The financial instruments that are in the background and the real cause of the financial metldown are very complex and hard to understand, including by the politicians who are now concocting policy responses. For civil society players it is just as difficult.

But help is coming.

The very best report I have seen on the crisis is the following from Corner House:

– A (Crumbling) Wall of Money Financial Bricolage, Derivatives and Power. by Nicholas Hildyard

The first 63 pages offer a detailed but very clear and lively explanation of the world of derivatives and securization.

Then the author tackles mainstream policy responses, followed by an attempt to formulate an agenda in the interest of social justice.

Here are these two last parts.

1. Mainstream Policy Reforms

Nicholas Hildyard:

“Calls for regulation of the banking sector now dominate the airwaves and print media. In private, even the International Monetary Fund (which, if the crisis had unfolded in a developing country rather than the USA, would, on past form, have been using its iron fist to impose widespread deregulation, not least of the banking sector) is reported to favour the regulation of the sale of credit default swaps (but not other derivatives) by shadow banks – a proposal that is as remarkable for its failure to take on board how limited and partial regulation is likely to encourage the very regulatory arbitrage that lies at the root of the current crisis as it is for its apparent break with IMF dogma. Others, such as the European Parliament’s Economic and Scientific Policy Department, propose forcing the originators of CDOs to retain some of the credit risk of the underlying loans (good idea – except that many banks never actually shed this credit risk, retaining it even though the loans had been placed off balance sheet . . . which is why they are now going bust). And still other proposals are striking less for their misconceived analysis than for their banality and sense of paralysis: who could dispute the need to strengthen “prudential oversight over capital, liquidity and risk management” – one of the main conclusions of the Institute of International Finance, the trade association for the UK’s financial services sector? Nonetheless, a bricolaged package of (limited) reforms is slowly beginning to emerge amongst mainstream commentators.

These reforms would include:

• Requiring the financial sector to be more transparent, not only about the risks inherent in new financial products but also about the risks held by banks and the sums set aside to cover them.

• Bringing hedge funds and other shadow banks under the same regulatory umbrella as regulated banks.

• Requiring banks to hold larger capital reserves.

• Forcing the originators of collaterised debt obligations CDOs) to hold some of their credit risk.

• Standardising derivatives or, at the very least, reducing their complexity.

“Excessive complexity is a significant source of lack of clarity. It is particularly damaging, as we have seen, to the originate-and-distribute model, because markets in complex securitised products may, at times, seize up, forcing central banks to become ‘market makers of last resort’, with all the difficulties this entails. One possibility then is to insist that all derivatives be traded on exchanges.”

– Martin Wolf, Financial Times543

• Changing the incentive structure within banks so that bankers are not rewarded for taking high risks.

“Simply put, the best way to prevent a recurrence of these systemic seizures . . . is once and for all to break this one-sided incentive system by cutting back banker pay and making a portion of it contingent on the longer-term outcome of their deals or trades. In effect, use a fraction of the excessive compensation to pay the premium on an insurance policy that will, hopefully, encourage less reckless behaviour.”

– William Cohen, financial commentator

• International action to ensure that all countries adopt the same reforms, in order to reduce the opportunity for regulatory arbitrage

“While the idea of a global financial regulator – or a global financial ‘sheriff’ – is for the time being a bit far-fetched a much stronger degree of coordination of financial regulation and supervision policies is necessary to avoid a race to the bottom in financial regulation and supervision and to prevent excessive regulatory arbitrage. Such international coordination of financial policies is currently occurring on a very limited scale and will have to be seriously enhanced over time.”

– Nouriel Roubini, New York University’s Stern School of Business

Quite an agenda. And, after two decades in which policymakers have systematically sought to deregulate markets, many, including proponents of free markets, have concluded that the “Age of Thatcherism and Reagonomics” are over, or at least waning. Certainly the wholesale nationalisation of the US mortgage sector in September 2008 is a departure (to put it mildly) that, if it had been undertaken as premeditated policy, would indeed signal a sea change in US politics (one senator denounced the nationalisation as “un-American” and “financial socialism”).

But there at least five reasons to be sceptical of claims that neoliberalism is in willing (or even unwilling) retreat.

First, no measures (beyond what has been necessary to rescue the banking sector from imminent collapse) and no regulatory reforms of any long-term significance have been taken by any of the major industrialised countries in the wake of the credit crunch. Short-selling of shares in banks has been (temporarily) banned to protect banks from the very instruments they have been promoting as essential to “price discovery”, but no similar bans have been instituted to protect ordinary people from the shorting of shares in the companies they work for. Little action has been taken to assist the vast numbers of people who go hungry because of speculation in foodstuffs, nor to protect mortgage holders from having their homes taken away from them. And, while steps have (rightly) been taken to protect those with deposits in banks, those with no savings remain at the mercy of the market. Meanwhile, hedge funds remain unregulated, and no measures have been taken to ban the use of more complex derivatives. Indeed, on present form, whatever wider new regulations are eventually introduced to rein in the financial sector – and there will be some – they are likely to be carefully crafted to ensure that the recent nationalisations that governments have undertaken do not threaten broader structural change in US and European society.

Second, calls for regulation should not be taken as inevitable harbingers of change. De-regulation is certainly a hallmark of neoliberalism – but so is regulation. Indeed, the free market “reforms” of the past twenty years have always been accompanied by re-regulation, designed more often than not to “lock in” neoliberal policy changes (the EU’s Maastricht Treaty is a case in point, making it illegal under European Union rules for member governments to borrow more than a fixed percentage of their Gross National Product; the World Trade Organisation’s General Agreement on Trade in Services [GATS] is another). The prospects that the regulatory fallout from the credit crunch will “reverse” neoliberalism, without accompanying social organising, should not be taken as inevitable, the more so when the proposed reforms are intended to “save” the free market – and, even, unashamedly, to “make Wall Street more profitable.”

Third, while blind faith in free markets may now be under question, the emphasis amongst mainstream policy makers is on “blind”. Despite isolated calls to “learn from our mistakes and act pragmatically to regulate markets as they exist in fact, not theory”, the proposed reforms are underpinned by the belief that markets are the most efficient means of distributing resources within society – and that economic actors, from bankers to consumers, act rationally in all their economic transactions. All that is required to prevent future “market turmoil” is to provide more information and a little more policing to catch those who break the rules. Yet, as Jeremy Grantham comments in the Financial Times, if the current crisis has shown anything, it is that “Efficient Market Theory” is a “complete illusion”.

Economic actors do not act rationally. They follow crowds, take decisions to keep in with other colleagues (rather than because they have diligently assessed the risks for themselves), and are carried away by the sheer adrenalin rush of clinching a deal. Regulations that remain imprisoned by theories that bear no relation to reality are likely to lead to more of the same, rather than a change in direction.

Fourth, the financial services industry has powerful allies and, internationally, constitutes one of the best-organised political lobbies in existence. Regulation will undoubtedly follow the bail out of the banks in the USA and Europe – but it is likely to be the weaker precisely because the bailouts have been agreed in advance of the regulation. It is worth recalling that there were calls to regulate derivatives following the financial “blow up” of 1994 when many derivative contracts went sour after interest rates suddenly changed. For a while “everyone hated derivatives”558 but, after lobbying by the International Swaps and Derivatives Association and a recovery in the markets, regulatory pressure died away and the derivative bricoleurs went back to their old ways. Given that those being called in to advise on or draw up new regulations are often the very people who played a major role in creating or profiting from the derivatives and securitisations that lie behind the mess, the prospects for radical overhaul of the financial system would appear slim.559 Moreover, with the private sector now financing much that the State used to finance (from railways to many previously state-run industries) – and securitisation being one of the principal ways in which the banks raise the funds to do so – the bricoleurs have governments over something of a barrel: regulate us too hard and you will need to increase taxes to make up for what your new rules prevent us from raising on the capital markets. Absent public pressure on government for the State to take a more interventionist role in the economy, it will be a brave politician that resists such arguments.

Fifth, even if the proposed regulations were introduced, they are unlikely to contain the risks of future collapse in the absence of deeper structural changes within society more widely. Whatever new measures are introduced, the bricoleurs will seek a way around them – and engender new risks (and new profits) in the process. Moreover, the bricoleurs are currently better equipped to circumvent the rules than the regulators are to enforce them.

As The Economist dryly notes:

“Naive faith in regulators’ powers creates ruinous false security. Financiers know more than regulators and their voices carry more weight in a boom. Banks can exploit the regulations’ inevitable blind spots.”

Moreover, talk of international action to close the loopholes that regulatory arbitrage exploits frequently ignores the profound constraints that neoliberal-inspired international regulations have already placed on the ability of national governments to act. Moves such as banning options trading in key commodities, which India introduced during the commodities boom of mid-2008, will not be available to many countries if current proposals under the latest round of the World Trade Organisation’s negotiations on a General Agreement on Trade in Services (GATS) go through.562 Given international organising, such agreements could be undone – but this is not even remotely on the official agenda for reform of the financial services industry. The obituaries to neoliberalism have not, it would seem, yet reached the World Trade Organisation.

If neoliberalism is indeed to be laid to rest – and risk in the financial system not to trigger further meltdown – the challenge surely goes beyond formulating new rules for the financial sector, necessary as this undoubtedly is. Where risk is viewed at a distance and reduced to number crunching and complex mathematical models, the impacts of specific decisions on people and their lives and livelihoods are merely abstract. “Repopulating” risk assessment so that parties to a contract know through personal contact who will be affected by any given action and how brings a different view of risk – and builds a different moral economy to that which currently dominates finance, one based on a different calculus of what is acceptable and unacceptable. 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. Those who make deals do not have to behave as sociopaths once they cross the threshold of their workplace: rooting economic behaviour in different social institutions and relationships could produce very different outcomes. Bankers know this, which is one reason why new recruits must be “socialised” into abandoning behaviour towards others that would be required in the outside world. The elaborate rituals and initiation rites that accompany bank training programmes – and which have been well described by ex-bankers – testify to the “unnaturalness” of the “Greed-is-Good”, “Big Swinging Dick” culture of today’s investment banks.

2. A more progressive policy response

“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 movementbuilding 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-focussed 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”?567 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.568 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,569 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 selfdetermination 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.”