Mapping out financial governance
I hereby declare that this thesis, “Mapping out financial governance”, is my own work and my own effort and that it has not been accepted anywhere else for the award of any other degree or diploma. Where sources of information have been used, they have been acknowledged.
Name Elvis Januskevicius
Date 21-08-2015
Master Thesis by Elvis Januskevicius University of Groningen 21-08-2015 Student number: 2003732
Email: E.januskevicius@gmail.com
Address: Schuitendiep 31, 9711RA, Groningen, Netherlands Thesis Supervisor: Senka Neuman Stanivukovicova
Acknowledgments
I would like to express my gratitude to Senka Neuman Stanivukovicova for all the help and feedback from which I have benefited greatly. I am grateful for the enduring intellectual contribution that has helped me immeasurably.
Contents
1. Introduction 3
2. Theory: mapping financial governance 6
3. Problematic of the Anglo-Saxon crisis 15
Liquidity 16
Solvency 21
Risk 24
Debt 28
The production of truth and limits of financial domain 32
4. Sovereign Debt in the Eurozone 34
Austerity apparatus 34
5. Conclusion 47
Introduction
The failure of the recent financial crisis was in big part related to people failure to understand the limits of the financial domain. One way to figure out why and how people misunderstood the limits of finance is to understand the contingent processes and practices through which the recent financial crisis was governed as a number of distinct problems that required particular solutions. That is to say, how the crisis was problematized. Understanding governance initiatives of the financial crisis this way means to question power/knowledge relations that shaped the way crisis was handled by sovereign institutions. The analysis will not challenge the academic consensus that extends its explanations, with regard to governance interventions, to the all powerful state, particularly central banks and regulatory institutions, intervening to rescue markets and financial economy from their woes, leaving interventions unproblematized (see Germain 2010; Helleiner et al. 2010; Porter 2014). Nor it will criticize these academic accounts. Although accepting the fact that it was a private sector crisis that has become sovereign responsibility, the analysis that will follow will make the governance of the global financial crisis comprehensible in a discrete manner.
Understanding crisis governance by following Foucault’s (2003) method of problematizations, his conceptual tool of apparatus (dispositif) (Foucault, 1980), and his line of thought centred on the concept of governmentality will require careful attention to the specific economic discourses that were enrolled in the apparatuses of knowledge that both framed the crisis into problems and provided the needed solutions in response to the particular problematic. Thus, analysis is theoretically grounded in Cultural Political Economy (CPE), which is in its stringent form a “political intervention into the field of knowledge production” (Jessop and Sum 2006, 159). In addition, theoretical input from Social Studies of Finance (SSF) will provide insights as to how the specific economic discourses that were enrolled in crisis governance initiatives have performed, in turn allowing to paint finance as a discursive domain articulated through performative practices
at the same time made the problem appear as an instance that required immediate attention and was of pressing concern, which was reflected in Barack Obama’s (2011) and David Cameron’s (2010) plans to curb sovereign debt (Langley 2015). In addition, liberal economic ideas, and calculative models have performed because channeled through relational arrangement of the apparatus they constructed the reality they described.
Moreover, placing recent financial crisis apparatuses of knowledge within the sovereign-disciplinary-biopolitical modalities of power will allow to show that sovereign institutions had the right to intervene to respond to problems of the crisis based not solely on sovereign power, but rather the right was born out from processes of governmentalization. Additionally, placing the concept within the three modalities of power will serve to show how government techniques and technologies were configured as well redeployed. In turn leading to some conclusions about the relationship between survival/limits of the state and particular tactics of governmentality.
The main research question of this thesis is as follows: how the governance of
the global financial crisis was framed by apparatuses of knowledge into series of problems so it could be governed with particular solutions in US and UK during 2007-2011, and particularly how the crisis was governed as a problem of sovereign debt in the Eurozone during 2009-2012? Two sub questions will follow. First one will present how the governance of Anglo-Saxon crisis was problematized into problems of liquidity, solvency, risk, and debt? The second will show how the governance of Eurozone crisis was problematized as problem of sovereign debt that required an immediate and dedicated response of austerity?
and UK as a problem of liquidity, solvency, risk, and debt. While Langley (2015) has considered crisis governance apparatuses as apparatuses of security, the argument of this thesis will argue in a different manner that these apparatuses were at first instance apparatuses of knowledge and not security. Pursuing the argument this way will allow to establish financial domain as built up and managed through performative practices. In addition, it will show how the limits of sovereign institutions of UK and US depended on tactics of neoliberal governmentality in governance of the recent financial crisis. In the fourth section attention will shift to the problematic of sovereign debt of the Eurozone. An analysis will delve into Alberto Alesina’s influential paper that has provided the needed economic discourse to European planners and the IMF to govern the sovereign debt crisis with preferred solution of austerity. Furthermore, an investigation into the particular power/knowledge relationship that pushed the austerity apparatus will be performed. In turn, the text will show how the problematization was in fact wrong owing to the fact that the European planners dependent on general tactics of governmentality, this time ordoliberal, which in reality caused financial distress. Concluding remarks will follow.
Understanding financial economy, distinctly the banking sector, as a discursive domain, means to understand finance as articulated through performative practices. Economic or finance theory is considered performative if it has the quality of “that which enacts or brings about what it means” (de Goede 2005a, 7). In this sense, understanding finance as a performative practice entails an understanding of processes of knowledge and interpretation as a way the real material structures of finance world are brought up, and precisely the way finance materializes (de Goede 2005b). This particular understanding of finance allows us to avoid the presumption particularly in studies of finance and economics that there exists a “prediscursive economic materiality” and provides possibilities to problematize this economic materiality in order to comprehend the particular discourse that governs financial sphere (de Goede 2003, 80). Consequently, understanding finance in this particular way means to repopulate the financial markets with human traders and speculators, who have particular and complex relations to what they understand to be the market; with human inventors of market modules, financial instruments, and formulas that are not only interpretations of economic reality but as well the tools that measure the economic reality that is to be governed; with journalists who do not just write financial news, but play important role in creating economic and financial space (de Goede 2005b).
A sociological approach to finance, such as social studies of finance (SSF), considers economic or financial theory performative “if it contributes to the construction of reality that it describes” (Callon 2007, 316). According to Callon (2007) economics, as well finance, attains its strength from the fact that it is a “constructed, logical discourse based on a number of irrefutable hypotheses”, thus predicting financial agents’ behavior “economic theory does not have to be true; it simply needs to be believed by everyone” (322). 1 Moreover understanding
performativity of finance entails an approach with which we need to analyze mechanisms through which conformity between finance theory and economic reality is
1 I understand economic and finance theory as placed on the same theoretical continuum. According to
realized, in other words deconstruct the prediscursive economic materiality. This implies a medium “between economics and economy”, such as institutions and norms that they impose, as well governance interventions through which financial domain is altered (Callon 2007, 324). Prominent attention will be given to the latter medium, mainly to apparatuses of knowledge that were strategically arranged as governance interventions to respond to problematizations of the recent financial crisis.
Analysing the global crisis governance through the understanding of finance as a performative practice brings particular considerations about the regulative practices that govern financial world. To begin with, these practices “govern the limits of the financial domain” and “act on the ways participants in this sphere understand their roles, interests, and possibilities” (de Goede 2005a, 10). By the same token, these regulative practices produce and reproduce financial discourses that govern financial agents, at the same time equip participants with “authority to perform, affirm, and amend these discourses” (de Goede 2005a, 10). From this standpoint deconstructing knowledge that supports these regulative practices means to understand the way we organize, comprehend and utilize finance.
mechanisms and processes (that are at the center of analysis here) involved in building economic orders or hegemonic blocs.
In an interview with Paul Rabinow, Michel Foucault elaborated on “history of problematics”, a concept prominent in his later work. He explained that there was a particular element of “problems” or “problematization” that was capable of describing “history of thought” (Foucault 2003, 388). In Foucault’s (2003) words:
“ […] for a domain of action, a behavior, to enter a field of thought, it is necessary for a certain number of factors to have made it uncertain […] or to have provoked a certain number of difficulties around it […] To one single set of difficulties, several responses can be made […] at the root of these diverse solutions the general form of problematization has made them possible […] It is the problematization that responds to these difficulties [because] it develops the conditions in which possible responses can be given; it defines the elements that will constitute what the different solutions attempt to respond to […] This transformation of group of obstacles and difficulties into problems to which the diverse solutions will attempt to produce a response, this is what constitutes the point of problematization and the specific work of thought” (388-389)
In other words, method of problematization allows to question power/knowledge relations, various discursive formations, and technologies that result from social, economic, and political processes. Subsequently it allows understanding how problems are abstracted so that they could be solved/governed through particular solutions. According to Rabinow and Rose (2003, xviii), “thought” encompasses material and scientific technologies of knowledge. Consequently, researching how the crisis was enacted upon “requires careful attention to the contingent manner in which it was made up and managed, as a number of relatively discrete technical problems that each required their own dedicated response”(Langley, 2015, p.5).
relations of power within which “the limits and forms of the sayable”2 were put in place within the domain of established discourses by the crisis governance apparatuses (Foucault 1991, 59, emphasis original). These discourses determine what is allowed to be spoken within the financial sphere and which phenomenon is considered evident of the severity of the situation that is to be governed in case of a financial crisis. Moreover, the same limits establish, which statements, evidence are invalid, in other words, excluded. In order to deconstruct these apparatuses Foucauldian understanding of power and the study of “apparatuses of knowledge” comes in hand.
Understanding financial domain as performative has consequences for the way we conceptualize power. In contrast to economistic notion of power as commodity, Foucault’s (1980) understanding entails analysis of power “as something which circulates” and “functions in the form of a chain” (98). It is “employed and exercised through a net-like organisation” throughout the whole social body, and individuals not only “circulate between its threads” they are as well in the “position of simultaneously undergoing and exercising this power” (Foucault 1980, 98). Understanding power in these terms brings a particular feature of the power of discourse, Foucault writes:
“[…] in a society such as ours, but basically in any society, there are manifold relations of power which permeate, characterize and constitute the social body, and these relations of power cannot themselves be established, consolidated nor implemented without the production, accumulation, circulation and functioning of a discourse. There can be no possible exercise of power without a certain economy of discourses of truth which operates through and on the basis of this association. We are subjected to the production of truth through power and we cannot exercise power except through the production of truth” (1980, 93).
In the case of finance “we must produce truth in order to produce wealth in the first place” (Foucault 1980, 93-94). Foucault argues that we need to study historically contingent technologies of truth production by studying “apparatuses of knowledge” (1980, 102). This has to do with the fact that the power of financial ideas stems from
2 Foucault (1991) argues that there are “a set of rules which at given period and for given society define
“the production of effective instruments for the formation and accumulation of knowledge” which include “methods of observation, techniques of registration, procedures of investigation and research, apparatuses of control” (Foucault 1980, 102). In the policy process any event, such as rendering crisis as a problem of debt so that it could be governed in a particular way, requires first that it would be “rendered into information” in appearance of “written reports, drawings, pictures, numbers, charts, graphs, statistics” (Miller and Rose 1990, 7; quoted in de Goede 2005a). Before continuing, we need to critically review the concept of apparatus so that it could be operationalized for this research.
In philosophy, terminology appears as an aesthetic moment of thought. This means that there is no necessity to fully define your terms. In the same manner as Plato never defined his most important term, idea, Foucault never fully conceptualized apparatus. For Foucault an apparatus is a “thoroughly heterogeneous set consisting of discourses, institutions, architectural forms, regulatory decisions, laws, administrative measures, scientific statements” in this sense the “apparatus itself is the network that can be established between these elements” as a particular “response to an urgency” with a “dominant strategic function” (1980, 194). An important feature of the apparatus is “precisely the nature of the connection that can exist between these heterogeneous elements”, the nature of these connections, as well the apparatus itself, “ is always inscribed into a play of power” and “always linked to certain limits of knowledge that arise from it and, to an equal degree, condition it” (Foucault 1980, 195). Crucially important for the functioning of an apparatus is the role of discourse and knowledges supporting it. Thus, a particular discourse has the power to define the way the apparatus will function, whether “justifying or masking practice” or on the other hand providing a “re-interpretation of this practice”, this way “opening out for it a new field of rationality” (Foucault 1980, 194-195). The analysis of various crisis governance apparatuses and the resulting regulative practices is thus placed at the heart of knowledges supporting these governance interventions to reveal whether we are witnessing a possible change in terms of knowledge structure supporting particular discourses that define or re-define the limits, and practices of the financial domain in the post-crisis era.
such, security apparatus could not function without the enrollment of apparatus of knowledge that is always involved in truth production that in turn has to be secured by security apparatus. Consequently, placing the attention to apparatuses of knowledge means focusing on the manner how knowledge is used to produce truth. In some cases the truth, following Nietzsche, becomes a metaphor that has been invented to lend authority to particular forms of thought and styles in governance of finance.
In short, the apparatus is “a set of strategies of the relations of forces supporting, and supported by, certain types of knowledge” (Foucault 1980, 195). In this research, particular attention will be given to the certain types of knowledge that conditioned discrete interventions for the governance of the recent financial crisis. The term knowledge requires some clarification. Rendering crisis governance via particular problems mobilized market devices of economics, such as practical calculation models and tools that makes circulation of financial instruments possible (Calon and Muniesa 2005; MacKenzie et.al 2007; MacKenzie 2009). At the onset of the crisis these devices did not merely allowed to measure the severity/extent of the crisis, as well through these devices the problems became known as “material givens” (Foucault 2007, 19).
Turning back to Foucault, the particular theoretical conception of apparatuses of knowledge is part of course of research that he establishes in terms of three modalities of power/knowledge relations. These are forms of power relations that have emerged in the ordering of West since the sixteenth century and still today are concerned with the shaping of political contours. It is here that Foucauldian philosophy centred on the concept of governmentality is of significant noteworthiness.
In Foucault’s terms “we live today in the era of governmentality discovered in the eighteen century” and it is precisely the “governmentalization of the state” that his concept of governmentality captures as “particularly contorted phenomena” (Foucault 2007, 109). This governmentalization is a process through which the sovereign power of sixteenth century, that is juridical and territorial mode of power, has not been eliminated, rather has been transformed with co-presence of disciplinary power, which has, with the birth of statistics and the problem of population in the seventeenth century, and through deployment of such institutions as schools, workshops, and armies has been able to organize and synchronize individual bodies (Foucault 2007). Consequently, these two powers have marked the governmental power that has developed “governmental management, which has population at its main target and apparatuses of security as its essential mechanism”, in other words biopolitical power (Foucault 2007, 108). Foucault suggests looking at these three powers as part of ”sovereignty, discipline, and governmental management” triangle in which the feature of this “line of force” throughout the Western world has constantly “led towards pre-eminence over” all these types of power (Foucault 2007, 107-108). Furthermore, the type of “government” power has “led to the development of a series of specific governmental apparatuses on the one hand, to the development of a series of knowledges” (Foucault 2007, 108).
How does then the concept governmentality refer to finance as a performative practice? Governmentality could be considered as a particular way of shaping “the limits and forms of the sayable” of the financial domain as a political rationality. Gordon (1991) writes that governmentality, as practice of government is “capable of making some form of that activity thinkable and practicable” (3). Thomas Lemke (2001) notes that governmentality “constitutes the intellectual processing of reality which political technologies can tackle” (191). Furthermore, governmentality makes intelligible how problems of the economy are “made thinkable and practicable” in order to become “knowable and administrable domains” (Rose et al. 2006, 86). Bearing in mind these definitions it is not hard to understand the value of Foucault’s claim in explaining interventions of apparatuses of recent financial crisis as part of performative practice of finance.
What is more to note, is that Michel Foucault’s analysis of governmentality and the three modes of power modalities generate further insights for this thesis. First, while acknowledging the fact it was a private sector crisis that has once again become a state responsibility, what made the mobilization of state institutions (central banks, treasuries, regulators etc.) was not only sovereign power, rather it was through processes of governmentalization that sovereign rights, such as right to tax, regulate, manage monetary circulation, was founded (Langley 2015). Second, placing the concept of apparatus within the sovereignty-discipline-government triangle will allow examining various patterns of association of government techniques and technologies that were configured as well redeployed thus transforming the patterns in question (Collier 2009). The merit of the second analytical insight amounts to the method of this thesis, namely, “topological” analysis (Collier 2009, 78).
“A topological analysis […] brings to light a heterogeneous space, constituted through multiple determinations, and not reducible to a given form of knowledge-power. It is better suited to analyzing the dynamic process through which existing elements, such as techniques, schemas of analysis, and material forms, are taken up
and redeployed, and through which new combinations of elements are shaped” (99, emphasis added).
Keeping in mind Collier’s reasoning, the previous discussion of technologies of truth production through “apparatuses of knowledge” gains impetus. “Apparatuses of knowledge” have an intriguing relationship with particular knowledge that has the power to guide the manner in which the apparatus will operate, whether “justifying or masking practice” or rather providing a “re-interpretation of this practice”, this way “opening out for it a new field of rationality” thus shaping the financial domain (Foucault 1980, 194-195). It is the exact “nature of the connection that can exist between [apparatus] heterogeneous elements” that is of crucial importance here (Foucault 1980, 195).
The method of this thesis corresponds to a topological map of recent financial crisis governance interventions. A task of mapping apparatuses of knowledge that were at play in the governance of the financial crisis will be performed. The task of mapping will follow patterns of correlation or associations between authoritative academic commentaries, press releases, speeches, policy statements, and media reports that will serve as an cornerstone to establish first, the way crisis has been problematized so that it could governed; second, it will allow to understand the particular task that the apparatuses of knowledge have performed in crisis governance. That is to say, by being involved in truth production whether the apparatus has justified a particular financial practice, such as risk management; or has the apparatus masked the practice by introducing an a new instrument and keeping the old practice in tact and creating a sort of “illusion of control” (Taleb 2007); or was the function of the apparatus was to redeploy the practice, in this light opening it up to a new field of rationality. It will also entail a historical research into the way the financial world has been built with the support of particular knowledges.
of knowledge that have problematized the crisis, as such enrolled and mobilized expert economic discourses to produce truth and apparent solutions. The research process has followed the relationship between a different range of official documents and media reports that during real time hit of the crisis fragmented the crisis into series of problems. Initially this first section will perform a rereading of Langley’s (2015)
Liquidity Lost with one important difference, looking at all these crisis governance
apparatuses as apparatuses of knowledge, not security as Langley has presented them, thus placing attention to knowledge that shaped the strategic function of apparatuses in question. Moreover, following Langley’s (2015) approach will allow us to paint finance as a performative practice by looking at the relational arrangement of economic theory in crisis governance initiatives that has contributed to the construction of reality that it describes, in turn altering the limits of the sayable. Furthermore, focus will also be placed on the way neoliberal governmentality has shaped all crisis governance initiatives.
The empirical focus will then shift to one particular problematic, that of sovereign debt. As Langley’s (2015) approach does not touch upon crisis governance initiatives in Europe, the second section will analyze the problematization of European sovereign-debt crisis during the years 2009-2012. Mapping out apparatuses of knowledge will follow correlation and associations between official documents, media reports, authoritative expert accounts that have all contributed to governing the Eurozone crisis as a problem of sovereign debt with an apparent solution of austerity. Moreover, a detailed account will be provided as how economic ideas of ordoliberalism have played in the construction of the euro project, as such were as well at play at framing the crisis as a problematic of sovereign insolvency.
Problematic of the Anglo-Saxon crisis
of other practices. The focus on problematic of debt will serve as a comparison in the subsequent section to show how a particular governmentality can shape an apparatus of knowledge that seeks to employ particular economic knowledges to create apparatuses of security in order to govern populations.
Combination of economic/finance theory with various market modules and formulas gave the crisis governance apparatuses a strategic function, that of securing global circulations (trade, money etc.) at the same time securing liberal way of life itself (Langley 2015). While Langley (2015) considers these interventions as part of apparatuses of security, although I agree that governance of the crisis was mainly presented as a problem of security, however the text will establish that these apparatuses as well acted as apparatuses of knowledge that had, implicitly or explicitly, the function of altering the limits and practices of the financial domain. As such they were the first immediate reaction to, and abstraction of the crisis into, particular problems, and were involved in the production of truth through application of economic discourses about what, how, to what extent, and why went wrong, thus setting the trajectory via which limits of financial domain were to become altered.
Liquidity
Chuck Prince, Citigroup chief, announced on the 9th of June 2007 that “as long as
distribute banking model. The moment markets froze, investors were unable to access fresh cash on money markets to renew their debt obligations. The crisis has also touched upon hedge funds too, producing 30 per cent fall in the value of assets held during 2008 (IFSL Research 2009). Leading journalists to predictions that half of 7000 existing hedge funds were likely to disappear, even causing more panic and fear for investors further freezing the markets (The Economist 2008).
In response to this big freeze, the Federal Reserve and Bank of England took on action to inject liquidity to the markets through open market operations (OMOs) and the use of the discount window as part of routine practices of central banking. The discount window, as a monetary policy tool, is a channel for commercial banks through which they can obtain emergency finance. As an instrument, it is an expression of Walter Bagehot’s dictum of lender of last resort (LOLR): at times of financial crises the central bank performs the LOLR function and lends freely at high interest rates (Carruthers 2012). By way of raising or lowering the interest rate, opening the discount window, the central bank can influence money market conditions, hence stimulating liquidity. OMOs as a second channel allowed central banks to “inject liquidity and address dislocations in money markets and credit markets” (Langley 2015, 39). Both channels are used by central banks to intervene in the markets by way of trading government securities so these could be used as collateral for banks and investment institutions to renew their short-term debt in repo transactions, in other words, stimulate circulation of money.
Rather the Bank has increased the rates, and at the beginning of the crisis did not have a consistent monetary policy reaction. However, the Bank has followed the Fed’s trajectory and took down the base rate from 5.75 to 0.50 percent in the period from December 2007 to March 2009 (Langley 2015).
The resulting crisis governance interventions in terms of liquidity injections, securities lending, liquidity facilities, and cutting the interest rates, took on material forms in 2008. The FED announced the Term Securities Lending Facility (TSLF) with the intention to “lend up to $200 billion of Treasury securities” in order to “promote liquidity in the financing markets […] thus to foster the functioning of financial markets more generally” (FED 2008). In the same fashion, the Bank a month later in April established its Special Liquidity Scheme (SLS). Mervyn King, Governor of the Bank of England, said "[t]he Bank of England's Special Liquidity Scheme is designed to improve the liquidity position of the banking system and raise confidence in financial markets while ensuring that the risk of losses on the loans they have made remains with the banks" (Bank of England 2008). According to the scheme, banks were permitted to exchange mortgage-related assets with issued UK treasury bills, the scheme finally lent out ₤185 billion worth of treasury bills. More striking were the Fed’s attempt to inject liquidity. The discount window numbers of median day to day borrowing rose from $59 million in 2006 to $552 million in 2007, then in the beginning of 2008 jumped to $13 701, eventually increasing to $85 814 million at the end of the year (FRB Markets Group 2009, 18). Numerous crisis governance interventions, as liquidity facilities, followed the upcoming year, such as Fed’s Primary Credit Facility, Term Auction Facility (TAF), Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), Money Market Investor Funding Facility (MMIFF), and Commercial Paper Funding Facility (CPFF), furthermore, both the Bank and the Fed took actions in terms Quantitative Easing (QE), all of these were crisis governance apparatuses that had a “specific and urgent need for liquidity” in order to restore the circulation of capital and money within the financial domain (Langley 2015, 56).
economics that turned on, and provided measures of, the liquidity markets” (Langley 2015, 44). First task is to deconstruct the liquidity discourse.
The term liquidity, rather lets call it a “metaphor”, is an image that describes circulation of monetary and financial economies (Nesvetailova 2010, 4; MacKenzie et al. 2007, 99-101). Liquidity has both, qualitative and quantitative features. The former refers to “qualities of liquidity” assigned to a particular financial instruments, such as an portfolio investment or an asset, that can be easily traded on the market and in a matter of seconds be turned into cash, in other words “liquefied” (Langley 2015, 45). Paper money, or any form of currency, is a good example. The liquidity metaphor also refers to “the pool of money or credit available in [the financial] system at any given time” (Nesvetailova 2010, 6). Liquidity, then, is noticeable as an easily obtainable material resource and a quantifiable flow. The main rationale behind the pumping of liquidity and liquidity facilities of sovereign banking techniques would thus be to restore the market liquidity, in turn bringing the market to the uninterrupted point of trading and circulation that takes places when financial markets function fluidly (Langley 2015).
According to the Turner Review (2009) “liquidity risks […] in the years running up to the crisis did not receive adequate attention” because it was not considered an issue worthy of attention that it would be written into 2004 Basel II international standards developed by BCBS at the BIS (68). However, when the crisis took proper hit, and liquidity was abstracted as a particular problem worthy of an apparent solution, the BCBS (2008) published Principles for Sound Liquidity Risk Management and
Supervision noting: “the market turmoil that began in mid-2007 re-emphasized the
importance of liquidity” (7). Consequently, BCBS (2013) developed a new practice, the “liquidity coverage ratio” that was formally written into Basel III international banking standards.
Another financial practice transformation occurred with regard to sovereign central bank techniques under Bagehot’s dictum of LORL. The process, liquidity injections and facilities, upon which the apparatuses of crisis governance functioned has redeployed the function of the central bank within the financial system. The actions taken up by the Fed and the Bank “ultimately entailed […] the minting of base money, in the form of bank reserves, in order that the commodified debts which were circulating as assets in the global financial markets did not have to be liquidated” (Langley 2015, 53). Since the abandonment of the gold standard, the Fed and the Bank were in position to freely create base money reserves without worrying of exhausting its gold reserves. In this sense, the function of last resort lending, as well the functioning of the financial system, was drastically transformed, as these sovereign techniques of making money for capital markets in order to repay short-term debt “had become structurally reliant upon the circulation of liquidity” (Langley 2015, 53). Because direct funding and making of capital markets for securitized assets and debt goes far beyond the routine techniques of central banking. These crisis governance interventions had another crucially important element within the apparatus, a market device of economics, namely the balance sheet.
the quantities and qualities of the liquidity injections. In other words, the balance sheets, by positioning base money on the liabilities side, have performed an active role in rendering the crisis as a liquidity problem (Langley 2015). The performativity of the balance sheet figured beyond central banks effort to establish problem of liquidity. Through its performative power, the balance sheet as well brought the problem of banking solvency to the fore with an apparent solution of recapitalization.
Solvency
2008 October has marked a significant change in terms of problem abstraction of the recent financial crisis. The attention of crisis interventions has shifted away from money and capital markets to banks and their bailouts. IMF’s (2008) October Global
Financial Stability Report has raised concerns of “threats of systemic stability” that
have caused “the collapse or near-collapse of several key institutions […] as markets have become unwilling to provide capital and funding”, more precisely “raising capital from the private sector has become very challenging and segments of the financial system have become undercapitalized” (xi, 32; emphasis added). Whilst the private sector has been reluctant to fund the recapitalization of banks, the Group of 7 Finance Ministers and Central Bank Governors (2008) announced, strongly supporting “IMF's critical role in assisting countries affected by this turmoil”, their Plan of Action on October 10th to “ensure that our banks […] can raise capital from public as well private
The Bank Recapitalisation Fund (BRF) as a “comprehensive package of measures” had the function to tackle “systemic problems” of “balance sheet weaknesses of UK banks” (Bank of England 2008a, 29). A central feature of the BRF was the government support to assist in the recapitalization of UK banks. The recipients included Abbey, Barclays, HBOS, HSBC Bank plc, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland, and Standard Chartered (Bank of England 2008a). Accordingly, these banks committed, as agreed upon with the government, to increase Tier 1 capital3. HM Treasury guaranteed a purchase of equities
in banks that were unable to raise Tier 1 (high-quality) capital in the markets. The Government expected to “take-up of these guarantees to be of the order of £250 billion” and the scheme has been made available for a six-month window (Bank of England 2008a, 31).
In the interim, on the other side of the Atlantic, recapitalisation of banks took on material forms through Capital Purchase Program (CPP) and Capital Assistance Program (CAP). These two governance interventions were part of “the most high-profile and politically contentious governance action” known as Toxic Asset Relief Program (TARP) (Langley 2015, 61). The TARP, organized by US Treasury, was an apparatus with a ceiling of $700 billion that had a strategic function of purchasing toxic assets from capital markets. In first instance, it was redeployed to respond to a quite different problematization, that of toxicity that intended indirectly recapitalize banks. TARP enrolled “an orthodox economic discourse […] [that] figured the crisis in metaphorical terms as a contagious infection of the cardiovascular system of the economic body”, to which toxic assets of Bear Stearns and the giant insurance company American International Group (AIG) were considered infectious, and had to be removed by way of creating bad banks that took on the role as the most effective medicine (Langley 2015, 61). The medicine became unfeasible; half of the TARP money was spent to directly recapitalize insolvent banks as part of the bailout apparatus. So the CPP used half of the $350 billion TARP funds to recapitalize nine largest US banks- including Morgan Stanley and Goldman Sachs- that were considered by regulators insolvent, while the second half of the money funded the CAP, through which equities were bought, just to name a few, from Citigroup ($20 billion) “in
3Tier 1 capital is considered as the highest quality capital. Under Basel III accords it includes common
exchange for preferred stock with an 8% dividend to the Treasury” and Bank of America on same terms ($20 billion) (US Treasury Department 2008; 2009). What was particularly crucial for the functioning of the bailout apparatus was the element of the balance sheet.
As a market device of accounting and economics, the balance sheet had a significant performative power that “not only [brought] into being the technical problem of bank solvency that was to be acted on, but also [provided] the apparent solution of recapitalization” (Langley 2015, 86). Building on works of social theorists such as Schumpeter (1950) and Weber (1978), Langley (2015) showed that the balance sheet, particularly double–entry bookkeeping, is a significant element for the development and reproduction of capitalist enterprise and rationality. In turn it is possible to argue that the balance sheet has a very broad performative power; as such, proper functioning of finance depends on this performativity. In the bailout apparatus, the performativity of the balance sheet worked in three ways. First, it was the main “calculative device” that presented everything what was wrong with banking and the financial economy in a broader sense (Langley 2015, 87). In the UK, the Bank problematized the crisis as “balance sheet weaknesses” (Bank of England 2008, 29). This kind of problematization “served to symbolically represent orthodox economic conceptions of the economy” that always leans towards equilibrium, naturalistic conception per se (Langley 2015, 88). Second, the balance sheet metrics served as a classification mechanism that produced material givens of solvency and insolvency (Langley 2015). The metrics, in simplest form, as a basic equation puts the worth of total assets against all liabilities plus equity capital, thus classifying an institution solvent or insolvent. Third, and related to the second, process of “capitalization” or “recapitalization” can only derive its “meaning in the context of the balance sheet” (Langley 2015, 88). In this light, the apparent solution of recapitalization of insolvent banks of the apparatus only came into being with reference to the balance sheet.
(Langley 2015). Financial regulation ensured that taxpayers would benefit if the bought equity in banks would rise in price by way of special dividends and warrants, providing an opportunity for returns to society (Langley 2015).
Moreover, in a similar fashion as the apparatus that governed the crisis as a problem of liquidity, the bailout apparatus has set a trajectory that brought change within an economic discourse of banking. What became clear with the crisis proper hit is that “previously unquestioned dividing lines which separated on- from off-balance sheet business became regarded as untenable” (Langley 2015, 89). This particular crisis discourse signified “that the models and practices which threatened widespread insolvency had not been prevented by the international standards” (90). As such, the Basel III accords, complementing the standards for liquidity risk, have number of strategies aimed at strengthening regulation of banking. The BCBS (2010) noted: “it is critical that all countries raise the resilience of their banking sectors” thus we need “fundamental reforms to the international regulatory framework”, which were done by raising capital to coverage ratio (leverage ratio measured by total assets divided by equity capital, thus strengthening Tier 1 capital) (2). The Basel III initiatives as well emerged from quite another apparatus that responded to a quite different problematization, that of risk, to which we now turn.
Risk
Alan Greenspan gave his testimonial apology on the financial crisis before Congress in October 2008. After reminding that a Nobel Prize had been awarded for work behind derivative pricing and risk management theories, he noted that:
“[t]he whole intellectual edifice, however, collapsed in the summer of last year because the data input into the risk-management models generally covered only the past two decades, a period of euphoria. Had instead the models been fitted more appropriately to historic periods of stress, capital requirements would have been much higher and the financial world would be in far better shape today, in my judgment.” (Greenspan 2008)
referring to Black Monday, the answer was abstracted as reality of “future-blindness” (New York Times 2009). A special report published in the Economist (2008a) on international banking, particularly on financial risk managers, showed that “risk managers” themselves “are also aware that they have to base their decisions on imperfect information”, as the title of the article casts them as “professionally gloomy”. Till Guldimann, one of the original architects of VaR, criticized his own market device by stating: “risk management is about stuff you don’t know that you don’t know”, particularly “VaR leads to the illusion that you can quantify all risks and therefore regulate them”, as the recent financial turmoil showed it is clearly not the case (Economist 2008a). Quite sadly, the atmosphere of the financial public has lost faith in “mathematicians and finance experts supported by major advances in computer and communications technology” that were at the heart of the risk management system of finance (Greenspan 2008).
Outright strikingly, four days to a year later a special report, again on international banking, included an article titled “The revolution within. The way banks manage risk- including how they reward managers for taking it- will change greatly” (Economist 2009). It is clearly noticeable that a drastic change has came forth on the perception on the effectiveness of banks’ in house risk management techniques that underwent innovation and development over the last year (Economist 2009). The decisive element of this revolution were macroeconomic stress-testing techniques that were “designed to think through how institutions cope with periods of pressure”, and are becoming strategically important to banks, but “more important to boards as they seek to define institutions' risk appetite” (Economist 2009). More intriguing is that the article came out a week later after US Board of Governors (2009) announced results of stress test exercise known as Supervisory Capital Assessment Program (SCAP) that was one of the elements within the apparatus that governed the crisis as a problematic of risk.
and almost a year later after the tests were taken and results were published Greenspan’s successor Bernanke proudly stated that SCAP has “contributed to the development of tools and approaches that will inform our supervisory process as we work to reduce the likelihood of future financial crises” (Bernanke 2010). As will be detailed below, like Greenspan, Bernanke was as well fooled by future blindness.
As specified by the SCAP methodology, nineteen firms “with year-end 2008 assets exceeding $100 billion” that “collectively hold two-thirds of the assets and more than one-half of the loans in the U.S. banking system” were required to take tests on adequacy of held capital against two “plausible “what if” scenarios” (Board of Governors 2009, 1, 10). There were two alternative economic scenarios, namely “baseline scenario [that] reflected the consensus […] among professional forecasters on the depth and duration of the recession” and with “the more adverse scenario [that] was designed to characterize a recession that is longer and more severe than the consensus expectation” (Board of Governors 2009, 1). Under these scenarios firms were asked to depict their revenues and credit losses for the years 2009 and 2010, as well anticipate the threshold of reserves needed for the year 2010 to cover losses in 2011.
Estimates off the baseline scenario showed that the nineteen banks collectively incurred losses of $400 billion across six quarters through 2008, with the inclusion of “charge-offs, write-downs on securities held in the trading and in the investment accounts, and discounts on assets acquired in acquisitions of distressed or failed financial institutions” (Board of Governors 2009, 2-3). Subsequently, the more adverse scenario estimated further losses equivalent to $600 billion over the years 2009 and 2010, leading to the conclusion that ten banks included in the SCAP were in need to raise a mounting amount of $75 billion in equity capital as required adequacy minimum at the end of a two year term (Board of Governors 2009). The CAP was closed on September 2009, and the ten banks have raised $77 billion by issuing new equity, selling asset portfolios and side businesses (Langley 2013; Langley 2015). Within a month of the SCAP results, nineteen firms began to repay their debt that funded their public recapitalization from TARP funds during autumn of 2008 (Economist 2009a).
the multiple and critically complex array of probabilistic risk calculations have authorized and justified numerous possibilities for taking risks and speculative profit making within the securitized model of finance. Exceptionally when “combined with the off-balance sheet accounting and securitization techniques of the originate-and-distribute model of banking” (Langley 2015, 108). The apparatus that abstracted the crisis as a problematic of risk management enrolled two particularly important economic discourses: critique of probabilistic calculations of VaR, and macro-prudentialism.
The critique of VaR was given expression by Taleb’s (2007) highly influential book The Black Swan. In a testimony given to Congress on “VaR and the Economic Meltdown” Taleb (2009) has argued that “VaR is ineffective and lacks robustness” because “we cannot "measure" the risk of future rare events like we measure the temperature” (3). There are numerous other problems with VaR, namely that the model “does not replicate out of sample- the past never predicts subsequent blowups” (Taleb 2009, 4). Moreover, a decline in VaR does not result in fewer risks, more then often the opposite is true, and strikingly, the “roots of VaR come from modern financial theory (Markowitz, Sharpe, Miller, Merton, Scholes), which, in spite of its patent lack of scientific validity, continues to be taught in business schools” (Taleb 2009, 4). These are just a few examples of his critiques that when are summed up have led to a point where, as Taleb (2009) noted with reference to his book The Black Swan, “we are in the worst type of complex system characterized by high interdependence, low predictability, and vulnerability to extreme events” (4).
upswings, thereby rendering minimum regulatory capital requirements as variable” (Langley 2015, 110). What this means, is that micro-prudential in house risk calculations such as VaR remain unchanged, the only change that the apparatus introduced is that there are capital buffers that would allow a bank to pay off its loss, thus not causing systemic weakness, but still allows the firm take up excessive risks as was in the pre- crisis period. Thus the practice of risk management has kept probabilistic calculations of securitized assets in place, what macroprudential stress testing provides is “an extra layer of protection against model risk and measurement error” that is VaR (BCBS 2010, 2). The pro-cyclical features of “VaR capital calculations are thus to be offset by counter-cyclical capital provisions” (Langley 2015, 118). The apparent solution of the apparatus that governed the crisis as a problem of risk has redeployed risk management techniques of VaR by creating adequate capital buffers for banks that can be utilized in periods of stress. Alas, Bernanke has been deceived by future blindness created by illusion of control about the uncertain future.
Debt
we have to use a scalpel and not a machete to reduce the deficit, so that we can keep making the investments that create jobs” (2011). This represents a more lenient acceptance of fiscal retrenchment (austerity).
Before the austerity measures took on material forms in 2010, there was a return to “global Keynesianism” in the preceding year as was proclaimed by Lord Skidelsky’s (2009) famously celebrated book, The Return of the Master (Blyth 2013, 54). In the US, the return of Keynes ideas was marked by public conversion of Richard Posner in the pages of The New Republic (2009). Most importantly, a prominent anti-Keynesian Martin Feldstein, an author of an highly influential article for The Public
Interest on the cracking of Keynesian ideas in the 1980s, has also began to make the
case for an active fiscal stimulus in the very late 2008 (Farrell and Quiggin, 2011). Numerous other academic commentaries have accepted Keynesian economic ideas with the likes of Oliver Blanchard (IMF chief economist), Paul Krugman (2008), Barry Eichengreen (2008), Brad DeLong clearly show that a consensus on a Keynesian response with regard to fiscal interventions to the crisis was in place.
The Keynesian fiscal stimulus package of the US came through American Recovery and Reinvestment Act with $787 billion programme in addition of $500 billion of public spending and tax cut measures (Langley 2015). UK on the other hand amounted a stimulus only to cover existing spending commitments, and was the only OECD country that combined Keynesian stimulus with a plan to cut its fiscal deficit in 2010 (BIS 2009, 111). In June 2010 Financial Times (2010) had reported on the G20 position on the crisis has moved from global Keynesianism to the abstraction that public spending has to be “maintained until the recovery was firmly entrenched” highlighting the “importance of sustainable public finances” in order “to deliver fiscal sustainability”. Policies of fiscal expansion were quickly trimmed to a new tendency to govern by fiscal austerity.
public spending in the pre crisis period when the financial sector was booming.
The US budget of 2011 (in fiscal year terms stands for 2010 October to 2011 September) had less of an impact on the fiscal deficit. Negotiations where harsh, as the Federal government almost witnessed a shutdown, nevertheless the budget approved a $3.5 trillion expenditure per annum, with task of consolidating government spending by $1 trillion over ten years while realizing $3 trillion reduction of net deficit in the same period, and charged “the Joint Select Committee on Deficit Reduction with finding an additional $1.5 trillion in savings” (Office of Management and Budget 2011, 1). The idea behind the detailed plan of the budget was to restore healthy fiscal discipline and move towards balance.
The apparatus that responded to the problematic of sovereign debt enrolled and “mobilized the long tradition of classic economic thinking that […] creates limits on the role of the state which are internal to liberal government” (Langley 2015, 153; see also Foucault 2008, 10-11). So Keynesian policies, and economic planning in terms of deficit spending both in UK and US defined the internal limits of liberal government (Foucault 2008).
Furthermore, in a addition to “liberal and neo-liberal economic narratives, orthodox economic concepts, and a number of national budgetary devices [that] all contributed to the rendering of the crisis as a problem of sovereign debt”, there were supplementary calculative models and elements such as the concepts of “Say’s Law, Ricardian equivalence, and crowding out” that “were arranged to establish the actuality of the debt dilemma” (Langley 2015, 156, 154). The first concept of Say’s law holds that production is the source of demand, meaning that supply creates its own demand. It supports the laissez-faire belief that capitalist economies will naturally lean towards full employment and equilibrium, thus making Keynesian fiscal stimulus or financing deficit to raise demand unnecessary. Second, the Ricardian notion of equivalence is an economic theory that holds the assumption of unchanged demand despite governmental attempts to stimulate demand. In contrast to Keynesianism, it adheres to the idea that reducing government debt and curbing public expenditures will lead to an increase in demand. Third, crowding out follows the idea that increased public borrowing or sovereign debt crowds out private investing by making credit and capital in the markets scarce thus initially raising interest rates.
concern that “rising debt will costs jobs” and eventually cause “damage [to] our economy” all due to the fact that “business will be less likely to invest and open shop” in US if our country is “unable to balance its books”. Her Majesty’s Treasury (2010) concerns were outlined in its “fiscal policy framework”:
“borrowing must be brought under control and debt as a percentage of GDP must be placed on a downward path as: reducing public sector borrowing will underpin private sector confidence and reduce competition for funds for private sector investment, supporting growth and job creation over the medium term; failure to address rising public sector debt in the UK risks pushing up long-term interest rates, which would affect not just the Government, but also families and businesses through the higher costs of loans and mortgages” (11)
Moreover, in addition to the performative power of the afore mentioned concepts, economic measures such as, budgetary metrics defined by ratios (government spending, fiscal deficit, aggregate debt, debt payments) against the figures of GDP were in place that gave the numbers and the material givens of the severity of the debt problem. In HM Treasury (2010) terms the fiscal plan envisioned “a target for public sector net debt as a percentage of GDP to be falling at a fixed date of 2015-16” by forecasting that “public sector net borrowing will decline to 1.1 per cent of GDP in 2015-16”, for instance (2).
the problem of sovereign debt in the Eurozone was of different character, and as well was enshrined in different power/knowledge relation. Before turning to analyse the issue of sovereign debt in the Eurozone some preliminary conclusions are needed on what so far the analysis has to say about the governance of the Anglo-Saxon financial crisis.
The production of truth and limits of the state
Up to this point the analysis has shown that the initial response to the financial crisis of US and UK governments symbolizes a phenomenal change in the state’s outlook towards financial markets that has through unprecedented actions of financial intervention, rejected nearly four decades of neoliberal financial reregulation that has created the dominant securitized model of finance together with the originate and distribute banking model that has crumbled in the beginning of 2007. However, routine central banking techniques, fiscal policies, and regulatory procedures were not arranged so to enable prevention of the financial practices of the securitized model of finance. These practices were to a large extent responsible for the financial havoc. Rather, the above-mentioned apparatuses, had the strategic function of securing global circulations, bringing back confidence in the financial system, and as well securing liberal life itself, as such they were security apparatuses. In this sense, sovereign institutions amid sovereign, disciplinary, and biopolitical modalities of power enacted and mobilized apparatuses of knowledge that responded to each problematization with apparent solutions that worked with, rather than against, the securitized system of finance, in other words the “limits of the sayable” of finance were re-established.
of security” (Foucaul 2007, 110). As such, each apparatus acted at first instance as an apparatus of knowledge that employed economic knowledge that has set the trajectory from which the “limits of the sayable” were re-established within the financial domain leading to a process through which techniques, schemas of analysis, and material forms of finance, were taken up and redeployed, and through which new combinations of elements were shaped, however keeping the old system of finance unchanged (Collier 2009). For instance, sovereign techniques of central banking have been altered in unprecedented ways that included making of capital by printing base money to keep the circulation of capital intact; as well sovereign techniques were involved in creating markets for securitized assets. Moreover, central bank balance sheets not only recorded the liquidity dried up markets, but as well were active in the apparatus that transformed the LOLR routine techniques of central banking.
that works with neoliberal governmentality, not against it.
Sovereign debt in Eurozone
This section will focus on the problematic of sovereign debt in Eurozone. Analysis will focus on individual economists, such as Alberto Alesina and Franceso Sylvia Ardagna paper Large Changes in Fiscal Policy: Taxes versus Spending, which has proved to be so influential after it was quoted in ECOFIN Madrid meeting in 2010 and adopted in Jean Claud Trichet’s thinking, it served as main intellectual underpinning for European and IMF plans to govern the crisis problem of sovereign debt with immediate response of austerity, as will be shown by analysing Economic Adjustment Programmes for Greece, Ireland, and Portugal as well the Financial Sector Adjustment Programme for Spain. The problematic, according to some critical academic accounts, was actually false (Blyth 2013). Leading Mark Blyth (2013) to argue that rendering the crisis as a problem of sovereign debt in Eurozone is “the greatest bait and switch in modern history” (73). Then, the analysis will show how particular power/knowledge relationship was arranged in accord with ordoliberal governmentality.
Austerity apparatus
The first concerns about sovereign solvency on the European shores came from Iceland. Although Icelandic economic crisis was consequence of the paralysis of money markets due to the Lehman Brothers crash, however, few scholars had the suspicion that the crash would have happened one way or the other 4(see Aliber 2008; Wade 2009; Wade & Sigurgeirsdottir 2010). Back in 2006 and 2007 that time’s Icelandic government run by David Oddsson orchestrated an apparatus of knowledge by outsourcing and neutralizing information5 about Iceland’s economic health that
4 Robert Wade has documented this particular case by problematizing and historicizing Iceland’s
political economy and its state-market relationship, and the result of his study has produced remarkable results. Apparently, there were factors at play that caused the paralysis of Icelandic economy, amongst them were problems of capitalist cronyism, neutralization of unwelcomed information centres, and extreme privatization of information in order to push legislation that allowed bankers’ pursue risky, wild, and irrational behavior in money markets (Wade, 2009; Wade & Sigurgeirsdottir, 2010).
5 During 2002-2007 Oddsson government neutralized unwelcomed information sources. National
allowed to push financial liberalization and de-regulation at a dangerous pace (Wade 2009; Wade & Sigurgeirsdottir 2010). The orchestrated apparatus of knowledge enacted privatization of information by pushing Iceland’s Chamber of Commerce to arrange a PR campaign by taking an active advisory role to decide upon the prospects of country’s financial stability by commissioning, for a symbolic fee6, analyses from
independent/private experts, namely Mishkin and Portes, both feasibly representing an epistemic community involved implicitly or otherwise with spreading of neo-liberal economic values (Wade, 2009; Wade & Sigurgeirsdottir, 2010; Mishkin & Herbertsson, 2006; Portes & Baldursson, 2007). Both of these reports came to a similar conclusion that Iceland is financially stable, and proved that banks are stable, thus giving green light to push financial de-regulation, a bankers dream come true. A situation reminiscent of financiers who read front to back Bill Black’s The Best Way
To Rob A Bank is to Own One. When the crisis hit the undertaken measures that
enabled de-regulation led to financial catastrophe that placed Iceland into Moody’s list of biggest financial collapses in history.
The reason for mentioning this has to do with the fact that the apparatus that functioned in Iceland was involved in first instance in the production of truth about the status of Iceland’s financial system, and the diagnosis that it came up with was wrong, mainly due to the particular character of the power play that pushed the apparatus in question. As we saw in the case of governance of Anglo-Saxon crisis, state institutions and sovereign techniques amid sovereign-disciplinary-biopolitical modalities of power were as well mobilized in the enrolment of the apparatus of knowledge that used economic knowledge as an instrument to advocate neo-liberal way of governing finance. Given this particular character of Iceland’s case a pattern becomes visible as to how apparatuses of knowledge strategically function when there is an intriguing power/knowledge relationship pushed by particular relations of forces. By way of analogy a very similar story follows for the austerity apparatus that has governed Eurozone since 2010, just in this case ordoliberal economic ideas took hold.
information; Oddsson terminated National Economic Institute and Competition Authority; IMF reports were also dismissed (Wade, 2009; Wade & Sigurgeirsdottir, 2010).
6 Frederic Mishkin received $135.000 for his report. Richard Portes payment amounted to $95.000 for
