Monday, January 26, 2009

The Subject Matter of Finance

Among the mainstream press, FT’s Lex column offers one of the more consistently thoughtful business observations. This past Friday’s column noted that after the firing of “Mr. Fix-It” from BofA and the hiring of Parsons as the Citi chairman – both considered good news for very different reasons – the stock of both companies dropped. From this evidence, the paper concluded:
The truth is that coming and (popular) goings of bank executives are a side-show. The financial crisis is not discriminating on the basis of management quality. The economic forces unleashed by financial crisis are so powerful that leaders have to a great extent been reduced to mere spectators.
In this backhanded way, and thanks to an unprecedented crisis, the FT finally recognized what the readers of this blog have always known, that the subject matter of finance is not people. It is capital in circulation.

There is more.

Financial crises that befall a financial system do not come from without. They are created from within the system, from its internal developments. Far from being aberrations, these crises are the natural stages – different moments, to use a term from mechanics – of a system whose functioning requires and produces a state of unstable equilibrium.

The process is not mechanical and depends on the actions of “market participants”. The executive officers of financial institutions, in particular, play a critical role in it by virtue of the exercise of their powers that influence the events. They acquire, divest, hire, fire en masse, grant favors and dictate the legislation. In the current crisis, they have been in the hyperactive mode, working feverishly to influence the events to their liking.

Yet, to the observant Lex writer they seem as spectators. What gives?

The answer is that the human actions are the very cause and source of the crisis. Who, but these very same executives and their counterparts in investment funds and trading rooms, brought about the current crisis? The most critical point, however – the point that separates the Theory of Speculative Capital from the simple narratives of the crisis – is that people do not act in vacuum. Within the modern financial market, in particular, they act under conditions created by speculative capital and in line with its dynamics. In doing so, they become the agents of speculative capital, a force that guides their actions but remains hidden from them.

Speculative capital is self destructive; it tends to eliminate the opportunities that give rise to it. This tendency manifests itself in many and varied ways, from the simplest, most obvious pruning of “excess spreads” between two European government bonds to the most spectacularly indirect. Lehman bankruptcy was an example of the latter.

The agents of the speculative capital follow the same self-destructive course, which is why their actions ultimately become self-defeating. Under such conditions, it does not matter which executive is in charge, a fact that the “market” eventually recognizes and reflects in a company’s stock price. But this happens not because managers are passive spectators. It happens because they are active agents. This process goes on at all times but it is more transparent at times of crisis.

The interaction of humans and markets is ultimately the interaction of the thinking and being. That is what this blog explores via its commentaries. A systematic exposition of the subject must await the publication of Dialectics of Finance.