Tools vs. interests in the credit crisis
August 19, 2009
I promised to bring to the blog some of the more heated discussion at the recent Politics of Markets workshop. (Dan Hirschman has already offered great deal of insight on it, as well as the folks from Orgtheory). So here it is.
Let me start by recapping the setup. The point of the workshop was to present the overriding debate between two competing understandings of politics in markets. The institutionalist view, led by the work of Neil Fligstein, argues that politics is an arena in which market actors pursue their economic interests. For instance, companies strive to limit competition by influencing regulation. I call this the “competing spheres view”: politics limits the realm of competitive markets.
The alternative view, inspired in the work of Michel Callon, argues that politics also exists in the calculative tools used by market actors. These use tools as black boxes, but that does not mean they lack politics. The politics and competing interests were built in when the tools were designed. I call this the “two-stage view”. Politics, so to speak, are in the engine of the cars that do the race. It’s not about limiting competition, but shaping it from the get-go.
Perhaps the intellectual climax at the workshop came with Neil Fligstein’s keynote presentation on the credit crisis. Fligstein analysis, he argued, shows that the crisis needs to be understood in political and institutional terms, and that an excessive attention to the financial tools — as the the sociologists of finance (read: us) — overlooks the real roots of the crisis.
As I understood it, Fligstein’s argument is twofold:
1. The root of the crisis lies in the government and the political debates of the late 1960s, not in Wall Street and complex derivatives. The crisis is caused by the mortgage securities, and as Sarah Quinn has argued, the creation of this form of security was led by the Johnson administration in an effort to increase government expenditure beyond a balanced budget.
2. The recent problems are the result of the narrow interests of Wall Street bankers. Mortgage finance became a very lucrative business. But at some point during the 2000s, bankers run out of prime mortgage securities to sell, and turned instead to subprime mortgages. The mortgages sold by these bankers were very low quality, but hedge funds and other financial institutions bought them from the banks anyways.
The debate obviously continued in the Q&A. But my point in writing this post is that Fligstein’s challenge to the sociology of finance calls for a detailed evaluation of what is it that SSF scholars have written on the credit crisis. What are the claims? How do they stack up against Fligstein’s account?