More on #10YearsOn

#10YearsOn is trending, and journalists are on the lookout for astute input on the causes and consequences of the financial crisis of 2008, on how effective or not where the regulatory responses, and on how this may happen again or not. Has anybody been given enough pause for thought, though, on the very terms in which this crisis makes sense as a crisis? Here is a quick translation from the French of Fabian Muniesa’s answers to the questions emailed by a journalist for an interview piece on the crisis for the French newspaper “Le 1” (September 19, 2018). Arguments intensively and extensively borrowed from Horacio Ortiz (here, here and here):

What led to the crisis, 10 years ago?

This is an eminently sociological question. The crisis of 2008 was the result of the spread of a series of financial practices that corresponded, at the same time, to a model of society: a North-American culture of access to ownership and indebtedness, with credit dealers encouraged by financial institutions that would buy the risks of their bad loans, hedging these by redistributing them into secured investment products, products that were, in turn, purchased by banking institutions everywhere in the world to provide a return to their customers. Emphasis is often put on the vicious, even criminal, dimension of the system that caused the crisis. But it was actually prompted, principally, by finance’s more virtuous function: that of providing reliable return to investors, low if the risk is moderate, high if the risk is significant, with so-called sophisticated investors accepting higher risk because they know, being in fact skillful financiers, how to cover it and turn it into profit. The crisis is never presented as a real breakdown of this system. It is rather decoded in the terms of this financial way of seeing things: that is, in terms of financiers not being skillful enough, of investors losing confidence because of a temporarily incorrect assessment of the true value of financial assets, and of bankers not having enough secured funds to deal with the ups and downs of the situation.

And the consequences?

Financial institutions having entered this game found themselves in trouble. Some went bankrupt; most were helped by governments attentive to the so-called vital role for the economy of these institutions. There were also difficulties, of course, but not of the same nature, for indebted households which, particularly in the United States and in some European countries, found themselves in an alarmingly precarious situation. Institutional customers of these establishments also found themselves in trouble, including some public institutions, such as municipalities. The crisis then moved into what was called the sovereign debt crisis, notably in Europe, with the requirement for states to develop austerity policies to again become attractive in the eyes of investors. The main effect of this was the development, particularly in the United States and Europe, a climate of social protest and political confiscation.

Were the responses effective?

The regulatory measures were oriented, to a very large extent, by a strictly financial vision of the world. They were mostly about reassuring investors, on the one hand, as the motto goes in these milieus, ensuring a better quality of information in markets and a better readability of the risks, and then, on the other hand, about protecting banks, checking the strength of their funds and ensuring they do not put themselves in too dangerous situations. This can possibly work fine in order to control a crisis, in the sense of preventing or tempering difficulties for the banks. But this is certainly not about questioning the power of finance.

Many people have the feeling that, despite the crisis, nothing has changed in finance. Are their views justified?

People have this feeling because they are not stupid. That feeling shows, moreover, that the problem is not with the crisis: it is with finance altogether, even when there is no crisis. But unfortunately there is not a socially clear and politically audible discourse to actually turn this feeling into something positive. Choosing between criminalizing the wealthy elites, raising walls around national capital, or fomenting a progressive entrepreneurial spirit, leaves the heart of the financial paradigm intact. The crisis could be have offered an opportunity to imagine different forms of organization for the distribution of money in society: public deposit banks, democratic control of credit, development of a fiscal currency, in short, anything other than the antiphon of restoring investors’ confidence.

Can the crisis happen again?

Yes, certainly. The chains that connect the dots in the financial complex are still there. And the paradigm that justifies the functioning of this complex is still there too. But the question to be asked is what is the problem when the system goes well, without a so-called crisis. Huge investment banks, who are given almost exclusively the task of distributing money in society, do so following criteria of return and security that stand as most legitimate. Buying financial products based on mortgage loans that allow the lower classes of the first world economy to buy real estate is still considered, today, as more interesting ans safe than, say, investing in the infrastructures of a country torn by civil war or than financing the public debt of a state striving to develop its public services. That’s not quite reassuring for investors, right? Unless the so-called risk is compensated by higher return. And that is the problem, don’t you think?