The Dystopian Consequences of Global Financialisation

Jürgen Habermas’ idea of the bourgeois public sphere imagines an interconnected social network that works for its collective interest vis-à-vis political authority. Through open social dialogue, informed by various channels of mass media, the public sphere is supposed to act as a watchman against any potential abuse that may be carried out by political leaders to the disadvantage of the masses. This dynamic should be especially pertinent to democracies, where we are fed the notion that the collective people pick their Leviathan and can readily remove them should they no longer act in their interest. There is an implicit assumption in this sort of theorising that political authority is mandated via the masses in a bottom-up power system. However, such a supposition belies the reality many of us experience on a daily basis; namely that there isn’t a neat bottom-up power arrangement. There are elites in every societal sphere and they disproportionately affect political authority. Those in charge are far more responsive to the lobbying activity of elites than they are to the misgivings of their entire citizenry.

If this is the case, why are systems that aren’t properly responsive to the majority of citizens frequently functioning without revolt? An obvious answer is political authority is more powerful than the bulk of the masses and can suppress dissidence like a Machiavellian prince. Another suggestion is that people are willing to forgo societal influence and opportunity to political authority and elites for physical and proprietor security akin to the respective ideas stemming from the works of Thomas Hobbes and John Locke. Finally, there is the firm belief among many within the majority that they can become a part of the influential ruling elite. They can climb the ladder and become a factor in the elite club of the public sphere or even a part of political authority. It is their own fault alone, if they don’t make the transition upward, not the society they live in.

Throughout history, a combination of the above factors has kept the masses satiated and in check for periods of time even though political authority disproportionately pursues policy more favourable to the rich and powerful. Of course at certain points these features, which keep political authority secure, come undone and revolutions ensue. This seemed to be a constant facet of history until the success of western liberal democracy according to Francis Fukuyama in his work The End of History and the Last Man. Consequently, with the end of the Cold War and the advent of liberal democracy signalling the apex of our socio-cultural evolution, the above tools of control should arguably be at their most pronounced and the masses at their most compliant.  However, this is not what we are currently experiencing. Instead, liberal societies throughout the world are politically unstable with resentment growing among the masses toward political authority with each passing day.

The cause of this is principally down to the financialisation of global capitalism. The term financialisation is relatively new having only been coined in the early nineteen nineties. It is a semantically loose word or as someone from the Wittgensteinian school of thought would remark; it’s not ostensibly definable. However, a useful working definition of the term, owing to its broadness, comes from Gerald Epstein who defines it as “the increasing role of financial motives, financial markets, financial actors, and financial institutions in the operations of the domestic and international economies”. Following on with this notion of financialisation, one can say that the increasing influence has been so severe since the delinking of money from gold in 1971 that the global economy has now become overshadowed by global finance. Chief to this has been the growing reliance on hedging instruments to mitigate the risk of floating exchange rates after this unfortunate decoupling and an altar like fate in their viability to carry out this function.

The global economic crisis that started to rip through the world in 2007 stemmed from financial products designed to assuage the risk presented by trading in the global market space. A major culprit was derivatives who derive their value off the performance of an underlying entity. They are effectively an insurance product that can be purchased by private actors, corporations, and sovereign states to smooth out the uncertainty of future volatility in exchange rates.  There are many varieties of derivative product but arguably credit default swaps (CDS) in particular accentuated the most recent crisis.  A CDS is essentially an insurance policy, usually done over the counter (OTC) outside of a regulated market, taken by an economic actor for a fee as protection against some other economic entity’s potential default. To buy one of these all you need is a lot of money. You don’t have to have shares in the economic entity you want to have insurance for in case of their collapse. Paradoxically, this means there are many wealthy economic actors with an interest in economic failure for financial gain.  More worryingly, if an entity who sells these products runs into economic difficulty and they themselves are on the brink of defaulting it has been political authority that steps in to save the day with massive tax backed bailouts, which has had a massive negative effect on ordinary working class civilians. As an example, AIG who held approximately $1 trillion in CDS in 2008 required a $150 billion government bailout because of their holdings. The sheer scale of the potential losses are frightening when you consider that this is only one economic entity’s ludicrous exposure and the overall global value of derivatives is greater than the total value of global GDP.

The risk models utilised by financial institutions are simply far too ill-equipped to deal with the complexities of the current financial market space. Former chairman of the Federal Reserve Alan Greenspan even concedes as much. This is no surprise when you consider that even the seemingly more theoretically simple risk controlling enterprises of pooling and collateral have been shown to be grossly deficient. Take another financial product known as a collateralised debt obligation (CDO). Here debts are backed up by some form of collateral in the shape of an asset. Before the crash in 2007, a big favourite among the economic players in the financial market was debt secured by housing collateral. When house prices imploded, the collateral supporting the debt vanished resulting in banks writing off billions of dollars in assets. Again, political authority was seen to be working more favourably for elites when they came to the rescue of the wealthy actors partaking in this reckless enterprise with massive bailouts at the expense of the totality of the citizenry.  Similarly, sub-prime mortgage lending was justified on the basis that the higher risk of default on a non ideal mortgage holder would be offset by the more secure prime mortgage loans on the lender’s books. By pooling the risk together financial experts viewed the risk as diluted and therefore less risky in comparison to what it would be if it were not pooled. That was again clearly a bogus view that has sharply hit people in the everyday economy.

It is pretty clear that the financialisation of global capitalism has seen elite financial actors hugely influence the masses in the public sphere for the worse. Their actions in the build up to the crisis have seriously damaged the dichotomy of the public sphere and political authority that has persisted for so long throughout history. The elite actors who partake in the financial market are now operating on a global scale beyond the remit of nation states.  Governments are lobbying elites in financial institutions now, as opposed to elites lobbying them.  The general will that Rousseau says is necessary for the successful functioning of a nation state is now so weak that people no longer know where they stand within their own country.

The consequences of the above are unsurprisingly grim. When a system is stretched to its limits and distorted it doesn’t take long for it to come undone. People in liberal democracies inherently know that national and global economies are not working for them like they once did. They are responding by resorting to explanatory logics that make appeals to insular nationalism, as it reminds them of the traditional public sphere political authority dichotomy that has persisted for so long throughout history. The real reason why Donald Trump became president of the USA and Brexit happened in the UK is because the players involved talked about bringing back the glory days of capitalism gone past. Appeals to history could instead sadly lead to a more unstable world with an increased likelihood for war as global cooperation cools down. On top of this, we need to seriously question the morality of financial markets. We now live in a world where betting on the lives of strangers has become a $30 billion industry and where firms can buy or sell the right to pollute. Even aspects of personal life are starting to become commercialised through social media blogging. Should we be happy that we live in a world where everything seems to have a price, where inequality is rampantly growing, where real wages are declining, and financial elites are making decisions that destroy livelihoods with complete disregard and abandonment? Are we in the first throws of a new global dystopia; a world where money is more important than humanity and financial power is above political authority?