Just when you think you’d had enough with hearing about the end of Wall Street and financial markets as we know them, there comes a story by Michael Lewis. It’s a very nice piece and well worth the read. But there are some points that call for clarification. One of them is the wrong impression that people may have about retail finance. Large part of the complex network of activities, technologies and institutions that is known collectively as Well Street is retail. That is, people and companies who sell financial products. In fact, for most of the public, this is the only side of Wall Street with which they ever get in direct touch. Now, when someone buys a car or TV, they know that the salesperson selling them the product has little knowledge about the intricacies of the technology driving the TV or the car. The same type of realisation about the division of labour does not seem to hold when it comes to financial products. The products there, having very little visible material, technological, footprint (at least to customer), somehow give off the impression that they are ‘made’ by the people who sell them, or, at the most, by a one level up the hierarchy of the retail finance company. The truth, as anyone now knows, is that Wall Street retailers did not know more about their products than your average cars or electronics sales people know about cameras or washing machines they sell. As one of Lewis’ interviewees tells him: “What I learned from that experience was that Wall Street didn’t give a shit what it sold”. Sure, they were some who knew more, but that’s typically because they had more background than necessary to do their job. Of course, “Old” Wall Street encouraged the establishment of indifference, and frequently let immoral and even deceptive practices to take root, but it would be incorrect to single out and demonize retail finance. It is not any better or any worse than any other retail business: it is based on distributed ignorance about the products sold.   

The current crisis is far from being funny, but one of the effects of is that many people who never had to deal with macroeconomics before, now have to turn to it, sometimes with hilarious results. For example, after the UK used anti-terrorist legislation to freeze assets of an Icelandic bank in the UK that withheld deposits of British customers (among them, the London Metropolitan Police), Icelandic websites published quite a few stories and commentaries about international macroeconomics. The following is an analysis of the current liquidity crisis, found in an Icelandic blog, from the perspective, allegedly, of an Icelandic farmer. (Thanks to Amnon for the link)

Well, as you can see from the first comment, this may not be the perspective of an Icelandic farmer, after all. So, I changed the title. It is still very funny, I think, and illuminating in its own way… YM

17.11.08 – Another reader asked me to put a link to the original source of the quote (search for comment by ‘cuppateawifmilk’). I have to say that the comment in its entirety is not as funny, does not carry the economics insight and rather xenophobic. But, hey, my readers’ wishes are my command! YM 

“But you must understanding England peoples. They think they rich because house expensive. I explain problem to my father that England people are like farmers who think they rich because someone say cows worth million pound even if not real. I say problems in England because now they wake up and know cows not worth million pound and all vey panicky on moneys. He ask me Iceland issue and I say it simple: Gordon Brown and England peoples have million pound cows but Iceland is like next door farmer who have billion pound chicken and they make deal to give money to have eggs regular . But cows all sick and not worth million pound anyway and same time Iceland billion pound chicken go missing and Iceland people say all egg go to Iceland people until they find chicken again. But, Gordon Brown say fox eat chicken so no chance and then he grab all egg he can. With this information my father has explain all global liquidity crisis to village at home.”

An interesting follow-up of sorts to our discussion from yesterday about the clash of incompatible orders of worth can be found in the Financial Times. Yesterday, the archbishop of Canterbury, the head of the Anglican Church, Rowan Williams, supported the decision to ban short selling. The archbishop of York, John Sentamu, went further and, according to the FT, ‘called traders who cashed in on falling prices “bank robbers and asset strippers”‘.

This moral condemnation, referring to the fact that short sellers gain from stock dropping in price (and, in effect, someone else’s losses) is correct, of course, according to one order of worth. Yet, short selling is a two-sided practice: someone has to lend the stocks that the short seller sells, and, as it turns out, that someone can be none other than… the Church of England. According to the FT: “Hedge funds pointed to the willingness of the Church commissioners to lend foreign stock from their £5.5bn ($10.2bn) of investments – an essential support for short selling”.

Yes, it is funny and it would be easy to look at this story as just another example of people not really understanding the market practices they criticise. However, there is more than this, I believe, in the story, which brings us back to the discussion about what could be a way to develop a sociological analysis of the events. The unfolding of the market crisis plays out the incompatibility between different orders of worth on the global stage. Yet, very little attention is being paid to how things are actually done. Who are the actors involved, for example, in short selling and what do they do? Very few finance professors can give a detailed answer to this question and, I would bet, even fewer sociology professors. Without understanding the mechanisms of markets at the operational level, we (and by this I include finance and economic sociologists) are cornered into a continuous process whereby we reduce actions, procedures and technosocial structures into ‘manifestations’ of one order of worth or another.

Posts in the last few days triggered so much good discussion in the comments that I thought that it would be a shame to leave it buried there. So, here is, with minimal editing, the discussion that Martha Poon and Zsuzui Vargha had here last week, following the bailout of AIG.

Whether a firm is “too large to fail” is in fact the outcome. I want to add that it’s not only about justifications but also calculation, as Yuval suggested at the end of the original post. In order to establish how “big” the firm is in terms of market worth (along the lines of Boltanski and Thevenot), the regulators have to trace or get a vague sense of what the network of contracts looks like, estimate the scenarios, assess the ripples. Another kind of calculation is about credibility. Regulators are always called upon being consistent, because markets have to be calculable, and calculability can only be maintained if actors’ responses are not random. This is both what Max Weber already suggested, and also the lesson from socialist economies with “soft budgetary constraints”. So, regulators have to prove that what they are doing is consistent-why they are saving AIG when they are not saving Lehman.

The justifications [for saving one institution but not saving the other] become inconsistent as they pile up on each other. At some points, however, the actors do look back on their decisions and try to justify how their current super-interventionist measures fit well with their earlier anti-regulatory position. In the most grand terms, Bernanke and Paulson try to say it’s a qualitatively different situation than the ordinary state of markets-it’s a state of emergency. Such a statement allows them to discard free market dogma, gives them carte blanche, and makes them problem-solving world-saving heroes. I wonder how accountability will or will not develop after the crisis is over. Bush managed to avoid it after 9/11.

Rapid change during this crisis makes the trial and error process of policy-making much more visible than otherwise. We literally see how the regulators are shifting justifications within 24 hours, from the case-by-case, now admittedly ad hoc way of addressing the crisis, to the “systemic” view of intervention.

What do you think about the following description? That this shift of frame means that the actors have given up calculating the consequences of each failing bank, it’s too complicated and they can’t identify the losers in advance, and they can’t bail them out as companies (that would really go against their anti-interventionist position). They are now calculating in terms of product market categories (what kind of debt should the government buy), which is not specific to the individual company. So they went from a firm-centered view of where the crisis is, to a market-centered one.

The choice of Sarah Palin as John McCain’s running mate seems like a stroke of political genius.  A beaming picture of perfection, the hockey mom and mother of five who talks like the woman next door may well do wonders to consolidate a segment of the conservative Republican base.

It’s important to point out however, that Sarah Palin is not ‘a woman’ (i.e. a generic model).  She is very particular kind of woman.  Her type is called the ‘superwoman’, a feminine being who effortlessly balances both a full time career and traditional domestic duties such as child rearing.

Plenty of sociological studies (for example the work of Arlie Russel Hochschild in ‘The Second Shift’ and ‘The Time Bind’) show that this woman does not exist in middle America.  If this was the dream of a certain generation of early feminists, when submitted to the empirical test, the idea that women can ‘do both’ and ‘do everything’ has rapidly fallen away.

So while she may appeal to a swath of middle conservatives who still herald the superwoman as the-woman-to-be, the middle women who are in a position to actualize this model will immediately recognize that she is false and unattainable.

So will that other segment of so-called elite women who have pursued high-powered careers.  Palin may have fired the gubernatorial chef, but she didn’t tell us who actually prepares her family’s meals.  Certainly not her if she’s busy campaigning, solving the energy crisis and dealing with national security.

Why does this point deserve its place on a ‘social studies of finance’ blog?  Because the financial situation of Americans will have a lot to do with who really identifies with Sarah Palin.

The U.S. is in a period of deep economic crisis it seems doubtful that that US families dealing with unemployment, divorce and overindebtedness are trying to live up to outdated cultural standards such as those projected by the Palin family.  Idealism prospers in times of prosperity, but in times of discomfort the bottom line is pragmatic.

If theories of practice are correct, ‘American families’, that most revered category of US voters, are struggling to forage new models to meet the challenges of contemporary family finance. In this electoral environment Palin’s image of woman and family may prove to be all but politically irrelevant.

Please welcome a new guest blogger on SocFinance: Zsuzsanna Vargha

Economic sociologist Bruce Carruthers just reviewed Avner Offer’s book The Challenge
of Affluence
for the American Journal of Sociology.

The most interesting concept of the book is the “commitment device”. As Carruthers writes, “’Commitment devices’ make decisions tractable and help to protect individuals from various temptations, including those that produce myopic choices and loss of self-control. To give an example, a hard-drinking partygoer who gives her car keys to an abstemious friend is using a third party to precommit to not driving while drunk. At the macro level, a gold-standard system helps governments resist the temptation to inflate their currency. Sexual behavior and savings offer other indications of the extent of self-control. Commitment devices frequently utilize social structures, conventions, norms, and institutions, and they operate at both micro and macro levels. They are costly and hence not evenly distributed throughout society: evidently one of the privileges of the rich is that they can hire some self-control.

The key problem, according to Offer, is that rapidly increasing affluence can eclipse existing commitment devices and lead to irrational or bad outcomes.” This is interesting because Offer is working from a behavioral economics framework, yet the result sounds much more like Bruno Latour. I am thinking of Latour’s example of the hotel manager in his essay “Technology is Society Made Durable” (In: A sociology of monsters: essays on power, technology and domination, edited by John Law). In very simplistic terms, in Latour’s story the hotel manager is trying to get guests to leave their room keys at the hotel, instead of taking them on their outings (and losing them). The manager tries various methods of combining the key and objects, until he finds one that works: attaching a large weight to the key, which makes it uncomfortable to carry the key. This way the manager succeeded in aligning various actors for his cause: the key, the weight, the guests. The technology of the key-with-weight is thus in fact a network of human and non-human actors. Commitment devices, in this light, are technologies for non-action. Offer calls it selfcontrol.

In any case, the concept points to the other side of technology as enabling action—you also need to work hard and configure technologies to restrict action. This is not new but Offer uses it to argue that prudential action is overridden by growing material well-being. This is because commitment devices cannot make their way to all the places where temptation makes its way. Using Offer’s concept of “commitment device” would be a fruitful approach to work out the overlaps between behavioral economics and actor-network methodologies. This is all the more important since Social Studies of Finance has been inspired by not only science and technology studies but also by behavioral finance. There is a lot to be said about affluence, temptation, and commitment devices, and whether Offer is on the right track by concluding that affluence erodes prudence. I also wonder what the substance of the argument means for finance: commitment devices make prudence possible. At a minimum, the concept could be tried out on topics like risk management, accounting (mal)practice, investing versus gambling, to name a few. 

Before we delve any further into this exchange, I think it is important to make our question explicit: The question I had originally raised was not about whether our work on finance is or is not political .  As Yuval points out, micro-scholarship movements such as ethnomethodology (literally the methods of the people) were inherently political. By extending the definition of what should be considered political to every day practices, 1960’s micro-scholarship sought to remove politics from big (state) institutions and re-conceive of it as a distributed property happening everywhere (the personal is political). These statements were simultaneously descriptive (shifting the object of study) and performative (intended to be a persuasive argument for the greater inclusion of more groups into formal political processes).

Laboratory studies like trading floor studies adopted the ethnomethodological position to politicize esoteric spaces: scientists and traders are people doing situated and contingent work: their work involves messy politicking. The charge of elitism towards lab studies and trading floor studies is really quite misplaced, for this work puts expert and non-expert groups on par. These studies make it possible to treat a group of say, laboring migrants, with the same analytic tools as Nobel prize winning bio-chemists. So why don’t we talk more with scholars of laboring migrants? Because ironically, many scholars of non-elite groups do not appreciate the equalizing effects of a micro-politics for everyone when pushed to its logical conclusion. When everyone is symmetrically engaged in meaningful practice and politics the traditional basis for critique drops out the bottom.

Exploring the similarities of how the trader uses the spread plot just as migrants might use cell phones to creatively assemble new forms of opportunity is distinctly distasteful to many of our colleagues. When talking about how these groups relate to one another in the world, they shift gears, preferring to talk abstractly about how ‘our’ traders are participants in a global capitalism that suppresses ‘their’ laboring migrants. And they sincerely wonder why we don’t do the same. I have to say, although I don’t find that form of argument particularly useful, I increasingly have sympathy for the question – for the desire to understand how the micro-activities of some groups seem to spill out as a force onto those of others. Not just how, say, one scientific group trounces another in the race to sequence the genome, but how genomic research might produce a forms of commercially developed HIV treatment whose application are unaffordable for the vast majority of people.

That micro-studies are political – because they certainly are – no longer seems to be enough. The question is: To what extent are these studies up to the task of answering other types of questions. Are we able to open up our finance oriented research program to include global questions of inequality and disparity in global resource provisioning and allocation? Are we able to show how these are not the problems of imperfect (financial) markets but to precisely trace how these are the very properties of extant market systems? Instead of ideologically condemning market systems as, on the one hand, impossible fictions, or, on the other, naked exercises of power, the idea is to ask a micro-empirical question about how these systems have been developed technically to produce the specific geo-political situations we know today. 

It seems to me there are other politics and other political questions to the ones that have been tackled.  I definitely do think our methodological approaches are elastic enough to examine a broader range of questions. But this will require active ‘translation’ and an adaptation to new data, and new kinds of research sites. These are not problems that can be inductively solved base on the research that has already been done…

Thanks for engaging in this conversation, Yuval.

After last evening’s raucous discussion about the price of bananas and its implicit politics, today there is a notice of a closed workshop to be held in Toulouse.

Hat tip to Teppo Felin at orgtheory.net.

This has nothing to do with financial markets, at least not directly. But, what an inspiring polticial speech! (and how often can you use ‘insipring’ and ‘political’ at the same sentence?)

On Friday, crude oil prices jumped in a new all-time high: the benchmark futures contract of light sweet crude was traded at US$139.54 in New York.

This new record was attributed to a comment by Iranian-born Israeli deputy prime minister, Shaul Mofaz, who said that: “If Iran continues its nuclear weapons program, we will attack it. Other options are disappearing. The sanctions are not effective. There will be no alternative but to attack Iran in order to stop the Iranian nuclear program.”

The news stories did mention that the context for this comments is the primaries in Kadima, PM Olmert’s party, where Mofaz is a contender and that it is likely that the comments were made for ‘domestic consumption’. The reaction to the statement shows that in today’s highly connected markets distinction between the local and the global cannot be made easily. Mofaz’s Israeli political bravado injected volatility to global oil markets. Such effect, in itself is dangerous enough, of course, but the other ‘leg’ of the reflexivity circle is potentially even riskier. In fact, this side of the phenomenon may feed a social loop that can place Iran and Israel on a sure collision course.

How so? Mofaz is now aware of the impact that his words have on markets. However, if anyone may think that this would serve as a lesson and that future comments would be less vehement, then they do not know the Israeli political discourse. Mofaz will now celebrate his influence on global oil markets and will use last week’s price rise as leverage for creating more political capital. Moreover, the reaction to this comment will motivate Mofaz and other Israeli politicians to outdo it and to have even more impact. So, as long as the scandal-ridden Olmert government is haemorrhaging support we should expect increasingly more flamboyant statements from Israeli politicians about Iran, more volatile markets and a steady progress to the brink of a (possibly, nuclear) war in the middle east.