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An Environmentalist Looks at the Financial Meltdown - September/October
2008
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By Nancy Myers
There is something
about what is happening now to global financial systems that brings
out the gaper in me. You know, slowing down to look at the wreck. I
am reading everything I can about crashing financial institutions,
the arcane instruments they invented to bring about their own ruin,
and the corrupt, wrongheaded, or oblivious politicians who looked the
other way. Who is to blame? How did it happen? What is the story that
most of us missed until it became all too evident?
Unfortunately, this is
not just about investment banks and hedge funds; it is about all of
us. The cliché is that "we" are Main Street and
"they" are Wall Street. Actually, many of us are
inadvertently or by some degree of choice living on both Main Street
and Wall Street. My husband and I, for example, are in the ranks of
the first victims of this train wreck: imminent and current retirees.
We are, in fact, on the derailed train. We bought our tickets some
time ago with our portfolio. How else do you prepare for retirement
these days? Not only investment but speculation is all but required.
We are both victims and participants.
As an
environmentalist, I have been musing on the opportunities this
financial crisis might present for our ideas. Many, like me, believe
that this is a teachable moment and we are already pushing forward
our agendas. Green jobs, the steady-state economy, responsible
investment, comprehensive reregulation, and valuing natural capital
are all being put forward as answers, or lessons, or ultimate
solutions once we get past the current crisis. To read some of these
recommendations go to SEHN's True
Cost Clearinghouse
and scroll down to the articles on "financial meltdown" and
"financial bailout."
As for SEHN's agenda,
as Guardian
(UK)
columnist George Monbiot wrote in a recent essay,
"Can anyone, surveying this mess, now doubt the value of the
precautionary principle?" We at SEHN have more to say about
economics, including challenges to the prevalent practices of
discounting and cost-benefit analysis. More about that in coming
months.
Nevertheless, for all
our forward-looking and ethical plans, many of us are to a great
extent participants in--and prisoners of--the economic systems that
are now falling down around our ears. As individuals and as
fund-supported NGOs, our investments are in trouble. The trouble is
not all our fault and certainly has not been under our control. But
that does not excuse us from examining it with clear and unbiased
eyes. And then we must decide how we are going to turn the system
around, so that our investments--where we put our wealth and what it
does in and to the world--lead to wellbeing rather than destruction.
Our first task,
however, is to understand what is happening and why. And therefore I
hope you read the two excerpts below from an extraordinary, timely
draft report just issued by a UK think tank called The
Corner House.
And then I urge you to read the entire, well-written report,
which tells what we've been missing--the whole story behind the
current mess. I've included just enough from the introduction to whet
your appetite to read the report, and enough from the conclusion to
tell you why this is so relevant to our work.
We've seen the story
happening, from mergers and takeovers, to Enron, to the privatization
of infrastructure like waterworks and the Indiana Toll Road, which
runs two miles past my house, and now the biggest financial crisis
since 1929. We've seen the story in pieces and haven't recognized it,
perhaps because people who tell it--especially politicians and the
media--are afraid to admit they really don't understand parts of it.
If you read through the 60+ pages of A
(Crumbling) Wall of Money: Financial Bricolage, Derivatives and Power
you will understand more about the current crisis than either
presidential candidate has let on so far, which is a bit scary.
Besides the two
excerpts from this work in progress, consider this gem from page 60:
"Greed
and fear are not given as the drivers for market behaviour as they
have been --unless markets are organised to allow them to become so:
solidarity and prudence are equally possible moral underpinnings."
And therein lies hope.
With the mechanisms and consequences of greed and fear now visible
all around us, we can roll up our sleeves and rebuild our
society--and perhaps even secure our personal futures--on different
values. Solidarity and prudence (there's the precautionary principle)
are good starting points. That would mean investing in future
generations, wouldn't it? Now there's a legacy to be proud of.
(Download the full
text, fully referenced, here)
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Nicholas Hildyard
The Corner House, UK
www.thecornerhouse.org.uk
8
October 2008 (Work in Progress) (Download full text, fully
referenced, here)
The French have a word
for it: bricolage
-- the use of whatever happens
to be at hand (regardless of its original purpose) to create
something that has a strikingly new use or meaning.
Examples include . . . the use
of pots and pans, discarded industrial oil drums, biscuit tins and
metal rubbish bin lids as musical instruments by the first Caribbean
"steel bands"; or
the cobbling together of furniture out of bits and pieces of wood
retrieved from skips or picked up at junk yards and rummage sales.
Today's bankers,
accountants and financial fund managers are not obvious bricoleurs
-- their pinstripes and
Porsches fit uneasily with the gobby rebelliousness of punks or the
"do-it-yourself" pragmatism of jumble sale junkies and
shantytown musicians. But bricolage
is not confined to the
marginalized or the thrifty. On
the contrary, the opportunistic recombining of "whatever is at
hand" to overcome a particular obstacle or achieve a given
objective -- in this instance, massive and rapid personal capital
accumulation -- is as much a feature of the many sub-cultures that
people the major financial markets as it is of society's myriad
other, less privileged, sub-cultures.
The financial bricoleurs
have seen and exploited
money-making opportunities thrown up by the liberalisation of
financial markets over the past two or three decades or so -- for
example, the removal of controls on the free flow of capital between
countries -- and by a period of low interest rates
and of weak oversight by the
financial authorities.
Academics, insurers, bankers
and fund managers have joined together to transform investment
practices worldwide by re-engineering a range of financial
instruments -- notably assets, known as "derivatives",
whose value depends on (or is "derived from") the price of
another underlying asset --
and by creating new ways of packaging these instruments up and
selling them. The recent tool of choice for such repackaging has been
"securitisation". . . .
Securitisation is a
process whereby assets that generate regular streams of income (such
as loans, corporate bonds, mortgages, export credit debt, care homes,
gas pipeline contracts or music rights on songs by rock stars like
David Bowie) are sold to a newly created company (known as a Special
Purpose Vehicle [SPV], but also sometimes called a Structured
Investment Vehicle [SIV] or a Special Purpose Entity [SPE]). The SPV
then issues derivatives, the other tool of choice that was to hand,
that give investors the right to the income stream from the assets.
The underlying asset -- David
Bowie's songs or the mortgage that has been taken out -- remains with
the SPV: the buyers of the derivatives have rights only to the
"receivables" that the securitised assets generate. By
combining risky assets (such as mortgages to low-income groups) with
less risky ones (mortgages to high income groups), securitisation has
been used magically to transform risky assets into attractive
investments. In
the process, new capital is raised to expand the businesses that sold
the assets to the SPV. In addition, through establishing the
securitised investment funds offshore in tax havens such as the
Cayman Islands or the British Virgin Islands, the bricoleurs
are able to enhance their
returns through tax avoidance.
In particular, the
bricoleurs have
used derivatives and securitisation to devise ways to make money by
evading or "playing" regulations; by extending the process
of commodification (derivatives have enabled virtually everything --
from weather to bandwidth and risk -- to be priced, commensurated,
bought and sold); and
by devising elaborate new financial vehicles through which they have
been able either to hide their "risks" (read:
their losses, actual or potential) or pass them on to less savvy or
less informed retail clients (for example, pension holders) or onto
the State, while ring-fencing their own profits from liabilities.
Risks have indeed been "spread"
(one of the main claimed
benefits of derivatives) -- but only in that they have been made more
contagious, not in the sense that they have been reduced.
Derivatives are used
within all major financial markets -- to make bets against future
fluctuations in interest rates, currency rates, commodity prices,
share prices, and the credit-worthiness of companies and states.
Their proponents argue that derivatives provide investors with a
vital tool both for the efficient management of credit risks
-- a claim that, as will be
seen, is highly questionable because much of the credit risk has been
hidden rather than mitigated -- and for making visible "the
market's assessment of the current and future value of certain
assets", sometimes
also called "price discovery".
Within the debt and
credit markets (the focus of much of the current concern over their
use), derivatives have transformed the ways in which companies raise
money to finance their activities.
Capitalising on the flexibility
of derivative-based financial instruments, a range of opaque and
unregulated bricoleur
created corporations,
notably hedge and private equity funds, but also "boutique"
investment banks, have constructed a "shadow banking system"
to that more familiar one long
operated by commercial and investment banks involving straightforward
deposits from one group of customers and loans (with interest) to
another. These new financial entities have used derivatives to both
generate capital and hedge against risk by passing it on to other
investors. These new players have been joined by mortgage lenders
who, thanks to the relaxation of the rules governing financial
services, have jettisoned their "mutual fund" status
and transformed themselves into
banks, aggressively raising money to "grow their businesses"
through the use of securitisation. The money raised has enabled the
mortgage lenders to expand beyond mortgages into other areas of
finance. . . .
The result has been a
wall of money, in the form of cheap credit, that has fuelled a boom
in mergers and acquisitions -- concentrating economic power in the
process --
and provided huge sums of capital for investment in sectors where the
bricoleurs saw
opportunities for profit. Industries that have seen money pouring in
include mining, biotech, biofuels, private health care, oil and gas,
and water supply. Projects are now underway that had been rejected
for funding even by the World Bank (not generally regarded as a model
of environmental friendliness), other multilateral development banks
(ditto) and official export credit agencies (ditto again).
The bricoleurs
have also developed new
capital-raising structures, involving securitisation and
derivative-based instruments such as credit default swaps to expand
private sector ownership of infrastructure
-- from ports and railways to
motorways, hospitals and utilities. In the process, they have
transformed infrastructure finance from a banking "backwater"
into a multibillion dollar business,
with profound implications for
corporate control over many areas of life that affect public welfare,
such as health care and access to water and energy.
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Nicholas Hildyard
"Greed
is what drives much of the modern financial world -- combined with
fear of getting sacked."
Gillian Tett, The
Financial Times
Environmental and
social justice activists may have different reactions to the
emergence of the derivative bricoleurs'
shadow banking system and its unfolding collapse (and partial
rebuilding) in the wake of the post-subprime credit crunch. Those
who, like me, came late to SPVs, CDOs, FELINE PRIDES and the rest of
the alphabetised jargon arriving long after the bricoleurs
had pieced together their
new world of finance, undoubtedly have much to learn from others who
were quicker to recognise the deep changes that derivatives have
brought about within financial markets. What follow are thus no more
than initial reflections -- in no particular order -- prompted by
what I have learned to date from my briefest of brief encounters with
derivatives:
First,
where activists (but also "ordinary" citizens) are willing
to become "literate" in complex financial instruments, they
may be in a stronger position to challenge some of the underpinnings
of the financial sector. Financial literacy is not a pre-requisite
for mounting such challenges -- far from it -- but it is a discipline
that may help in enhancing effectiveness. As MacKenzie puts it at the
end of his "Philosophical Investigation into Enron": "[The]
fate [of Enron's employees] should . . . remind us that numbers
matter. We need to understand how they are constructed, and perhaps
to start to imagine ways in which they can be reconstructed to better
ends."
Second,
the construction of modern derivatives markets and their daily
operation provide many insights into the clear disjuncture between
free market theory and its practice. Revealing the social networks
that underpin such markets and their influence on market behaviour
might provide activists with powerful tools for unpicking many of the
assumptions that underpin neoliberal theories of market efficiency.
Building such arguments is often undervalued as a form of resistance
-- but it would seem to be a key task if free market theory is to be
dislodged from its current hegemonic position and if the market is to
be regulated on the basis of how it actually works rather than on how
free marketeers say it works. There would seem to be much potential
scope here for collaboration between activists and activist
academics, building new networks that may assist in depriving free
marketeers of a tool for claiming that their bricolage
is in the "public
interest".
Third,
unless policy reform is rooted in wider grassroots mobilisation for
change, regulation of the financial sector (though a necessary task)
will do little in and of itself to undermine the structures of power
that the derivative bricoleurs
have constructed through
derivative trading. On the contrary, for the bricoleurs,
each new regulation is a new opportunity for arbitrage and
accumulation. This is not a reason for eschewing regulation. Far from
it. But it is a reason for placing it in context, for recognising its
limits and for prioritising movement-building that might contribute
to deeper structural change -- and which, alone, will create the
political pressure to ensure that regulations are not weakened by the
financial services industry or restricted just to measures that
provide bailouts for the banks. Opportunities for such movement
building include stronger linkages with those affected by the
subprime fall-out and with communities affected by volatility in the
commodity markets, and with those affected by the predatory actions
of private equity and hedge funds.
Fourth (and
closely related to the above), all of the institutions constructed by
the derivative bricoleurs
have their vulnerabilities.
Many are financed by public institutions or public monies -- pension
funds, university endowments, and municipal funds -- which are
potentially vulnerable to public pressure (albeit pressure that needs
to take into account the changing rationale of public funding).
Campaigns against the investments of such institutions in hedge funds
and private equity could provide useful political space for those
directly affected by the investments made.
But, drawing on the
experience of other campaigns directed at single institutions,
hanging banners on yet another set of buildings will not in itself
challenge the power of those within. Institution-focused campaigns
may shake financial power, embarrass it, even force it relocate
elsewhere, but, unless they are geared to wider movement-building,
their successes may prove short-lived or even Pyrrhic, trapping
activists in years of restricted "engagement" that at best
contains the most flagrant excesses of an institution and at worst
enables its expansion. Yes, single hedge funds may be forced out of a
specific investment. Yes, they may be forced to adopt environmental
and human rights standards. But campaigns that are not rooted in a
drive for wider institutional change -- and that do not build new
alliances among social movements -- are again unlikely to be able to
move toward closing down the space for derivative bricoleurs
to accumulate at the
expense of wider society. Campaigns need, for example, to show how
hedge fund activity is tied to the withdrawal of the state from
pension provision, and
private equity to growing inequality within society.
Fifth,
the current credit crunch offers many opportunities that have not
presented themselves to environmental and social justice movements
for many decades. Reports of the death of neoliberalism may be
exaggerated, but the so-called free market model is certainly now
being questioned -- even by many who for years have passively
accepted it as "the only game in town". Moreover, with the
state having now nationalised a slew of failing banks and much of the
US mortgage industry, the space to push for new forms of ownership
and control over the provision of credit has been considerably
increased. With Britain's fifth largest bank, Northern Rock, now in
state hands, is it simply to be patched up before being sold back to
the private sector? Or are there other possibilities that could be
pursued that would benefit society at large? And, if so, what form of
governance might work best to ensure not simply public control but
the exercise of that control for the public good? And how is the
"public good" to be determined? What political processes
might be nurtured to encourage debate and consensus-building around
what constitutes the "public interest"?
Here again,
possibilities for new alliances present themselves -- for example,
alliances with those at the grassroots who are building new forms of
mutual societies and credit unions that offer the opportunity to
build a shadow banking system rooted in a moral economy -- based on
solidarity rather than "fear" and "greed" -- that
is very different from that constructed by the derivative bricoleurs.
At the international level, too, the credit crisis has similarly
opened up space for change, dramatically unsettling the balance of
power in global markets -- with institutions such as the
International Monetary Fund playing second fiddle to state-owned
sovereign wealth funds from China and the Middle East in the bailouts
that are being negotiated. How
might that space be best used?
The sixth
-- and this may apply more
to professionalised NGO activists like myself than to grassroots
activists -- is that there is much that can be learned from the
activism of the Wall Street and City bricoleurs
(yes, Wall Street and the
City have their activists as well) that has so dramatically
re-engineered the institutional landscape in which investors operate.
For the derivatives revolution has not been achieved through "this
year's campaign" or mass-emailed letters to Ministers: it has
come about primarily through the everyday actions of traders, whose
bricolaged "successes"
have been picked up and further developed by the networks within
which they work. In itself, this provides important insights into the
dynamics of change within markets -- dynamics suggesting that
critical responses to the derivatives revolution that rely primarily
on "policy-oriented" tactics aimed at regulating what
already exists may be far less effective in reclaiming markets for
the public good than other everyday grassroots acts of bricolage
aimed at constructing --
and organising around -- alternatives to "The Market".
Such acts of bricolage
might include active
solidarity with those seeking to develop (or to defend) social
networks that share risk consensually, such as credit unions, where
savers potentially have more direct control over what gets financed
and how, or, as an alternative to derivative-based hedging in
agriculture, community-supported farms,
where farmers sell directly to
community members, who provide the farmer with working capital in
advance, thus lowering farmers' risks and ensuring they receive
better prices for their crops. Active solidarity with movements, such
as those committed to defending the "commons", would also
be critical to constructing a moral economy in which no one has the
right to accumulate at another's expense but where all have a shared
right to decent and dignified livelihoods.
The bricolage
of derivatives markets
suggests that, far from being insufficient to leverage structural
change, such grassroots activism and self-determination is, in
practice, the primary organisational form that change is based on.
Having the confidence to trust in the power of grassroots activism
may well be the greatest challenge facing many professionalised --
and often depoliticised -- NGO activists. Grasping that nettle, with
its organisational implications, may be the first act of bricolaged
resistance that is
required. The French have a word for that too: courage.
(Download full text,
fully referenced, here)
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