Banking and finance used to be complicated, but not all that complicated. The basic principles could be understood by people who were not bankers. In recent years, that all changed, as ever more esoteric financial instruments were created that, it now seems, even the bankers did not understand. The foundations of our financial system collapsed as if the banking business were just a giant Ponzi Scheme, dragged down by collapsing assets that seemed to have all the substantiality of thin air. We started with common-sense notions of banks as giant piggybanks which, granted, could loan out more pennies than they actually had, because their depositors could be counted on not to take all their pennies out at once. We ended up with piggybanks filled, not with pennies, but with helium.
How did we get here? Awhile back, John Lanchester wrote a marvelous essay in The New Yorker in which he maintained that to understand modern banking, we need to look at some of the 20th century movements in modern art -- specifically, the movements known as modernism, and then later, postmodernism.
Finance, like other forms of human behavior, underwent a change in the twentieth century, a shift equivalent to the emergence of modernism in the arts—a break with common sense, a turn toward self-referentiality and abstraction and notions that couldn’t be explained in workaday English. In poetry, this moment took place with the publication of “The Waste Land.” In classical music, it was, perhaps, the première of “The Rite of Spring.” Jazz, dance, architecture, painting—all had comparable moments. The moment in finance came in 1973, with the publication of a paper in the Journal of Political Economy titled “The Pricing of Options and Corporate Liabilities,” by Fischer Black and Myron Scholes.The building above is US Bank Plaza, the Skidmore, Owings and Merrill modernist structure on Madison's Capitol Square that started going up that same year, 1973. For Lanchester, this dates the time -- the development of the theoretical basis of the modern derivatives market -- when nonspecialists could no longer understand finance, paralleling a similar movement in the arts.
It seems wholly contrary to common sense that the market for products that derive from real things should be unimaginably vaster than the market for things themselves. With derivatives, we seem to enter a modernist world in which risk no longer means what it means in plain English, and in which there is a profound break between the language of finance and that of common sense. It is difficult for civilians to understand a derivatives contract, or any of a range of closely related instruments, such as credit-default swaps.Common sense was out now. What was next? In the arts, modernism was followed by postmodernism. (The building at right is part of Madison's Block 89 redevelopment often described as eclectic and postmodern.) Lanchester contends that the same thing has happened in finance. In modernism, the meaning in art might be complex and fully accessible only to specialists, but there was no doubt in the art world that art did, in fact, have meaning. Postmodernism questioned the very idea of meaning, which was seen increasingly as something to be "deconstructed."
If the invention of derivatives was the financial world’s modernist dawn, the current crisis is unsettlingly like the birth of postmodernism. For anyone who studied literature in college in the past few decades, there is a weird familiarity about the current crisis: value, in the realm of finance capital, evokes the elusive nature of meaning in deconstructionism. According to Jacques Derrida, the doyen of the school, meaning can never be precisely located; instead, it is always “deferred,” moved elsewhere, located in other meanings, which refer and defer to other meanings—a snake permanently and necessarily eating its own tail. This process is fluid and constant, but at moments the perpetual process of deferral stalls and collapses in on itself. Derrida called this moment an “aporia,” from a Greek term meaning “impasse.” There is something both amusing and appalling about seeing his theories acted out in the world markets to such cataclysmic effect. Anyone invited to attend a meeting of the G-8 financial ministers would be well advised not to draw their attention to this.From this point of view, you could say that Barack Obama faces the daunting task of bringing about a post-postmodernist restoration of faith in the meaning of our financial assets, or in financial terms, value.
Note: There are links and additional information about the Madison buildings shown here in my Flickr photostream. Click on the photos to get there.