Notes on the Meltdown

Fifteenth-Century Currency, The Intercontinental Railroad, Geofinancial Space, Earnestly Drinking Cheap Beer, Impossibly Complex Derivatives, The Smell of Volatility and Fear, The Asian Flu, Anticapitalist Bedtime Stories, Predictive Power of Marxism and Socialism, Conjoining Finance Capital to Daily Life, Turtles, Many Economic Bubbles, The Neoliberal Project,The Nearly Obliterated Wachovia, Some Kid in West Africa Who Isn’t Even Born Yet

Notes on the Meltdown

Joshua Clover
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I. Two great tastes that go great together

We could begin in fifteenth-century Genoa with the invention of fixed currency and modern banking, or with the first foreclosure of this current crisis just a couple years back. I’m going to begin near the middle: in the nineteenth-century United States, with banks and railroads.

Railroads being too pricey even for the well-heeled capitalist, banks that could provide grand lines of credit became major players. This concert of powers dominated the nation’s finances, extending the financial network even as they exerted increasingly centralized control. They were only too willing to loan the money forward, both for stakes in the enterprises and in the happy knowledge that the intercontinental railroad would open up new markets. Credit doesn’t just allow for such expansions; it requires them, to conjure its necessary returns.

The relationship was so intimate that sometimes it collapsed into singularity. Chartered in 1833, the Georgia­ Railroad and Banking Company built a then-lengthy line from Atlanta to Augusta; the firm survives as a real-estate concern. Its rail system now belongs to massive CSX Transportation; the banking division was a part of Wachovia, which was nearly obliterated this September and has under Federal duress recently merged with Wells Fargo, which started in 1852 as a transport and banking company. Two great tastes that go great together.

The salient point is this: that the expansion of the rail systems throughout physical space, sewing together the continental United States with threads of iron, was identical to the credit-fired expansion of financial networks. Not parallel developments, but one and the same. Geopolitical space and finance space are simply different dimensions of the same structure, the same unified market—what we might call geo­financial space.

II. Drinking Pabst Blue Ribbon in Silver Lake

The morning air reeks of volatility and fear, the way I always imagined nitroglycerin would smell. In the unfolding of the present crisis, we see “the illuminated surface of events,” in the words of the great historian Fernand Braudel. Massive companies merge, fail, are bailed out; it’s on the front page of reality. Unemployment and income figures flash from every marquee. This is the layer of the market economy. The layer below, that of daily life and what ­people do with their days in times like these, is hard to see beyond one’s neighborhood, which may not itself be a good representation. They are still drinking Pabst Blue Ribbon in Silver Lake and Williamsburg—now with less irony.

Even more opaque is the layer above the market: the finance economy, with its impossibly complex derivatives, its futures and hedge funds, its credit default swaps and collateralized debt obligations ad infinitum. Rather than trying to detail each item—the CDOs are particularly fucked—I’ll propose the exact opposite, which is that the particulars are not that important. They are if you’re an investor: if you’re looking for tips on managing your portfolio in these difficult times, and want to know who is holding what kind of “toxic assets,” this essay is not for you. It is for those grasping after a sense of the larger situation, as I am. For those who do not know how to feel about this mess, as I do not. Though I do not entirely disdain the smell of volatility and fear. Calling all forms of satisfaction over the ruination of the wealthy by the one name schadenfreude misses the emotional dynamics of economic life almost entirely.

III. The end of the world trade

The two core characteristics of finance capital are correlation and credit. Correlation is the situation produced by the need for increasingly rapid and voluminous transfers throughout the financial network; credit, what is transferred. Conveniently, we might visualize the finance system as a rail system: corporations are the stations; correlation the network of tracks that connects them; and credit what is moved from station to station. Profits are made by balancing local risks (a.k.a. hedging), and then striking at increasingly slighter and briefer differentials out there in the system: undervalued stocks, skewed currency exchange rates, and any number of more arcane items. The payoff might come in minutes, years. However, high correlation means that gaps are smoothed out swiftly; the imbalances at which one strikes are momentary and minuscule. As a result, the strikes must be delivered at ever faster speeds, with ever greater force. So there must be ever more channels and ever more free-­flowing capital to pour through them. Correlation and credit.

This situation has several implications. Companies must be increasingly “leveraged”: an endlessly lowering ratio of the money they’re using will belong to them, while ever more is borrowed against future profits. This points up one of the fairy tales circulating of late: that there was a “failure of fundamentals” in which companies were over­leveraged. Competition makes increasing leverage an absolute inevitability, without which there is no way to survive. The idea that this problem comes from outside the logic of the financial system, or is caused by mismanagement or “excessive greed,” is—to use a technical term—ludicrous.

Correspondingly, a high degree of correlation—also inevitable—means that a failure at one spot in the system is increasingly likely to cause another failure elsewhere (a contagion model, hence the 1997–98 crisis sometimes being called “the Asian Flu”). This problem is even worse than it might at first appear. Correlation connects financial entities not just with their brethren but with governments, via national currencies and state-­insured banks and other mechanisms. This is the import of the phrase too big to fail—that systemic risk is not just fiscal but global and political.

One can even buy insurance against such an apocalypse. As ­Donald MacKenzie writes, “The trade is the purchase of insurance against what would in effect be the failure of the modern capitalist system. It would take a cataclysm—around a third of the leading investment­-grade corporations in Europe or half those in North America going bankrupt and defaulting on their debt—for the insurance to be paid out.” This may have seemed like nothing but an anticapitalist bedtime story a year ago. Now it just seems like a possibility (hence the tenfold increase in the price of such insurance). The national hysteria around socialism and Marxism that haunted the last month of the election arises not from Obama’s policies, but from a world situation in which those ideas seem to offer not just an alternative vision but some predictive power.

IV. It is not turtles all the way down.

All this credit coursing through all these channels is, as noted, what both allows and requires that system to expand. But it still has to be credit against something. For all the variations among the baffling and mystical constellations of financial instruments, and the way each one seems to be premised on yet another, they finally share the quality of credit in general: they are a series of guarantees both made and believed, stacked one atop the other like turtles.

Even the wagers that certain promises won’t be kept—insurance, credit default swaps, etc.—are part of this stack of turtles, helping to keep it stable as it towers ever higher into the heavens of finance. They too are part of the series of guarantees. They too have to be believed. And something has to produce this belief, that these debts can be paid.

That is to say, it is not turtles all the way down. The bottom turtle rests on the production floor: the “real economy” where people go to work, make stuff, are paid wages, and in turn purchase stuff. This is where new value appears, and nowhere else. And it is the beginning of credit. You take out a mortgage and promise to work thirty years to pay it off. The heat from your ­labor bears the promise aloft, and it resembles money more and more as it rises toward the penthouses of Goldman Sachs and AIG. And so is the finance-capital layer joined to daily life.

V. Some kid in West Africa who isn’t even born yet

The problem, from the perspective of financial capital, is that the value generated on the production floor can no longer keep up with the accelerating needs of financial competition: derivatives trading now far outpaces the real economy. Again, it is crucial to understand that this does not mean that new value is appearing up there. Thus we get the fatal guarantee, right where the production floor and the stack of turtles meet: the promise that the real economy of the future, and of new and distant lands, will eventually be paid into the ongoing apparatus—and thus can be spent as money now. One must believe that the railways can suture together an ever larger market, to revisit our model.

The bottom turtle is consumer credit. That’s your future ­labor, of course, but it’s also some kid in West Africa who isn’t even born yet and whose life of toil is pretty much already charted out. She will duly be incorporated later; the ­system expands now on the certainty that this will happen. This is how the bottom turtle can be inflated periodically; we call these “credit bubbles.” Each of the bubbles—the tech bubble, the commodity ­bubble, the housing bubble—is yet another promise to expand the real economy in space and time.

The rescue is its own odd ­bubble: money from future work set in motion now, but this time without even the chance of a mortgage or flat-screen TV. It’s a credit bubble without anything to buy: the most hollow promise yet, 700 billion dollars’ worth, to stave off the collapse of our current world system by inflating it one more time. The only matter of debate is which ­turtle to inflate; even the most ­“liberal” economists simply suggest it will work better if we treat a lower turtle. Pure liquidity, the top turtle? Financial services turtle, small-­business turtle? The lowest turtles of consumer credit and consumer demand? This set of choices is called “the political spectrum.” It’s sort of pathetic.

VI. What is on offer is apocalypse itself.

It is clear enough that this situation dominated by an endlessly expanding, relentlessly interconnected aggregation of corporations and states premised on the increasing internalization of labor across space and time is exactly what we have gotten used to calling “globalization.” You will have noticed it’s the banks and railroads gone total: a geofinancial space that circles the world. This is exactly what people mean by the term neoliberalism. And it thusly is clear that the attempt to “rescue” the financial sector is an attempt to rescue the neoliberal project.

But the very fact that it needs rescuing is of some interest. This is what is actually meant by a “credit crisis.” Not the inability of individuals or corporations to get loans; not the loss of liquidity, or freezing of the money markets. The credit crisis is found in the status of the relationship between the financial and real economies. There is no ­longer a strong belief that the system can keep expanding, keep adding ­workers and value on the production floor to make good the promises floating far over their heads.

One sees immediately that the credit crisis is also a crisis of ­hegemony. To believe credit can be extended and repaid is to believe that the U.S.-led geopolitical order can continue to expand, that the globe can be sewn together even more totally. This particular belief is the state religion, and it’s going the way of Mithraism and the gold standard. It is the end of empire, and this is a better reason to celebrate than is a presidential election.

Meanwhile, we are told that we must make this final round of expenditures because what is ending is not our empire but the world—the end of history with a vengeance. What is on offer is apocalypse itself, or rather a defensive spell against it. We are getting nothing for 700 billion but promised protection from the threat of systemic failure, a threat issued hour by hour on the news, by politicians and economists. We are made to purchase end-of-the-world insurance, but may sell nothing onward. It’s an apocalypse ­bubble. It smells like nitroglycerin. 

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