Ali’s blog

Mostly quant stuff with occasional digressions

NLR piece on subprime and financialisation

Posted by alifinmath on April 30, 2008

An essay by Robin Blackburn, in New Left Review, which can be found here. I’ll try to be sparing in my cut-and-paste:

Such distortions multiply as ‘financialization’ takes hold. It is boosted as the logic of finance becomes ubiquitous, feeding on a commodification of every aspect of life and the life-course—student loans, baby bonds, mortgages, home equity release, credit-card debt, health insurance, individualized pension funds. Financialization also encourages corporations to privilege financial functions and to see themselves as chance collections of assets which, as circumstances change, must be continually broken up and reconfigured. While the individual is encouraged to think of him or herself as a two-legged cost and profit centre, the corporation is simply an accidental assemblage to be continually shuffled in response to fleeting market signals.

More broadly, today’s institutional investment—‘grey capitalism’—has tolerated or spawned financial malpractice often dressed up in the latest jargon of the ‘quants’ and engineers.

The post-1972 take-off of financialization coincided with advances in computing capacity and the discovery of new mathematical techniques for valuing options and constructing derivatives. To begin with, these techniques were used mainly to reduce uncertainty and hedge currency risk. But before long it became clear that derivative swaps could be used to bamboozle tax authorities and shareholders. Financial engineering could convert one type of income stream into another, or an asset into income or the other way round—reducing or avoiding tax.

The complexity of the cdos and cdss—credit default swaps, the financial instruments which insure bond holders—generates new risks: documentation risk, operational risk, ratings risk, counter-party risk, liquidity risk and linkage risk among them.

As time goes on, we’ll probably see more and more of this kind of serious analysis from the Left (i.e. the real Left), which will seek to place the curent problems in a theoretical and historical framework.

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