Wednesday, July 13, 2011

Postmodern finance (5 Nov 2008)

Writing in the New Yorker, John Lanchester compares the current credit crisis to a Derridean aporia:
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.
Often, the temptation in graduate school was to deploy this insight to assert that there are no essential meanings, no essential values, that basically everything is relative and nothing -- say, authorial intent, a person's identity, an emotional experience, the aesthetic merit of a text -- could ultimately be authenticated. I'm not sure the same thing is happening in the financial world with derivatives -- which are well-explained at this site. By definition, derivatives derive their value from something else, but in the financial realm, the "movement of the trace," as Derrida would have called it, is not arbitrary -- the value of derivatives are not at the mercy of random concatenations of contiguous assets. Bankers may have neglected the black swans, as Nassim Nicholas Taleb has argued, but the nature of the derivatives themselves did not alter depending on the perspective of who was trying to decipher them. The peculiarity of derivative is that they allow investors to go short or long on concepts (say, the idea that G.M. will go bankrupt) rather than physical assets. This makes it sound as though there is no there there, which makes it seem very postmodern. But the key distinction in Saussurean linguistics is that the relation between the signifier and signified is entirely arbitrary. The premise of derivatives is just the opposite; contracts are drawn up to bind the parties around some very specific relation of an asset to its future value.

What is so "decentering" about deconstruction is the notion that meaning is constructed in the arbitrary relations of signifiers to other signifiers, and the total detachment from the signifieds. Financial derivatives don't detach from the underlying assets, as I understand it, no matter how opaque they may become. The problem in the crisis is not that value, like meaning, is inherently fluid (and that isn't even meant to be a pun on the illiquidity problem) but that the original amount of valuable stuff was wildly disproportionate to the amount of value being circulated in the financial system. The system was overleveraged.

The closest postmodern equivalent for this would be the notion that there is no value to begin with at the heart of things, only a convenient fiction that value exists: a Master Signfier that seems to give stable meaning to the rest of the signs and allows the joy of the free play of signifiers to begin. If you accept this, then you can argue that the crisis has come because somehow people began to question the necessary fiction (I'm not sure if this is what causes the aporia in Derrida's argument) and began believing that it wasn't fiction at all. The peculiar notion that gold has some intrinsic value is a better example of this; the value of gold is in what you can exchange it for, so it must keep moving. If you hoard it, thinking you are gathering value to yourself, you have become lost in the delusion of original, inherent value. The point is that all value is constructed in circulation. Meaning is created through the movement of the trace; the trace itself has no inherent meaning -- it's not the master signifier, even though people may need to believe it is so to start it moving.

Anyway, the tendency to mystify the doings of financial "geniuses" with this kind of postmodernist analysis is dangerous, I think, because it masks the much more apprehensible truth that the credit bubble had become a Ponzi scheme, a game where continued returns depended on recruiting new suckers -- new unqualified borrowers, new pension funds to buy up fallaciously rated AAA CDO tranches, etc. That makes for a better metaphor for the crisis than the word games of postmodernists, and is more likely to inspire the sort of regulatory action we should be taking in response to it.

Famously, the only option left open to us by postmodern philosophy is a kind of hopelessness, the "fatal strategies" of apathy or silence or heedless surrender. These are appropriate if you truly believe the entire notion of meaning or value is a sham, that every action helps reinforce the system you want to escape from. But if you believe that companies in a capitalist society actually are productive, that GDP really is a measure of value, that the economic output of a society consists at some level in things we all need to distribute and consume, then postmodern strategies are rhetorical disguises best used to distract people from that actual value while you try to secure more of it, i.e. more power over how the output of society is distributed, for yourself.

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