Video Archives - A Discussion on the Intellectual Origins of the Financial Crisis (2011)

10-16-2014

(Featured Image: American financial crisis, Source: Bossip)

Friday, June 10, 2011: A Discussion on the Origins of the 2008 Financial Crisis

Participants:

-- Roger Berkowitz, Academic Director of the Hannah Arendt Center for Politics and the Humanities and Associate Professor of Politics at Bard College.

-- David Matias, Managing Principal of Vodia Capital.

In 2011, Roger Berkowitz had a discussion with David Matias about the origins of the 2008 financial crisis. Sponsored by the Bard Socially Responsible Investment Committee, their conversation explores different approaches we can use to make sense of the crisis. Berkowitz’s perspective focuses on the “intellectual” origins of the crisis and uses Arendt as a basis of understanding. By contrast, Matias, who has been involved in finance for over two decades, brings to the discussion an advanced technical perspective, placing a strong emphasis on the way in which traditional economic models and trading practices have become obsolete.

[caption id="attachment_14614" align="alignleft" width="300"] Easy money (Source: Get Money Maker)[/caption]

Berkowitz says that there is a simple answer to the question of what precipitated the financial crisis, but that the answer is actually too simple to serve much of a purpose. He is referring to easy money, or money that individuals can obtain in great amounts by manipulating existing money. “The problem of easy money has been around for a long time,” Berkowitz says, offering a survey of historical events that point to its origin. These range from Alan Greenspan’s proactive response to preventing a post-9/11 recession, to the 1971 abandonment of the gold standard, stretching all the way back to 1716 when the first bank put paper money into circulation as a fixed-rate stand-in for gold.

For Berkowitz, it is important to understand that the prospect of chronic crisis has been with capitalism from the beginning. Indeed, John Stuart Mill recognized as much, sensing that the advent of capitalism would entail a periodic market collapse. This was in his eyes a good thing, a natural consequence of the existence of free trade. But Berkowitz disagrees with Mill’s assessment: “The ‘Mill response’ risks normalizing what should be seen as extraordinary.” Berkowitz then points to the unprecedented scope of the government response to the recent crisis in 2008, during which the federal government so immediately and comprehensively bailed out the financial industry, in order to illustrate that it defies common sense to take for granted these kinds of emergencies as normal or inevitable. This mindset, according to him, robs us of an idea of limits.

It is here where Arendt comes into the picture: Arendt worried about what happens when corporations, expanding to become global entities, exceed the political limits of nation-states. An American state can regulate an American corporation, but what happens when the corporation exists in parts across the globe? Concomitantly, moral and ethical limits are broken down. Such a corporation, existing beyond the nation-state, thinks not civically but in terms of pure competitiveness, and money-making becomes the dominant ethic.

Matias illustrates for the audience what a purely competition-motivated ethic looks like in practice. He details how financial companies can legally create dozens of shell entities in tax havens around the world in order to circumvent regulations. He also spends a good amount of time talking about just how much the 2008 collapse altered the status quo. “The world has changed…the day Lehman Brothers collapsed, our world changed permanently… It’s an earthquake, with a tsunami on top of it.” Matias takes a dire tone because he sees that the discipline of economics is failing in its central mission: managing and understanding the flows of money. He tells a parable of how in 1986, buyers could complete a stock trade in twenty minutes and with a few phone calls. By contrast, today it takes only the stroke of a key. Moreover, so many corporations do this using algorithms developed by physicists, chemists, and others whose sole purpose is to maximize profit. For these reasons, he says that macro- and microeconomics classes are obsolete: between “the Fall of ’08 and March of ’09, the market was reacting in a way nobody had ever anticipated.” This is a dangerous trend. As a result of the imperative to simply maximize profit through complex mathematical procedures, the economy is becoming indecipherable to traditional economic models.

Both Berkowitz and Matias have a lot to offer with regards to this issue; their discussion is worth revisiting as we continue to “recover” from this latest crisis.

Analysis by Dan Perlman

You can watch Berkowitz and Matias's discussion below:

Intellectual Origins of the Financial Crisis Discussion from Hannah Arendt Center on Vimeo.