So I want to say here that I have long, long— I don’t know how long we know each oth­er… Seventy-five years, a hun­dred twen­ty, I don’t know but it feels like a very long time. [laughs] Thirty, that is amaz­ing, actu­al­ly. I have always real­ly admired how you mix in a very sub­stan­tive way the tech­ni­cal aspect and then these social ques­tions. And I real­ly love the pro­gram that you have devel­oped here and the plan, so I just want­ed to say that, and your talk.

Now I want to talk, then, just for twen­ty min­utes about this sub­ject, that it is a mis­take to think that finance is about mon­ey. If it only were, that would be so sim­ple. So I liked what you said before, you know, the mon­e­tiz­ing of, and that in a way finance has iron­i­cal­ly enabled in mas­sive ways the mon­e­tiz­ing of every­thing. But it itself, if you reduce it to mon­ey you’re miss­ing the key aspect of the plot.

So I sort of want to throw out the notion that finance is a capa­bil­i­ty. And so when you look at some of the mea­sures of its val­ue today, for instance out­stand­ing deriv­a­tives, a basic measure—a quadrillion…that mon­ey does­n’t exist, you know. Global GDP is some­thing like six­ty tril­lion. There is no— Quadrillion is many many zeros. I know that in Europe you have dif­fer­ent des­ig­na­tions. It’s more zeros than you’re used to in your aver­age fig­ures that you see with lots of zeros—it’s more than a tril­lion, let’s put it that way.

So I think one first step is to dis­tin­guish between tra­di­tion­al bank­ing, which sells mon­ey it has (or it can bor­row very quick­ly, what­ev­er) and finance, which sells some­thing it does not have. And in that sell­ing what it does not have lies its cre­ativ­i­ty. It has to invent instru­ments. And secondly—and they go together—it has to invade oth­er sec­tors. Because it itself does not have what it needs to produce.

Now, of course we use mon­ey mea­sures because that’s a way in which we can get some sort of grasp on it. And of course mon­ey is made. I mean, that’s no doubt. But finance itself, real­ly, I think it’s extreme­ly impor­tant to be thought of as a capability.

Now I clear­ly am not think­ing of capa­bil­i­ty as a nec­es­sar­i­ly benign con­di­tion like Amartya Sen and Martha Nussbaum, where capa­bil­i­ty’s always beau­ti­ful and good. You know, I think in a way capa­bil­i­ty is a vari­able, and what might be good Time 1 might not be so great Time 2. So when I say capa­bil­i­ty I mean some­thing whose valence can change rad­i­cal­ly. Big footnote.

Finance makes cap­i­tal. So if we could only gov­ern finance, it might actu­al­ly be rather inter­est­ing. We could build hous­ing for the whole world. We could have green trans­port sys­tems every­where, etc. So I am not in prin­ci­ple against mak­ing a means with­in this kind of econ­o­my that we have now. Ideally we would move to a very dif­fer­ent type of econ­o­my. But we could actu­al­ly do some good. But to a very large extent, finance has lost the capac­i­ty to gov­ern itself. So it keeps going into crises, and it keeps devel­op­ing instru­ments after instru­ments on itself.

Now, one image that I have is that finance is the steam engine of our epoch. Its present every­where, direct­ly or indi­rect­ly. Now the steam engine was in some ways a more benign inno­va­tion than this is. 

So, I just want to use this as a—this is a very well-known graph—just as an illus­tra­tion of— So, just very quick­ly, this is cred­it default swaps, one kind of instru­ment. But just look at the rate of growth. That is what I mean by capa­bil­i­ty. So, it starts under $1 tril­lion in 2001, and by 2007 it’s $62 tril­lion. Now that’s more at that point than glob­al GDP, which is $54 tril­lion at that [time]. Now think of any­thing that can have that rate of growth. That’s a scale of—you know, that orders of mag­ni­tude are jumped. Now if you then con­sid­er that right now the val­ue for this par­tic­u­lar instru­ment that we’re deal­ing over a quadrillion, then you can imag­ine the rates of growth in all kinds of instruments. 

Now, in prin­ci­ple good things could be made with all of this if you mate­ri­al­ize it, you bring it down to ground lev­el, you make some­thing out of it. But that most­ly does not hap­pen. And when you use ground-level stuff, it often is very destruc­tive. I’m sure again you are famil­iar with this. So one issue that I have focused on at great lengths is this ques­tion of when mod­est neigh­bor­hoods become part of glob­al finance. Insofar as finance needs to invade oth­er sec­tors in order to deliv­er goods to itself, it runs out of stuff. So right now we are on stu­dent loans, we are on mod­est homes, because a lot of stuff has been financialized—very high-value items have been finan­cial­ized, valu­able real estate etc.

And here the bril­liance, if you want… And here I’m think­ing more like you know the famous lit­tle book The Technical Problem? Brilliant minds put to work on a tech­ni­cal prob­lem. That might have dev­as­tat­ing con­se­quences. But they’re bril­liant minds work­ing on…a tech­ni­cal prob­lem. So the chal­lenge in this par­tic­u­lar instru­ment, sub­prime mort­gage by the way is also spread­ing to Europe. You know we all have a lot of fore­clo­sures in Europe also. The chal­lenge was to delink—and this hap­pens reg­u­lar­ly; this is a very good exam­ple because we’re deal­ing with a very con­crete thing—a mod­est lit­tle house that can gen­er­ate for the high-level circuit—investment circuit—an asset-backed secu­ri­ty. Actual mate­r­i­al good at a time when almost every­thing has lost an actu­al mate­r­i­al asset.

The chal­lenge, then, since that is such a low-value lit­tle thingy, was to delink. To delink the con­tract that could be used in com­pli­cat­ed ways and com­pli­cat­ed instru­ments for the high-level invest­ment sec­tor. To delink that from the actu­al val­ue of the house. And this made it dan­ger­ous for the peo­ple who were involved. Because whether they paid or did­n’t pay, whether they could or could not pay those mort­gages, it did­n’t matter. 

So I don’t know if peo­ple are fol­low­ing me at this point, right. But it took like fif­teen or six­teen steps, and I like to say the math of this kind of instrument-making, very com­plex etc., is not the math of micro­eco­nom­ics. Microeconomics func­tions in a closed space. This is the math of physi­cists, those who try to track what can­not be known. So math becomes a very pow­er­ful instru­ment to cre­ate some pos­si­bil­i­ty. And that is what finance is—a pos­si­bil­i­ty. Very often it goes wrong, very often it goes very well.

Now, the result of this very short bru­tal his­to­ry— This is anoth­er thing, an accel­er­a­tion. And that is enabled by dig­i­tal tech­nol­o­gy, by inter­con­nect­ed mar­kets which make it on the one hand unpre­dictable, on the oth­er hand cre­ate extra­or­di­nary mul­ti­pli­er effects. So you stand back and if you want­ed to give a dif­fer­ent term, you would say finance is trans­ac­tiv­i­ty, accel­er­at­ed trans­ac­tiv­i­ty that goes in mul­ti­ple direc­tions and has mul­ti­ple inter­sec­tions. Transaction, trans­ac­tion, trans­ac­tion, con­nec­tion, connection. 

Am I speak­ing too fast? Okay, fine. Because I have an accent in English but that might help, actu­al­ly. The Brits tend to mum­ble. I don’t know if there are any Brits here in the room, but I can’t under­stand them, either. But anyhow.

So here get a sense— Now, this is the United States. It’s a very large coun­try; too big, in my book. It should real­ly be divid­ed into sev­er­al coun­tries. And so these num­bers are actu­al­ly a lit­tle lit­tle part of the of all the house­holds. But in them­selves, it is quite a sto­ry, you know. On that scale, those mod­est hous­es etc. So, fore­clo­sure is not nec­es­sar­i­ly that you’re out of your house. But accord­ing to our cen­tral bank, called the Fed usu­al­ly, we have right now 9.2 mil­lion peo­ple in this his­to­ry of about six years have been thrown out of their homes. That’s an amaz­ing­ly, sort of…you know, that’s pro­duc­tion, I would say.

Now, we have over thir­teen mil­lion fore­clo­sures. The worst years are 2013, 2014; it sort of drib­bles to an end in 2015 because those con­tracts were issued like say, you don’t have to pay any­thing for five years because what they paid or did­n’t pay, the val­ue of the house, the val­ue of the mort­gage, none of that mat­ters. And that again I repeat is the brilliance.

Now, here we have…I have in my new lit­tle book that I have gen­tly called Expulsions that deals with some of this and much else— I looked at the Europe 27. And so the high­est fore­clo­sure lev­els— And these are just num­bers, and the num­bers are much small­er than in the United States, but the pop­u­la­tions— So Hungary has now a mil­lion house­holds plus that are basi­cal­ly in fore­clo­sure and must be thrown out. But also Germany. I like to men­tion that. And the Netherlands, see there at the bot­tom, that is among the low­est. But these economies which still are so much more humane, if you want, than the American econ­o­my, they also have this bru­tal mode that is expelling at the bot­tom cre­at­ing an invis­i­ble zone tru­ly of expul­sions, peo­ple who are expelled. It’s not sim­ply a ques­tion of exclu­sion and more inequal­i­ty. It is deep­er. So here you have some of these num­bers. I want to move on.

Now, debt. You men­tioned it. Debt is the lit­tle bridge that helps finance invade just about any sec­tor. And what I want­ed to point out—you don’t have to look at every­thing, but just let’s take Hungary. And by the way the title of this table ratio of house­hold cred­it to per­son­al dis­pos­able income.” Credit sounds real­ly pret­ty. Credit is debt. They call it cred­it, but it’s debt. So what we’re look­ing at here is anoth­er very short bru­tal his­to­ry 2000 to 2005. And a lot of the 2000s marked sort of I would say this shift into a tru­ly bru­tal deploy­ment of this capa­bil­i­ty. Enormous com­plex­i­ty pro­duc­ing sim­ple bru­tal­i­ties. I find that con­trast sort of very compelling.

So look at Hungary. Starts 11%, so rea­son­able. Look. At that time the United States was already a 104%. Always num­ber one and well over a hun­dred, right. Now by 2005, that house­hold debt is almost 40%. By then the United States is 132%. Look at Spain, also. Now look at Germany. I love this moment. Seventy, sev­en­ty, sev­en­ty, sev­en­ty. Absolutely they did­n’t budge. How they did that I don’t know.

Now, I then I ask myself, because I think it mat­ters, once you look at debt as a crit­i­cal instru­men­tal­i­ty, as a bridge, it’s not just about the debt itself. Who owns this debt? And so you go scram­bling in the IMF papers, etc. This is IMF data, basi­cal­ly. And you see that, in the case back to Hungary, for instance, 40% of that debt is foreign-owned. Foreign banks. Now, if a lit­tle bank owns your debt, chances are that what­ev­er you pay, the inter­est what­ev­er it might be, that recir­cu­lates. But if a for­eign bank owns it, who knows where it goes? And that is of course the sto­ry also in the United States, where up to 70% of con­sumer debt is owned by five big banks. That is absolute­ly not nec­es­sary. The sys­tem has destroyed over ten thou­sand small banks in the last fif­teen years. That’s also an achieve­ment, you know. These are mas­sive destruc­tions all over the place. Capability; you can­not think finance in terms of mon­ey. It is sort of to me a different…

Now, at the same time—I don’t want to dwell on this—there is this new invent­ed hous­ing mar­ket. What I want to cap­ture here is some­thing very spe­cif­ic. These are min­i­mum prices. And those are the main nation­al­i­ties, etc. I just want to run through it as you can see…mixes: Dubai a very dif­fer­ent set of nation­al­i­ties, etc.

I love this one. In Shanghai, the main buy­ers are Hong Kong, Taiwan, US, Canadian, Korean, like the world is buy­ing in Shanghai. In Hong Kong, much more expen­sive mar­ket, the main buy­ers are main­land Chinese. I don’t know, I love that. I don’t know if peo­ple get it but anyhow.

So the actu­al de fac­to price on all of this is a hun­dred mil­lion. It’s just like a flat— The Honda is like the basic ten pounds or the ten this—it’s a hun­dred mil­lion. In New York and in any of these places. None of those build­ings is worth that mon­ey, none of them. And we’re talk­ing most­ly actu­al­ly apart­ment buildings. 

But we’re also talk­ing a lot of cities like London and Paris, a lot of build­ings. And so what I see here, this is not about hous­ing. This is about a land grab, an urban land grab like you have a land grab in the Global South. And how do you buy urban land? You buy it in the form of build­ings. And so if you jux­ta­pose that—I think I have a slide lat­er on on the Global South land grabs—2006 to 2010, short bru­tal his­to­ry, 220 mil­lion hectares of land— And we’re only [counting]—this is the glob­al net­work Land Matrix get­ting all the data, etc. And these are only prop­er­ties that are over two hun­dred hectares. The small­er is not counted.

So you have this— Some of you may know this, but I’m real­ly very inter­est­ed in the cat­e­go­ry ter­ri­to­ry.” This is not to do with finance now for a sec­ond here. And I think of ter­ri­to­ry as this com­plex mak­ing of log­ics of pow­er and log­ics of claim-making, etc. So this urban land grab and this rur­al land grab in the Global South, to me it’s very sig­nif­i­cant. It real­ly down­grades a com­plex con­di­tion that we make col­lec­tive­ly and that can­not be flat­tened into just land or ter­rain. Flattening it into just a sim­ple com­mod­i­ty that we call land. Anyhow, it is a bit of anoth­er story.

So I just want­ed to show you, just to just to nail it down, a few curves; they all go up. They all go up. And what you see here bob­bing, this is cor­po­rate prof­its after tax. I’m tak­ing the United States 1940s to 2010s. And it sort of bobs around around—it’s not at zero by the way, it’s just a bit above zero—but this is in bil­lions. And then it starts to go up, and look at 2000 it goes sharply up, then comes the cri­sis. A cri­sis that lasts for about two hours, you know—I exag­ger­ate, more like two years. And then it goes up even fur­ther. Now, finance is out of the cri­sis. We are all still stuck in it—or not not all of us but many of us.

Here’s anoth­er one, cor­po­rate assets; Same kind of curve. So in this lit­tle book— I love these sim­ple lines, a line that tells a tale. Because it has such a sharp change, you know. So you have a lot of these curves that go up, and they start all to go up in the 1980s and sharply real­ly in the end of the 1990s, etc. In this case it’s cor­po­rate assets.

Now, at the same time, coun­tries includ­ing Germany—I point [out] Germany because Germany’s sort of trot­ted out like they knew how to avoid the what­ev­er. All our gov­ern­ments are get­ting poor­er. Most of these gov­ern­ments, func­tion­ing lib­er­al states, could not engage today in the kind of vast infra­struc­ture rebuild­ing, etc. that they did in much of the 20th cen­tu­ry. They real­ly have become poor­er. And at the same time you see these oth­er curves going up. 

Now here is anoth­er curve. This is wealth, and every­thing you see that of course the ratio of 1% wealth to medi­an wealth, that always was a big gap, etc. But look at the curve in 2007, etc. Whoop, it goes up like that.

Here is anoth­er ver­sion of that, share of total wealth gain. What gains is from 80% up, basi­cal­ly. And the rest is los­ing. These are short, bru­tal his­to­ries that can­not be reduced to this finan­cial cri­sis bit. I think that in a way one way of putting it is that we’re deal­ing with an emer­gent epoch that begins to devel­op in cer­tain parts in the 80s, etc. And that it has a dif­fer­ent DNA. Now, if you think of our DNA, what are we, 88% the same as cer­tain mon­keys, right? We humans. But that lit­tle 2% actu­al­ly makes a lot of dif­fer­ence. So a lot of this stuff is absolute­ly the same as it was maybe in some cas­es even two hun­dred years ago. But at the same time there is a lit­tle thing that real­ly mat­ters and that gets you on sort of, if you want, the oth­er side of the curve. And so I’m very inter­est­ed in these curves.

Now, anoth­er quick ele­ment that I want­ed to—because this is anoth­er way in which finance has inno­vat­ed and is a capa­bil­i­ty. So, there is an agree­ment in the inter­state sys­tem, which is one ver­sion of what we might call the world,” with its rules and laws. And that is that you do not take sovereign—sovereign is the state in the lan­guage of inter­na­tion­al law; it does­n’t have to be a queen. So, you do not take a sovereign—a state—to court to demand it…you just don’t do it—in a domes­tic court.

Well, the vul­ture funds—who are now proud to call them­selves vul­ture funds”—in oth­er words they will extract val­ue from lit­tle pick­ings like lit­tle mod­est homes—they did. And here is just an exam­ple, just to show again this notion of finance as capa­bil­i­ty. These finan­cial firms, very aggres­sive, very inno­v­a­tive, altered the posi­tion of the state and sued them in civ­il court.

And this Elliot Fund is one of the first to be so aggres­sive and go to states. In October 1995, a New York vul­ture fund bought $28.7 mil­lion of Panama debt for a dis­count­ed price of $17 mil­lion. Why? Because the banks who owned that debt thought they would nev­er get the mon­ey back, since you don’t go and sue a state. 

Then they brought suit in a US court—in a domes­tic court—against the Panama gov­ern­ment for full pay­ment of the debt, plus inter­est. And they got the court to approve—an absolute prece­dent; we had nev­er seen that—and forced [Panama] to pay $57 mil­lion. Now, they did that—I have a full list—with coun­try after coun­try after coun­try. They actu­al­ly man­aged to repo­si­tion the state and to use the debt vec­tor of banks who are part of the big inter­na­tion­al sys­tem who would not sue a bank, bring it into anoth­er finan­cial cir­cuit, and go claim the money.

Now, I know I have to end here, so I’m going to skip all of these won­der­ful things. […] So… Bye bye. Thank you very much.

Further Reference

Overview post at the Institute of Network Cultures site about the con­fer­ence pan­el this pre­sen­ta­tion was part of.