is undermining the relations between the economy, civil society, and the state. There is something profoundly disturbing about people’s escalating disenchantment with the results-or at least the aftermath-of all the introductions and returns to democracy that they have only recently won. So much is this the case that there is sometimes a nostalgia, at once genuine and insincere-not, as is sometimes mistakenly thought, for ousted and discredited authoritarian regimes, but for the certainties that they brought to everyday life. Not the least of these certainties was a foundational logic that once seemed to bind work to wealth, virtue to value, and production to place.

The contrast with the contemporary globalization of finance capital could not be more striking. Technologically driven derivatives detach the value, cost, and price of money -manifest in exchange and interest rates-from the fundamentals of the economy, particularly the state of production, the social welfare of the producers, and the political needs of citizens for self-determination, dignity, and the creation of identities. The economic power of the capital markets also threatens the right of popular dissent against those who govern the economy. Although this right, helped immeasurably by advances in communication, only reached its maturity in the twentieth century, its contemporary roots now run deep and worldwide. But the forces of circulation offer up no address or even an identifiable object. How does one know about, or demonstrate against, an unlisted, virtual, offshore corporation that operates in an unregulated electronic space using a secret proprietary trading strategy to buy and sell arcane financial instruments? The mass media can disseminate the visions and voices of dissent, almost instantaneously and worldwide (and usually at a profit); but without a recognizable object, such as that provided by the national state or a corporate headquarters, the dissent seems meaningless, impotent, or worse, some entertaining spectacle. The question that is both concealed and that matters concerns the economic powers and global reach of financial derivatives.

One way of posing the question is to collect the news headlines and to ask what the collapse of Argentina and the Enron Corporation, the demise of hedge funds such as Long Term Capital Management, and the accounting scandals at Arthur Andersen have to do with high and rising interest rates in Johannesburg, Kuala Lumpur, Istanbul, and other locations on a multipolar periphery. Are these phenomena also connected to the sudden and severe devaluation of currencies and then the ascension of interest rates, to levels of cross-currency volatility that confound any possibility of economic planning, to the concomitant escalation in global impoverishment, and to the increasingly intense and pervasive forms of indigenous unrest and regional disquiet, and the decline in the capacity of national states to provide social welfare? The short answer is that they are all tethered to the umbilical cord of circulation. They are directly defined by global streams of capital and critically configured by the buying and selling of the financial instruments called derivatives. So though financial derivatives are cloistered and complex, their character matters because they inform the course of capital that informs the course of people’s lives worldwide. The singular result is that globally, government officials, the academic community, and the news media are beginning to appreciate the extraordinary power and reach of these flows of capital. To assume, as some commentators have apparently done, that derivatives cannot be influential because they exist in virtual space and therefore do not produce anything material or real is as unsound as assuming that religion must be historically inconsequential because, after all, God doesn’t really exist.

Derivatives have episodically captured the world’s attention because of a number of spectacular failures and crises that threaten entire economies and regions. These examples of catastrophe matter in themselves and because they identify the fault lines along which key transformations are taking place. Catastrophes also open an unexpected window into the inner clockwork of financial transactions that would otherwise be closed to public scrutiny. On this accounting, the Asian currency crisis of 1997, the collapse of firms such as Long Term Capital Management and local governments such as Orange County (California), the introduction of financial risks so systemic that they threaten a global implosion of the banking system, and the accelerated and economically disabling devaluation of currencies such as the Turkish lira and Argentine peso all confirm that electronically amplified flows of capital have become instrumental in compromising the sovereignty of national economies, and thus the extent to which politics, democratic or otherwise, can regulate circulatory capitalism. There is a growing concern that the international order is disintegrating because the global economy is on the edge of crises whose shape and symptoms are different from past and more familiar ups and downs.

Though it is the regional crises and spectacular corporate failures that periodically put derivatives on the front pages and internet banners, their social and economic effects are more pervasive and difficult to determine. They infiltrate the economies of weak and developing nations through their effects on the price of money, which in turn greatly affects its availability for housing, education, and the other social goods whose provision is necessary to advance the economy. At least as important is that financial derivatives not only are designed specifically to deal with short-term fluctuations in the price of money but also tend to exaggerate the oscillations in exchange and interest rates. For manufacturers this makes it extremely difficult to synchronize on the one hand the time horizon of commodity production, which to be successful must be measured in years, and on the other hand short-term fluctuations in the cost of the money necessary to purchase their plant and equipment and guarantee them a profit on the goods they export. The impact of the fluctuations is hitting developing nations particularly hard, causing business failures that have little to do with the demand for the product or the efficiency of the producer. The result is often increasing poverty for the already poor and further weakening of already weak states. The most salient feature of our times is that contrary to the buoyant optimism of the early postwar period (1945-73), most “developing” nations are regressing economically if not also politically.

Especially because of its wide-ranging impact on the developing world, the financial turbulence of the past decades- exemplified by one currency and debt crisis after another- has convinced most serious observers (though certainly not all) to abandon the assumption that liberalization of the capitalist financial markets was destined to bring about a new regime of unparalleled global economic benefits. Also left by the wayside has been the overly optimistic imaginary that liberated economies of liberated peoples would bury their pasts and launch a progressive process of planetary integration. In its place is a troubling realization: unregulated flows of capital are engendering a turbulence that is undermining the lives of even peoples who inhabit territories incomparably distant and different from the landscape of metropolitan capital. Whether anyone understands what is happening or not, irrespective of political consent, arcane financial markets and instruments-encoded in the most mathematical of terms-appear to be determining the fate of those who reside in what the metropolitan literature, such as that issued by the International Monetary Fund (imf), identifies as economically emerging and transitional nations-the concept of the “Third World” apparently rendered senseless by the demise of the Second and dissolution of the First into the image of the planetary market. It is becoming increasingly clear that since the early 1970s, the cultures of circulation, especially that defined by speculative capital and the risk-based derivative, have unceremoniously begun to displace production as the leading edge of capitalism. This transformation accelerated through the 1980s and then exploded in the 1990s into the new millennium. The bankruptcies and currency crises that punctuate the transformation destroy the perception that it is possible to attend to politics independent of the economy, thereby undermining the celebration surrounding the resuscitation of democracy and civil society after the cold war in the post-colonial and once communist universe.

So a continuing refrain in both academic and popular works on globalization is that transnational capital has become instrumental in defining every aspect of the present economic environment, from the climate for interest and exchange rates to the topography of global redistributions of labor. These works see these streams of capital as mobile, muscular, and speculative, moving in a self-created and self-creating terrain lying beyond the perimeter and thus the regulatory power of the state. In the metropole as much as the post-colony, commentators have become progressively aware and worried that these global flows of finance capital will, in the words of the historian Eric Hobsbawm, gradually reduce “older units, such as ‘national economies’, defined by the politics of territorial states” to mere “complications of transnational activities” (1994, 573). Arjun Appadurai (2000) contends that circulation’s most “striking feature is the runaway quality of global finance which appears to be remarkably independent of traditional constraints of information transfer, national regulation, industrial productivity or ‘real’ wealth” (3; our emphasis). Saskia Sassen observes that such flows are leading to a “denationalization of domains once understood and/or constructed as national” (2000). Eric Peterson (1995) warns that continuation of contemporary trends will lead to the inevitable “hegemony of global markets” and the power of circulatory capital to determine the conditions of production; Jean and John Comaroff (2000) underline the degree to which “the explosion of new markets and financial instruments” gives the financial order an autonomy “from ‘real production’ unmatched in the annals of political economy” (300-301), while the geographer David Harvey (1989) claims that emerging circulatory forms are fracturing the history of capital itself.

In concert with this concern for circulation and its capacity to efface the forces of regulation, there is a growing emphasis on the social character of markets, particularly the ways in which the creation and distribution of wealth have to do with more than technological advancement and unfettered competition. There is a growing realization that modern markets rely on governance and cultural institutions that they are also partly responsible for creating. Fligstein (2001) notes that the social structures, social relations, and institutions underlying the market are the works in progress of a long-term historical project, and that in many cases they represent the fruit of sometime desperate experimentations in the face of market turmoil and economic depressions (4). In a parallel vein, Perez (2002) and Brenner (1998) attempt to understand how the social and political economy of globalizing capital absorbs, assimilates, and deploys great upsurges in wealth generated by technological advancements and the over-accumulation of capital that so often follows them. They argue that the social and institutional framework, including governance, developed to deal with the previous set of technologies (such as those of Fordist production) are invariably inadequate to enframe the new technologies, in this case the globalizing forms of financial circulation. There is a mismatch both across geoeconomic spaces, as exemplified by the relationship between the metropolitan nations and those of the periphery, and between the techno-economic and socio-institutional spheres, such that the economic system at least temporarily decouples finance capital from the organization of production. In that respect, our argument is that the globalizing process now in motion is engendering a decoupling on a scale more encompassing, more powerful, and also perhaps more permanent than anything that has gone before.

From a historical perspective, the capitalist circulation of money and commodities that began in earnest in the nineteenth century appears to be taking a new direction. Though this expansion was long in the making, dating at least as far back as the sixteenth-century Low Countries (Schama 1988), and its eventual trajectory was far from ordained, its dominant and world-dominating form only fully emerged at the start of the nineteenth century. Its developmental logic animated a process of perpetual expansion, punctuated by rounds of amplified globalization, with the result that capitalism engineered an increasingly interdependent worldwide political economy based in production and founded on a single, self-universalizing division of labor. While financial and mercantilist capital were present from the outset, and importantly so, this form of capitalism valued production over circulation, labor over risk, investment capital over its more speculative cousin, and the territorialized state over both more local forms of sociopolitical organization (especially world cities) and supranational forms. In what is probably a far too mechanistic metaphor, the swing of the economic pendulum that began with mercantile capital and then shifted toward production-centered, state-based capitalism is currently in the process of returning, albeit in a profoundly different way, to a more circulation-centered paradigm. This circulatory regime is less strongly tied to state and territory, more culturally diffusive, violent in ways that are both more abstract and more tangible, and above all, founded on a reorganization of the interrelationship between production and circulation. In this respect, the current round of globalization is so significant because it is transforming the blueprint for restructuring a global political economy that has been dominant for two centuries. The touchstone and animating force of the contemporary global transformations is the reemergence of circulation as the cutting edge of capitalism.

Continues…
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