A Demon of Our Design: Markets, Hedge Funds and the Perils of FInancial Innovation
By Richard Bookstaber
John Wiley & Sons, Inc., 2007
Historically, many empires have been undone by letting go of their domestic manufacture-based economies. A seventeenth-century Spaniard enthused: “Let London manufacture… as long as our capital can enjoy them. …All the world serves [Madrid] and she serves nobody.” Eventually, London used its manufacturing to become the center of a new empire, while’s Spain’s empire declined.
Speculation: U.S. Imperialism’s Hidden Weakness
The financial sector now accounts for 31 percent of U. S. corporate profits — up from 20 percent in 1990 and 8 percent back in 1950. But, larger percentages of financial profits come from hedge fund speculation. New York Times business columnist Floyd Norris blames these financial “innovations” for spreading the housing-related credit market crisis.
On the other hand, China has a growing industrial economy allowing it to become an emerging imperialist competitor. Not long ago U.S. “experts” questioned China’s economic viability since Chinese banks carried too many non-performing loans. China Investment Corporation, the state-run investment fund, will spend two-thirds of its $200 billion shoring up these banks. Their percentage of “bad” loans has already dropped by half.
Chinese imperialists got this capital from exploiting workers in their vast, rapidly-expanding manufacturing sector. They can get away with it because capitalist leaders long ago hijacked the communist revolution. They’ve turned it into it’s opposite — another exploitive capitalist nightmare.
Spiral to Hell
Bookstaber gives a running account of financial “innovations” beginning in the 1980s. He explains the mathematics behind investment strategies that caused such infamous disasters as the 1987 crash and the demise of Long Term Capital Management. He worked with many of the players and admits to contributing to financial catastrophes.
He freely admits speculative “financial tools” help for only a few years. The investment community “invents” one speculative scheme after another trying to stay ahead of the inevitable payback. By now, the very design of financial markets insures a “liquidity spiral to hell.”
His solution is to reduce “tight coupling and complexity of financial transactions.” The financial markets shouldn’t use “every financial instrument that can be dreamt up.” Speculation shouldn’t rely on large sums of borrowed money. This “leverage” speeds up the spiral to catastrophe, spreading the danger to areas beyond the original investment. Bookstaber hopes “simpler financial instruments and less leverage will create a market that is more robust and survivable.”
He never asks why U.S. bosses turned to financial speculation in the first place. Industrial opportunities to extract surplus value and profit failed to keep pace with those of emerging imperialist competitors. U.S. financial titans were forced to speculate to keep up. Bookstaber’s solution is fanciful in this climate.
Workers Create All Value
The value of an automobile or airplane is greater than the sum of the parts that make it up. The amount of labor in production creates the increase in value. The boss can’t use this extra value until he sells the product. Marx called this part of the process exchange. Exchange itself doesn’t create any value.
As exchange becomes less connected to creation of value, it turns into speculation. One boss can make money at the expense of another, but no value is created in the exchange. That’s what increasingly opaque hedge funds are all about. Eventually the house of cards collapses if no extra value is created to back up these financial “tools.”
Ruling-class strategic thinkers have awakened to the danger and to the need to actually produce value. They are re-industrializing on the backs of low-paid immigrant and black labor, starting with expanding subcontractors.
Racist practices like this hurt all workers. The network of non-union subcontractors has grown to include low-paid sub-assembly and assembly factories. Conditions in traditional union plants — with older white and black workers — are being driven down to subcontractor levels. Even in union facilities, the new hires get paid half what veteran co-workers make. The bosses may not be able to stop speculation, but they can and will attack us.
Re-industrialization with low-paid domestic labor is only the beginning. The bosses hope to rein in emerging imperialist competitors like Russia and China through control of Mideast oil. The current wars are only a prelude to more bloody oil wars. Eventually, direct confrontation will be necessary, leading to world war.
Poverty, war, racism and economic crisis are the demons of the capitalist design. We need a new design that produces for the needs of our class, not the profits of the bosses — communism.