Neoliberal Blues

-- By GloverWright - 17 Apr 2010

They’re selling postcards of the hanging
They’re painting the passports brown
The beauty parlor is filled with sailors
The circus is in town
Here comes the blind commissioner
They’ve got him in a trance
One hand is tied to the tight-rope walker
The other is in his pants
And the riot squad they’re restless
They need somewhere to go...

- Bob Dylan

Introduction: A Reckoning

On Friday, April 17 -- the same day that Senate Republicans issued a statement against the Democrats' financial-reform bill that would, for the first time, regulate derivates -- the Securities and Exchange Commission filed a civil complaint in the Southern District of New York against Goldman Sachs & Co., alleging fraud in the structuring and marketing of a collateralized debt obligation (CDO).

In summary, the SEC alleges that, at a client's behest, Goldman bundled a group of subprime residential mortgage-backed securities (RMBS's) identified by the client -- hedge fund manager John Paulson -- as likely to fail into a CDO in which Paulson took a negligible equity stake. From the beginning, Paulson intended to take a short position against the CDO by purchasing credit-default swaps (CDS's) initially backed by ACA Capital, the company whose subsidiary worked closely with Paulson -- without knowledge of his intentions -- to select the securities which comprised the CDO. Goldman then fraudulently marketed the CDO as a legitimate vehicle in which investors might take a long equity stake, without mentioning Paulson's involvement. The CDO, of course, failed, and Paulson collected on insurance of about $1 billion from a consortium, led by the Royal Bank of Scotland, which had purchased ACA.

The SEC's complaint charges Goldman with violating sections 17(a) and 10(b) of the Exchange Act, which proscribe fraudulent interstate transactions and manipulative and deceptive devices, respectively, and which remain untested in the emerging area of structured-credit litigation. Thus the outcome of the case, public anger at Goldman and its peer institutions notwithstanding, is far from determined. And this uncertainty helps to disclose a greater difficulty that ultimately we must face -- an incommensurability between certain ethical considerations that we wish to impose on society via the law and the principles of the financial world in which entities like Goldman and Paulson have been allowed, and encouraged, to thrive. The problem is that the law remains circumscribed within an economic sphere whose particular rationality runs counter to the interests of those who might wish to litigate, as well as to the grounds on which they might bring an action in the first place.

A Fiscal (Re)Ordering

In July 1944, the 44 Allied nations met in Bretton Woods, New Hampshire, to restructure the international monetary system in order to promote economic stability and revitalization in war-torn Europe and Asia. They agreed to a system of fixed exchange rates in which their currencies would be maintained at rates relative to the United States dollar, which in turn was pegged to gold at $35 an ounce. In effect, the Allies agreed to a global gold standard, limiting credit and ensuring that international trade surpluses and deficits more or less balanced out.

The Bretton Woods system worked pretty well for a couple of decades as Europe and Asia regained their economic health, the United States experienced a comfortable prosperity, and wealth and finance were tied to production. But the value of gold continued to rise on the open market, and the United States -- whose gold remained valued at $35 per ounce -- lost a significant portion of its reserves. In light of those losses, and rising global inflation followed by stagnation, the United States unilaterally went off the gold standard, thereby foreclosing the possibility of fixed exchange rates and introducing volatility into the foreign exchange market in which currencies were now floating. Along with that volatility came the need to create financial instruments with which investors could manage the risks to which they were exposed by currencies -- particularly the dollar, which remained the world's reserve currency -- whose present value was unstable and whose future values were uncertain.

Thus did what David Harvey calls the "embedded liberalism" of the postwar period -- "characterized by ... a social safety net" ensured by state interventions in the international economy and domination of national economies via the regulation of fixed exchange rates -- give way to neoliberalism favoring a "free" market allowing for maximal individual (economic) autonomy and, by extension, exposure to risk. The logic of capital was no longer constrained by production -- currency markets obviate the need for buying and selling goods and services -- nor by a more or less fixed resource in accord with with which money was issued and valued. Rather, capital oriented itself towards circulation and began to flow globally in directions determined both by risk assessments (and not necessarily by efficiency concerns). And as capital divorced itself from production -- as wealth lost touch with its material basis, on account of the fact that a material basis was no longer necessary -- the accumulation of capital became, logically, an end in itself.

And So Now

Thorstein Veblen was right about at least two things. We are status-conscious creatures, and though we may no longer engage in exactly the kind of conspicuous consumption that he wrote about in 1899, we remain in the thrall of waste -- of accumulating not because we derive utility from accumulation but because we are bound by our natures to accumulate as much as we can of whatever it is that our era happens to prize. In our time that is finance capital, which often serves no purpose but its own. The point of derivatives -- of CDO's and CDSs and RMBS's -- is no longer to hedge against risk but to create new sources of wealth which may in turn be leveraged for ever more profit. And we remain driven also to emulate those who have accumulated the most. In late 2007, for example, a representative of a Mongolian investment bank with whom I was interviewing told me, excitedly, that the bank had just structured the country's first RMBS for sale on the international market. One might think that such an endeavor would raise the question of just what residences -- in a country with fewer than 3 million people, 30 percent of whom are nomadic and probably another 50 percent of whom live in dilapidated Soviet-era apartments complexes with meager incomes -- were being mortgaged in the first place. But this, apparently, was no matter. Residential mortgage-backed securities were a promising new investment vehicle, and they were driving global capital flows, some of which may as well end up in Mongolian accounts.

All this is to say that even if the SEC succeeds in its case against Goldman, and even if the Democrats pass their financial-regulation bill, the economic principles according to which our current world has been constructed remain opposed to the kinds of ethical considerations which those favoring reform would like to see implemented and enforced by courts and legislatures. A lawsuit -- a whole host of lawsuits, civil or criminal -- will not bring fundamental change, which is not to say that lawsuits should not be brought but that expectations should not be too high. Goldman and Paulson are only doing what the world has been structured, deeply, to encourage them to do. They will take their licks, legal and reputational, and then they will continue doing the work with which God has charged them.

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