Ismail Erturk

The democratization of finance? Promises, outcomes and conditions

ABSTRACT This paper analyses the ‘democratization of finance’ or the promise that all households can make money and/or manage risk by buying appropriate financial services products. It does so by exploring the reasons for discrepancy between what is promised and what can be delivered. Our analysis starts from the economic promises and political pitches for the democratization of finance since the early 1990s and the corollary emphasis on promoting mass financial literacy. The article then identifies three key social preconditions which must be satisfied before the promise is delivered. Evidence and argument from the UK and US suggests that these conditions are not met because the context is confusing, individuals lack calculative competence and products are opaque. Under these conditions felicitous outcomes are uncertain for existing middle class savers and very unlikely for lower income groups. A concluding section relates this analysis to the cultural economy literature and to the politics of social security versus individual responsibility.

Banks as Continuous Reinvention

While one can sympathise with . . . (the bank branch) manager who realised some time around the year 1980 that his world was disappearing, his position was not sustainable in a business which was increasingly driven by sales targets and capital returns. Things had to change. Banking had to rediscover itself: how it worked, the sort of people it needed to employ, how it intended to serve its customers.

Reconceptualizing financial innovation: frame, conjuncture and bricolage

Abstract This article argues for a reconceptualization of financial innovation which, as culprit and victim of the current crisis, is now damned by those who once praised it. But what is financial innovation? The dominant answers from mainstream finance and social studies of finance share variations on a rationalistic view whereby financial innovation is about improving markets or at least extending the sphere of rational calculability. Because improvisation is more important than the dominant perspectives can admit, this article proposes a new concept of financial innovation whose three main elements – frame, conjuncture and bricolage – are indicated by the title of this article. The importance of this problem shift is that it highlights the inherent fragility of this type of intermediary-led financial innovation where things will often miscarry and highlights the need for a more radical rethinking about policy responses to the financial crisis that began in 2007.

Misrule of experts? The financial crisis as elite debacle

Abstract This paper is about knowledge limits and the financial crisis. It begins by examining various existing accounts of crisis which disagree about the causes, but share the belief that the crisis represents a problem of socio-technical malfunction which requires some kind of technocratic fix: the three variants on this explanation are the crisis as accident, conspiracy or calculative failure. This paper proposes an alternative explanation which frames the crisis differently as an elite political debacle. Political and technocratic elites were hubristically detached from the process of financial innovation as it took the form of ‘bricolage’, which put finance beyond technical control or management. The paper raises fundamental questions about the politicized role of technocrats after the 1980s and emphasizes the need to bring private finance and its public regulators under democratic political control whose technical precondition is a dramatic simplification of finance.

Corporate Governance and Disappointment

This paper raises fundamental questions about the political and economic conditions and consequences of UK and US corporate governance. It does so by locating corporate governance in present day capitalism. Politically, the rise of governance since the early 1990s is part of a more general discursive attempt to combine neoliberalism with social responsibility, which works in the specific case of corporate governance by constructing a plausible but intellectually fragile narrative about agency problems and solutions which would align shareholder and management interests. Economically, the initial promise of corporate governance in the 1990s and the growing disappointment with governance in the early 2000s are then related to successive phases of financialisation: governance promised much in the 1990s as long as the bull market delivered equity value for shareholders; while the limits of corporate governance were demonstrated after the tipping point in the different circumstances of the early 2000s. It is then argued that disappointment is inevitable because procedural rules cannot control the self-serving behaviour of social and political elites in the UK and US. If corporate governance was ostensibly about safeguarding shareholder interests, effectively corporate governance sanctioned a huge increase in absolute and relativepay for US and UK top managers who remain the major beneficiaries of governance in a world where the giant corporation has become an important accelerator of inequality.

Pay for Corporate Performance or Pay as Social Division? Rethinking the Problem of Top Management Pay in Giant Corporations

This article begins with the 1980s and 1990s business and public policy issue about pay for performance, which set executive pay in the United Kingdom and the United States into a problematic about value creation. In this context, it is not the absolute level of rewards that is the main concern, but rather the ways in which pay is connected with corporate performance. The article reviews evidence on long-term trends in remuneration and corporate performance. While the empirics on the growth of CEO pay in the United Kingdom and United States over twenty years show rates of increase that result in ever widening gaps between executive and average pay, the data on performance suggest that such pay increases have significantly outrun any sustained increase in value attributable to management effort. The article therefore argues that executive pay in giant corporations needs to be set in a new problematic of value skimming, which allows small elite groups to enrich themselves in ways that do not directly impoverish larger groups of shareholders or workers.

Ownership matters: private equity and the political division of ownership

This article returns to the issue of how ownership matters. It does so by developing a critique of the ‘advantage-value-return’ framework of assumptions about value creation from the product market, which are recurrent in resource based strategy and many other discourses that highlight what managers can do and the variable governance of management by owners. It then uses a case analysis of private equity and presents empirics which show how the financier general partners capture value so that general partners are enriched regardless of the performance of their investment funds. While private equity publicly claims to represent ownership with control for strategic decision making and operating efficiency, the undisclosed generic business model is the control of ownership through constructing a hierarchy of ownership claims for debt and equity suppliers in the capital market. Before or after the financial crisis that began in 2007, what matters is the position of the general partner as first among owners, not the motives, identity and actions of managers or the different suppliers of debt and equity.

Hedge funds as 'war machine': Making the positions work

The paper criticises current metaphorical characterisations of hedge funds as either trader/arbitrageurs or speculator/gamblers. We argue that these two different characterisations share a definition–identity–outcome frame within which hedge funds are separate and distinct from other financial actors, and engaged in an activity of buying and selling assets with ‘real’ and fixed risk/return characteristics. To break with this frame, our article makes two discursive moves. First, it counters metaphor with analogy by replacing the metaphor of buying and selling with the analogy of war, drawing on Deleuze and Guattaris concept of ‘war machine’. Second, it combines the military analogy of war with our own political and economic concept of conjuncture to emphasise the relevance of space and time in understanding hedge fund practice and performance. These two moves open up a different approach which highlights the interconnectedness of hedge funds with other financial actors, and the increasing difficulty of distinguishing hedge funds from other financial and non-financial companies who now engage in combat using identical strategies. The techniques of shorting and leveraging are presented as weapons not tools because hedge funds are not just active traders, but active manipulators of those trades, when the goal is to ‘make the positions work’. We conclude, however, that this strategy becomes more difficult on new terrain as the economic conjuncture shifts from excess liquidity to credit crunch.

How) Do Devices Matter In Finance

This article distinguishes between different concepts of device. In traditional English usage, as in the Foucauldian or Deleuzian concept, devices exist in a context of power, opportunism and force. Through argument and evidence about hedge funds and financial innovation, we argue that this kind of non-Callonian device is ubiquitous in finance so that the idea of device can be part of a much more political analysis of the present-day capitalism. Capitalist devices are not neutral tools with fixed uses and predictable results because they vary in purpose and effects from one context to another. This is the point Deleuze makes in the context of nomadic war machine when he explains how a tool can be a weapon; and it is an issue in the present-day capitalism where we can ask whether politically strong financial elite have turned tools like short-selling into weapons that may harm other stakeholders in the economy. This article also connects devices in finance and the process of innovation with the desires of financial elites who enrich themselves and are negligent about the costly consequences of their bricolage for society. In this political frame, financial devices are products of a banking system that works for itself generating fees and bonuses and incidentally recreating pre-1914 levels of income inequality of historic proportions. This goes unchallenged because a democratic deficit allows financial elites to socialise losses and privatise gains.

HALDANE'S GAMBIT: Political arithmetic and/or a new metaphor

This article considers the body of work which Andrew Haldane has published since the onset of financial crisis. It draws a distinction between two kinds of criticism in that work: Haldanes interference through political arithmetic on the costs of finance and Haldanes big concept of the financial network using metaphors drawn from the life sciences. His readers have mainly focused on Haldanes innovation through concept and network metaphor while neglecting his political arithmetic and empirics on the costs of finance. But this article argues that Haldanes political arithmetic on costs is an important radical intervention when the finance sector is deflecting reform with a trade narrative about the social benefits of finance.