Genres of the Credit Crisis

September 29, 2008
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In the last week, as the Wall Street bailout plan was developed and debated, Americans have struggled to visualize what $700 billion dollars could buy. A popular illustration of that buying power is the now-often-repeated 2200 McDonalds apple pies for every man, woman, and child in the country. This need to tie the intangible and incomprehensible to something more pedestrian and quotidian calls into question what exactly money represents. In order to expound on this “problematic of representation,” we called on Mary Poovey, author of Genres of the Credit Economy: Mediating Value in Eighteenth- and Nineteenth-Century Britain to discuss what history and the humanities can teach us about our modern credit crisis:
In Genres of the Credit Economy, I developed a historical argument to show that, in periods in which what I call the problematic of representation became visible, economic, political, and epistemological uncertainty often ensued. When I developed that argument, I never expected to live through such an experience myself. But here we are, in the United States of America, in 2008, facing exactly this kind of uncertainty. With the investment firms of Bear Stearns and Lehman Brothers now extinct, Merrill Lynch and Goldman Sachs having morphed into (or been purchased by) more ordinary banks, and Freddie Mac and Fannie Mae (the cornerstones of the U.S. mortgage market) in the hands of the U.S. government, we are all now being confronted with the insecurity of the investment models that fueled the economic growth of the nation for the last two decades. We are being forced out of our complacent state of ignorance about how arcane financial instruments work by a plummeting stock market and diminishing retirement accounts. We are being subjected to the frightening televised spectacle of a president, members of Congress, and presidential candidates who manifestly do not know how to handle all this, and whose failure to understand credit default swaps and collateralized debt obligations suddenly matters. For me, the only consolation capable of countering the uncertainty we are now experiencing is the knowledge that versions of this have happened before, and national economies have recovered. The recovery has often been painful. But the lessons of history so often are.


By the phrase “the problematic of representation,” I mean the gap that always exists between the signs of any signifying system and the underlying ground, or referents, that theoretically give meaning or value to those signs. In the system of language, this simply means that individual words do not naturally refer to objects but do so as a matter of convention or social agreement. In the monetary system, this means that individual monetary instruments—dollar bills, quarters, but also shares in a company or futures options—do not naturally embody the value for which they can be traded, but work only because all the participants in the market agree to treat them as if they actually represent this value. In Genres of the Credit Economy, I argue that even though the problematic of representation may be inherent in every representational system, this only becomes a problem—it is only experienced as a problem—when some historical or economic event exposes the gap and makes it clear to everyone that the tokens of value we have so complacently exchanged primarily derive their worth from our belief in them, not from an underlying resource they actually represent.
What neutralizes the problematic of representation most of the time—what prevents it from becoming visible and thus disturbing—is the social process of naturalization by which the gap inherent in, say, the monetary system comes to be taken for granted. As a consequence of naturalization, most people, most of the time do not notice that dollar bills are worthless pieces of paper, and they happily exchange them for the day’s coffee or for a lifetime’s new condominium. As naturalization achieves a more robust form in the various financial institutions created to ramify the operations of the credit economy, financial professionals develop new instruments capable of managing risk (and therefore generating profit) in new ways. As long as the majority of people continue to believe in the system, these new financial instruments will work. As long as the stock market continues to go up and losses are inflicted upon other people (preferably in another country), most people do not think it worth their while to try to understand these new instruments or to question whether their own life savings might somehow be at risk because money they thought safely invested in a money market fund was actually used to purchase the “toxic waste” of low-grade mortgage-backed securities.
What I’ve just written implies that, if individuals had studied up and learned about derivatives and CDOs, this whole mess wouldn’t have happened. That, of course, is not the case, for what we are now experiencing is an outcome not simply of the taken-for-grantedness of the modern monetary system but its complexity. The thing that really worries me is that, by almost all accounts, even the investment experts who were developing these new financial instruments did not always understand how they worked or what their long-term effects might be. Even the CFOs of the major investment banks (the ones that used to exist) did not know the extent of their companies’ exposure to sub-prime mortgages and credit default swaps. Even the analysts who developed the algorithms that calculated how groups of mortgages could be bundled, sliced, and traded could not predict how amassing these securities would affect the overall market. The profitability of insurance policies to protect against such complex deals’ default (remember AIG?) attests to the fragility of the entire house of cards. But, with no functioning regulatory agency capable of overseeing the whole, no amount of personal understanding could be a hedge against loss.
A version of this occurred in England in 1720, with the South Sea Bubble’s dramatic inflation and collapse. It happened again in 1836-37, 1848, 1856-57, and 1866. So repeated and so regular were the catastrophic downturns of Britain’s credit economy in the nineteenth century, in fact, that some economists described them as “natural” events—the products of a natural phenomenon, like sun spots, perhaps. Others described them as intrinsic to the “logic” of capitalism itself, features of a boom and bust cycle that would continue until capitalism wound down its ugly reign. None of these explanations put an end to the ups and downs, for the need for credit (on the part of individuals and nations) was too great, and the tolerance for ignorance too effective to make enough people question whether economies based on a complex calculus of risk and reward was really desirable.
I do not pretend to understand all of the intricacies of the investment system or the financial instruments that got the U.S. economy into this situation, nor can I predict how the “bailout” will affect future markets, in this country or the global economy to which the U.S. market belongs. I do think that one of the unanticipated benefits of this crisis is that more people now know at least a little bit about how leverage works and what money managers have been investing our money in. I also think that the lessons of history can help—if by doing no more than cautioning every citizen about the risks involved in lapsing back into the complete ignorance that felt so comfortable only a few weeks ago. In such a complex world, we may continue to need financial experts. But we also need not to cede to them such complete control over the money we have worked to earn.

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