From: www.GegenStandpunkt.com/english/fin-cap/fin-cap-II.html
II. The development of finance capital?s credit power: The accumulation of ?fictitious? capital
[Translated from GegenStandpunkt: Politische Vierteljahreszeitschrift 2-09, Gegenstandpunkt Verlag, Munich]
Part III and IV: forthcoming.
1. From loan business to capital market
With its loan business, the banking industry achieves something remarkable. In its hands, money is capital ? many times over. It makes the deposits of its cash depositors grow through interest payments. It puts money at the disposal of its loan customers, which strengthens their power to generate profits and both obligates and enables them to make interest payments. The net interest generated by the banking industry increases the capital with which it conducts its business.
This achievement presupposes and is based on the fact that the material life-process of society depends on money and serves the accumulation of money. Money, employed as an advance of capital, sets in motion the whole world of material wealth and the work necessary for its reproduction and increase; and this motion is guided by the goal, obeys the criterion of success, and brings about the result of more money. Finance capital takes the full-fledged rule of money and the power of property, measured in money, over all wealth and its sources as the starting point of its own business. It avails itself of a mode of production in which all the productive forces of society are set in motion and developed by money. In this mode of production, all capacities of material wealth ? nature, science, and work ? are for sale and have been made available as sources of money of the property that takes hold of them. Finance capital depends on money proving itself as its own source of accumulation: as a necessary means for this all-dominating purpose; and as sufficient means on the sole condition that it is available in sufficient quantity. The corresponding need so particular to capitalist society ? the need for money-capital ? is managed by the banking industry. On the one side, as universal debtor of a society operating on money, it concentrates society?s assets and business means in its hands. As manager of the societal payment system and with the interest it pays, it acquires legal power of disposal over virtually all monetary wealth. On the other side, with this power of disposal, it confronts the business world as the supplier of the one business means that all need. It procures and makes available, as universal creditor, what the world absolutely requires and, in its judgment, also can sensibly use. It makes use of this two-sided legal relation ? the transfer of title as a loan ? as its own source of money.
With this all-encompassing business activity, finance capital makes abstract wealth immediately productive without any productive achievement of its own; money acts as power to increase itself, turns itself directly into capital, just by coming into the hands of a financial institution that lends it out. By taking charge of other?s money, such an institution makes itself responsible for paying interest on the sums it acquires, and thus for their capital ?quality.? By lending money, it makes the paying of interest on the lent sum ? i.e., the effect that normally comes about only because it has been used successfully as an advance of capital for production and trade ? a legal obligation that the borrower has to meet, regardless of how it does so or which means are used. And by constantly borrowing and lending, the bank ?expands? its own wealth in the most direct fashion conceivable, via a double, complementary exchange of money for a right to more money. Its account balances are the proof, and its ability-to-pay the practical evidence, that this shortcut kind of legally constituted accumulation of money is economically sound. This is how the banking world formally gives the capitalistic capacity of money an independent existence in opposition to its precondition and basis, i.e., in opposition to the use of the money as capital advance and to the realization of surplus on the market. As credit, money is already capital.[1]
This equation, which successful loan operations make valid in practice, justifies and guarantees a finance-capitalistic practice that makes going into debt anything but an emergency measure. Debts become equity, and are thus capital by their very ?nature,? a commodity that the financial industry produces and sells. Finance ?securitizes? the increase in money that its loan business promises, i.e., it documents that promise as a binding pledge in the form of a security and trades with it. The buyer of such a paper acquires it in order to earn something from it. His ownership of it entitles him to receive the yields the seller commits to pay. What the seller sells is the legally binding promise to put the sum of money the buyer has used to purchase the security to work as capital for the buyer. The seller uses the proceeds to cover his need for capital. So a security is a debt obligation that has become a commodity by virtue of having been turned into tradable money-capital that serves its purchaser as an investment. What the buyer achieves here through the mere act of purchase normally requires using that sum of money as an advance of capital and earning a profit on the market. The sale obligates the issuer to deliver what is otherwise generated by a successfully concluded capitalistic expansion process. A security with its legally fixed payments substitutes for what a sum of capital accomplishes with its turnover. It represents, in a legally effective way, the increase of the sum of money the buyer pays for it, as if the increase were its economic nature. As an independently existing business item, it objectifies the equation the bank executes with its lending business, i.e., the conversion of a sum of money into automatically accumulating capital merely by its being transferred to the purchaser. The financial industry throws this thing on a market where the only thing bought and sold is the power of money to increase itself, stipulated ? ?securitized? ? in debt instruments, and which for that reason is called the capital market.[2]
The advance that finance capital thereby makes can be seen in the economic characters that populate this market and in their special business practices.
? Borrowers are, in this case, no longer debtors who suffer from shortage of money and need money owners who have something left over for them, but are issuers of a paper that represents a self-accumulating asset, i.e., that promises a share in the indubitable power of the issuer to turn money into more money. Whereas a debtor takes on the obligation to pay interest, the issuer of a security crows with the assurance that the fulfillment of his promises-to-pay goes without saying, and is to be regarded and treated as an automatically occurring effect, virtually as the economic quality of the issuer?s IOU. In this way, banks progress from being collective debtors of the money-owning business world, entitled to disposal over its money, to being producers of instruments with which they make other?s money ? not least, the credit money their banking colleagues are ready to ?create? for worthwhile business ? available for themselves. They act as active procurers, like producers of the sums with which they do their business and supply their borrowers. They not only offer to meet their respected customers? need for credit, but to market it appropriately as a commodity. Instead of freeing a firm from its limited assets through a loan transaction, they provide their clients access to means to free themselves, to the instruments that allow them to sell their need for money as a commodity. Instead of interest, the bank then earns fees for its intermediation services as well as by investing in the capital investments so created. Creditworthiness is here no longer an open question that a critical bank, after careful examination, confirms or rejects until further notice, but a secured precondition.[3] That is what a securities issuer markets.
? Lenders on the capital markets are no longer creditors who need to be concerned about the whereabouts of the sums they have lent, but investors who acquire securities in order to make money from them. That is why, while not uncritical about the yields the securities promise, subjecting them to comparative appraisal, they regard them, in principle just like the issuer does, as a reliable effect, viewing the entitlement to them as an economic attribute of the securities they acquire. The certificate of debt they buy is an investment for them, a profitable asset, self-acting money-capital, which also can be resold as such. Unlike the creditor, who wants to see his right to punctual interest payments and principal repayments served, the paying out of promised yields and the repayment of the invested sum are not the professional investor?s ultimate aim, but rather signs of the quality of his investment. He continually and comparatively examines it according to these and other criteria to assess its usefulness as a speculative capital investment. Banks act here as investors on their own account and as trustees of the financial assets of their customers, all the time searching for the best investment and trying to optimize their own security portfolios and those entrusted to their care.[4] Complementary to their issuing activity for themselves and those they act for, they create with their own and others? funds continual demand for capital investments.
The banking industry thus draws a far-reaching, forward-pointing conclusion from the extensive success of its lending business: it makes the results of its credit creation the starting point for a higher sort of business activity. With its power of disposal over the circulating money and deposited funds of society, it goes on the offensive and procures itself ? and its elite customers ? funds by giving access to others? property the form of investments it creates itself, and putting this into circulation as a commodity. Banks know how to make use of their power over the financial needs of the business world, namely, their power to set processes of expansion in motion, to continue them or bring them to a halt, to arrange a multitude of competing business activities, and to direct them in the interest of their own accounts: they take the liberty of marketing their own debts and a good many others directly as self-expanding financial assets, i.e., offering and taking opportunities for capitalistically productive financial investments. The sole content of the objects they buy and sell on the capital market is the power of money to increase, which they take for granted and whose use they decide on in their loan business. In the securities trade, they treat and use this power as a commodity and thereby set an entirely separate world of financial capitalistic enrichment in motion.
Additional remark 1. On the relation between facts and their explanation
With its borrowing and lending, finance capital gets the power to do as it wishes with others? money and business activities, and to make money from them. Of course, its business depends on the loyalty of its customers and the business success of its borrowers, but this dependence is based on achievements of the financial sector that establish a completely different dependence. It provides earnings for its depositors, thus unleashing the capitalistic capacity of their property; and it helps its borrowers break free of the limits of their own assets. With the creation of a capital market, finance capital makes the position it has achieved at the heart of the market economy the basis of a trading business in which debts are marketed as capital. On the capital markets, interest yields are no longer the ultimate aim of business. Instead, punctual payments are important from a higher perspective, i.e., as evidence for the traded debts having the ?quality? of being capital. With the establishment of this business sphere, finance capital makes the provision of capitalistic enterprises of all kinds ? and even the national budget ? with financial resources dependent on the success of its securities trading. That is why it seems somewhat odd that both favorably disposed apologists and leftist critics of the banking business ? even in their commentaries on the present crisis, of all things, which demonstrates the power of the banks in the most drastic way ? refuse to recognize the independent methods and criteria of the financial capitalistic accumulation of money. The apologists try to elicit understanding for the useful services that they attribute to the banking industry, services they would like to make plausible by claiming that credit and capital markets are actually simply about putting money one person happens to have left over to good use by another person. This childish image is scientifically ennobled by the label, ?allocation of scarce capital resources.? They justify the fact that banks end up with a bit of extra money on their hands as nothing more than a reward for ensuring an optimal ?supply of money? and ?allocation of resources.? Any bank activities that cannot be made to fit this complement are considered lapses that have nothing to do with the true mission of the credit business. On the other side, with reference to Marx and his ?labor theory of value,? critically minded leftists regard finance as parasitic: this conception combines the same picture of sums of money being moved around, sums which are earned and needed and profitably used outside the financial sector, with the reproach that the riches finance capitalists pocket are unjustified, because they haven?t performed any work themselves. Some critics take our remarks about the superior standpoint and distinct achievements of finance capital, along with its power to expand capital entirely in its own way, as a blatant offence against the doctrine according to which value can only result from work.[5]
At least for the latter sort of critic, it might help to point out that the power of finance capital to grow by means of its control over money and the capital requirements of the business world is not a questionable theoretical construct, but a fact demonstrated by the accounts of any bank. That fact needs to be explained. But it won?t be if the only thing one cares to note about the objects that finance capital throws on the capital markets is that they are actually mere debts, and if one only looks at the debt business of banks to see who pays interest to whom and ultimately has to make good on all outstanding accounts. Of course, such reminders can be useful in the sense that they are required to trace the whole, inflated business back to its foundation. But that is just the starting point of the explanation. After all, money-capitalists don?t stop at this foundation ? they erect their business on it. They operate their business with debts, their own and others?. For them, piling up claims and liabilities is neither burden nor danger, but the way they enrich themselves. This wealth is so real that it takes a crisis of quite immense proportions for knowledgeable experts to realize that what is acting as money-capital in this case are debts. These experts are then temporarily beset by doubts as to whether and to what extent this business is legitimate and economically sound. And they arrive without fail at the proper conclusion that when in doubt, the state has to use its power to save the quality of the banks? products of being wealth and attest their equality to money. If, therefore, there is indeed something fishy about the fact that financial institutions treat their speculation on debt as a yielder of profits ? just like a secure source of earning ? and then even ?securitize? these debts and let them circulate like money capital with a built-in increase of value, then it is all the more worth explaining how such a business practice becomes the key activity, indispensable for the free market system, dominating all other industries and rising above them ? and why it has to do so.[6]
Our explanation can be methodologically summarized as follows (all the details can be found in the text, with a few more observations paralleling Marx in remark 2): the power of finance capital consists in utilizing the power that the capitalist exploitation of labor gives to money, such that this thing acts as its own source. Hopefully, this will obviate the fear and accusation that such an analysis of the power of finance capital calls into question the Marxist critique of the creation of value by labor: if the credit trade with all its stages of escalation is based on the regime of money over work and wealth, and makes this regime, having become independent by force of law, the instrument of its enrichment, then it annuls nothing of this regime. On the contrary!
2. The capital market and its business items: On bonds, stocks, and other ?products?
On the capital market, debt is traded as self-expanding money-capital. And just like the loan transaction itself, its transformation into a yield-bearing security is also a legal matter: the capital ?property? of a security is a product of property rights, that is, it consists in the legally valid definition of a debt relation as a legal entitlement to monetary benefits from others? businesses. A security includes what otherwise results from the capitalist production and circulation process ?the preservation and increase of monetary wealth ? in the form of legal terms and conditions governing the preservation, any necessary repayment, as well as interest payments or other appreciation of the investment. When it comes to redefining debt relations as money-capital, finance capitalists have creatively developed and applied property rights so as to achieve a wide range of variants, which differ from each other essentially by their similarity to, or their emancipation from, a basic lending transaction. In the process, a competitive relationship between the issuer or seller and the investor takes the place of the creditor-debtor relationship and determines in practice the capital ?quality? of a traded paper, in principle deciding on whether it is recognized as money-capital at all. The parties haggle over the price of the good, which in this case means that the competition between suppliers and customers decides on the size of the money-capital the security promises to expand, and hence on the yield due on it or the level of promised proceeds and therefore on the sum of money to be invested. This competition therefore determines the quality of the paper as a securitized expansion process and thus altogether the quantity of value that undergoes this process of legal expansion. This happens in different ways and with different consequences depending on the design of the investments.
? At one end of the scale, still very close to the lending business of banks, are bonds, which are issued by high-powered borrowers such as large companies, states,[7] and banks themselves. In their most elementary form, they promise a fixed interest rate for a fixed investment amount and are redeemed on a fixed date at the nominal issue price. The distinction between bonds and ordinary debt, however, is hard to miss. It is not an amount of money that is formally sold for interest ? as in the awarding of credit ? but rather an entitlement to a return for a sum of money. With bonds, the object of commerce is an interest-bearing capital investment, which can be repeatedly sold up to its maturity date. In some cases, the issuer links bonds to specific business activities that already provide it with a regular stream of income or that it claims to be safe and profitable investments. This will then increase the credibility of the right to returns that it would like to sell as a piece of money-capital incarnate. With reference to their legal right to timely debt service, banks have developed techniques for giving loans they?ve made, money already given away, the form of self-expanding value and for using them as a tool for refinancing their business operations by selling the thing. In any case, when it comes to bonds, paying interest is reduced to a precondition taken for granted for a debt to be defined as a financial asset, and the creditworthiness of the issuer is turned into money. Therefore, the reputation of the tendered paper determines the level of interest the bond issuer has to offer in order to find investors. And the critical comparison of promised returns with alternative investments in terms of their size and security determines ? upon issuance of the paper and then upon each further sale ? its going rate, i.e., the daily updated actual size of the capital objectified in it relative to its nominal issue price and hence the real interest rate in contrast to the promised one.[8]
? The same calculus is employed quite differently at the other end of the scale: in the trade in shares, securities that the issuer is not obligated to redeem, that represent a title of ownership to the issuing company, and promise permanent participation in its proceeds. In this case, the company aims to make others? money its own capital irrevocably, i.e., to remove from a sum of money belonging to someone else and continuing to exist independently the character of being someone else?s property, to remove from borrowed funds the character of being a debt obligation. Shares realize this contradiction with the legal device of separating the object of a property title (the capital stock of the company) from the property title itself and its benefits (participation in the profits of the company). The money a company collects upon issuing shares is at its disposal as its capital. Conversely, the real quantity of money-capital represented by the shares is determined, not by the capital advance with which the company operates its business, but primarily by the income promised to the shareholders: their future income is speculatively anticipated and ?capitalized,? i.e., credited as interest on a capital sum that is calculated with the customary rate on corporate bonds and return on capital investments serving as reference points. Speculations about economic trends in general and comparative assessments of the earnings prospects of a company in particular, speculation on changes in interest rates, and any number of additional considerations influence the calculations with which an issuer of shares and the market initially compete against each other,[9] followed by the competition of shareholders willing to sell and interested investors. Their trading activity gives rise to the share price, which is determined on modern exchanges in two-second intervals and made public because its behavior is in turn an important, if not the most important, determinant of speculation on the future trend of the capital asset that the share objectifies, and therefore of its own performance. Thus share-capital leads its own life alongside the course of business of the company that has issued the share certificates, based on sheer speculative projections and circularly acting influential factors. It is precisely this independent motion that is the all-important economic variable, for it decides in a binding way, continuously anew, on the value and earnings prospects of the title of ownership to the company the shareholders have invested their money in; i.e., it decides on what the sums that investors have thrown into the speculation in shares are good for as invested capital, and hence on their size as well. Therefore, it also determines what the company itself, with all its capitalistic wealth and its capitalistic use ? with its factory buildings and offices, its machines and warehouses, its patents and market shares, its profitable workplaces and its entire workforce ? is actually worth, namely, what it is good for as means of enriching its owners. The market value ? the price at which all the shares of the company could be bought, i.e., the share price multiplied by their number ? with its continual ups and downs and all its erratic fluctuations, provides a figure for the service the company renders the capital market; it measures the financial power with which the company itself operates and that its owners, the shareholders, have at their disposal.[10]
? Besides taking the rest of the capitalist business world in its hands, finance capital has seized hold of the sphere of landed property in a very special way. Bankers need not have invented the fact that the ground on which all life takes place ? in the market economy as well ? is subjected by the state to private power of disposal, and that its use by other interested parties yields a ground rent for the owners. What they have found appealing is the fact that monetary proceeds that can be gotten on the basis of a moneyed interest in using a plot of land can be entered in the books as interest charged on capital, and can be marketed as money-capital as easily as can debentures. With this in mind, they have added to their various capital markets a real estate market in which they and other financially strong interested parties can, by acquiring real estate, invest their money in an asset with very special speculative potential. Such investments are, on the one hand, considered particularly safe because they exploit the trivial circumstance that each and every economic activity, and human existence in general, needs a spot where it can occur, and the satisfaction of this elemental need costs money, as does everything else in the market economy. On the other hand, this market is particularly vulnerable, as experts assure us, to speculative ?bubbles.? As long as the ?bubble? doesn?t ?burst,? that is not a disadvantage, nor is it a surprise. After all, the object of speculation is not the future of an ongoing business with reasonably predictable earnings, but the potential future interest of all potential investors in a very specific business requirement: location. The land prices produced by this speculation are therefore, firstly, extremely dependent on the general and local trends of the capitalist business world. Experts therefore consider land prices to be a very sensitive seismograph for business fluctuations. Secondly, land prices are extremely flexible. They can skyrocket when there are prospects, or possible prospects, for developing a piece of land for a high concentration of business activity. And they are just as prone to crash. Capital market pros are all the more keen to involve the whole world in the creation and accumulation of speculative money-capital from land through real estate funds or similar constructions: an opportunity for the next kind of securities business.[11]
In these and other variants, finance capital always performs the same service. On the one hand, it turns debt obligations into money-capital by making debtors? payment obligations ? i.e., its own or those it manages for the issuer ? the foundation for speculative capitalization and, as a result, marketing the creditworthiness that it attests to itself or its clientele. The offers it thereby makes are, in turn, aimed at finance capital itself. It acts on the other side, on another?s behalf or on its own account, as an investor that doesn?t just collect interest, but decides with its willingness-to-pay on the capital quality and quantity of the credit relationship put up for sale.
Additional remark 2. On Marx? ?fictitious capital? and its real power
Marx characterizes the business items of the capital market as ?fictitious? capital. He thereby attests their raison d??tre and power to act as a source of money ? to be capital. At the same time, he distinguishes them as a kind of notional substitute,[12] from the same power and purpose of those financial assets ? he calls them in this context the capital of the ?reproductive? capitalists ? that are employed as power of disposal over means of production and power of command over labor in order to produce profit-bearing goods and allow their actual value, namely, exchange-value, to really come into existence through sale, to be ?realized.? Such an expansion process is not ?fictive? insofar as it uses the labor, means of production, and products with which society materially reproduces itself. That has earned this way of using monetary assets the peculiar honorary title of ?real economy,? and earned capital in general the compliment of being the instrument through which ?we all? enjoy prosperity and progress. Of course, this fiction is reality only in a cynical sense: where the capitalist mode of production prevails, the creation and use of useful goods and the reproduction of society itself are entirely dependent on their function in the process of capitalist expansion. By virtue of the power that property entails ? and that a state guarantees by force of law ? any prosperity all the way down to mere survival is subject to the private power of money and the purpose of making more money out of money. The regime of capital degrades work and wealth to sources of power over work and wealth: to sources of the value that exists objectively in money. But in this cynical sense, the praise of advanced money is one hundred percent correct. In the real market economy, everything needed for the social life-process can be had for money, and nothing can be had without it. And all materially useful activities in the real economy serve the increase of money. That is why, in this system, everything depends on capital alone. Production and consumption are taken up as functional elements in the economic process that starts with a sum of money as necessary and sufficient condition and ends with a larger sum of money as purpose and result, hence a process which realizes the power of money to increase itself.[13] The success of this process is economically ? i.e., according to the principles of this political economy ? only a question of the sum of money invested.
This is where finance capital comes in. This banal quintessence of the capitalist mode of production ? summarized by Marx in the formula M?M? ? is precisely the standpoint that banks put into practice. Finance assumes that nothing else is needed for the only economic success that counts but what it already has at its disposal as authorized holder of the financial assets of society: sufficient money ? but it needs this absolutely. It operates as an agency that allocates that all-important resource in the business world, while at the same time ignoring all material conditions, needs, and concerns of the real, capitalist accumulation process. It gets to the heart of the matter ? appropriately ?one dimensionally? ? to a quantity of needed money. Like any other capitalist enterprise, finance is interested in the amount of demand for money and the prospect of a decent return; but unlike companies in other industries, the management of these two variables is also its entire business. For a money-capitalist, the fact that between M and M? quite a bit of production and trade must take place is a matter of course taken care of by others and lying outside his responsibility; what he is responsible for is the power of the money he has disposal over to bring about its own accumulation by being passed on. This power of money is an economic fact for the money capitalist, and his profession consists in managing that power.
It follows from the logic of this business that it does not stop at acquiring and lending disposable sums of money. Once financial firms have secured power over the accumulated monetary wealth of a market economy and function as indispensable lenders for the ?real economy?; once the economic world consists of nothing but a need for capital and for money waiting to become capital; once financial companies combine this power and this need so successfully that they are able to give credit to every business with prospects of success and to attest to every sum of money the right to increase; once the power of money to increase itself has become a reliable economic fact in their balance sheets; with all this behind them, financiers see it as the most natural thing in the world to make their power over the capitalist capacity of any money itself the object of their business. Finance capitalists ? literally ? capitalize on their proven reliability in matters of credit, access to money and sources of money, by attaching to money ? given to them, given away by or through them ? the quality of a self-accumulating financial asset on the basis of associated interest obligations, and throwing securities on the market that quasi-objectively and quantifiably represent this quality. With this operation, finance capital replaces the achievement that money otherwise brings about by being used as an advance for the establishment and operation of profitable workplaces ? in plain language: for profiting from exploitation. Compared with this ?real economic? expansion process, the one that finance capital promises in a legally binding way is ?merely? fictitious. But there is nothing fictitious about the power with which it carries it out. And the result is as real as the end product of all capitalist expansion processes: the power of access and disposal materialized in money.
After all, the power of finance capital ? just to make the comparison with real, ?reproductive? capital ? is not exhausted in its command over a company whose workforce profitably expands advanced capital. This power is based on lawful access to the achievements of loaned money in all enterprises in all industries, and it brings about a real summary of the power of money operating in the free market system in the balance sheets of the financial sector. The overall profitability of capitalist business life is represented there as the economic achievement of money-capital. The numerical results produced by companies in the ?real economy? appear as ?use cases? of the power of money to accumulate in the hands of financial institutions, as alternatives to the realization of this capacity associated with material prerequisites, market conditions, and the like.
3. The expansion process of finance capital on the capital market: On portfolios and their profitable management
The wealth of that part of the business world that is active in the financial sector, or that lets its assets ?work? there, appears as an immense collection of securities; trading with these papers is its main source of income. After all, every single security promises interest, dividends, or similar yields. The professionals in the securities business are not content, however, to wait for this disbursement and use the sums received or invest them again. As managers of their own and other financial assets, they are constantly restructuring their investment portfolios. In order to increase their value, they continuously trade investments.
The material for these operations is continually and abundantly replenished. On the one hand, issuers of securities compete on the capital market to find buyers for their offerings. And because they all deal basically with the same product ? with debt as money-capital ? they seek to differentiate the conditions attached to their products to make them appear especially attractive. With this in mind, they choose the class of securities with which they intend to (re-) finance their businesses; within the selected segment, they try to impress investors with the level of promised yields, as well as with their safety, hence with the size and reliability of their financial might, and to beat competing bids. In so doing, they meet up with congenial money investors ? these are of course the same companies with their financial geniuses that appear alternately on the capital market as buyers and sellers. They examine the offers from the same point of view, comparing them with each other; and when issuers, investors, and asset managers agree to terms, they fix the size and yield of traded money-capital, continually revising both pieces of data in the course of their trading.
This permanent fixing and updating of traded assets not only affects new offerings, but also any existing stock of assets. For also in this case, everything that promises less gain than a commercially available alternative counts as a loss maker; conversely, worse alternatives that still find a market increase the value of the better ones. This is how all securities take part continuously and notionally in the trade with capital investments, and are affected in practice by the continuously modified results: the prices ?discovered,? i.e., produced, by trading immediately alter the value of all portfolios and confront their owners or managers with the question of whether the profits and losses to be booked ? for that reason also called ?book profits? or ?book losses? respectively ? should be ?realized? through actual exchange, i.e., through sale of existing papers or purchase of new papers, or not. Financial capitalist wealth grows and shrinks with the corresponding decisions. Its ?expansion? and accumulation thus takes place in and through the trading of its constituent parts. The fact that the promised returns arrive on time is one element in this expansion process. In principle, they are assumed to be a sure thing, but can be considered dispensable depending on the circumstances. In any case, they represent no more and no less than one essential consideration in actively managing the total assets at the disposal of a money-capitalist ? his investment proceeds are nothing more and nothing less than portfolio material. The fact that finance capitalists credit the increase of their wealth, not to their creditors, but to their own speculative skill, is only fair.[14] After all, that?s how growth actually takes place in this industry: through the transfer, accumulation, and restructuring of assets with whose sale the speculation refinances itself for further and increased investment. The trading by which ?fictitious? capital accumulates confirms on the one side the financial might of securities issuers, and strengthens on the other side the financial might of the investor. Securities trading therefore causes the wealth of speculative suppliers to grow through speculative demand, conversely that of demanders through profitable supply. The securities trade thus enables all sides to achieve new and larger transactions. The power of money to increase itself runs riot in the increased turnover of more papers with rising prices and of growing bond issues in the roundabout between ever more, and above all ever more powerful market participants, in the generation of trading profits, fees, and growing asset values. That is capital productivity in its pure form.[15]
4. The stock market, the ?real economy,? and total social capital
The accumulation of finance capital through continual, speculative purchases and sales takes place for the most part in public venues. On the stock market, the shares of companies in a somehow delimited location for capital get their price. In addition, official bond markets provide guidelines for the daily value of papers traded there and for the conditions in terms of yield and safety that new debt securities have to meet to be accepted as money-capital. Indices, in which the prices of various papers are summarized according to ingenious calculation rules, continually represent the capital quality and, correspondingly, the value quantity of whole classes and aggregates of investments. They quantify the degree to which circulating capital investments, or the sums of money invested in them, have, in their documented ups and downs, proven themselves as means of enrichment. They therefore ?indicate? the current state of accumulation of sections of ?fictitious? capital, and, in so doing, provide traders with a crucial reference point for the next round of valuating them.
The expansion process of finance capital on the capital market includes the decisive valuation of all operations and expansion processes in the field of production and trade: namely, the decision about their suitability ? past and future ?as investments. The examination of their suitability is driven by the interest in bringing about material for securities trading, so speculative caution is in order. The systematic survey of business needs in the field of industry and commerce according to the criteria of the securities business therefore has a restrictive effect in some exceptional cases, but generally not at all. Rather, it amounts to a general mobilization that often exceeds anything that business people or companies would have thought they were capable of in sticking to the provisions of their bank credit lines. First and foremost, this concerns the growth of their capital: access to capital markets means access to investment funds of every magnitude, for streamlining that can be used to attain competitive advantages and extra profits, for conquering new markets and opening new company locations around the globe. The capital market expects such investment offensives from issuers of securities from the realm of the ?real economy?; it decides critically about the past use firms have made of their business assets, and sets standards for their present and future use. Without the interest and resources of the capital market, those ventures that aim for growth without actual growth ?mergers with, and acquisitions of, other companies ? are all the more impossible to ?leverage.?[16] Access to these growth funds is the decisive lever for the competitiveness of firms, and as such radicalizes the first and most important virtue of capitalist growth: size is not to be had without efficiency, which is absolutely required. Speculation provides the standard according to which the business use of means of production and labor must prove itself: the ?performance? of the business has to justify the creation and the creative accumulation of ?fictitious,? speculative money-capital. For joint stock companies, the relevant catchword is ?shareholder value?; this typically English direct and uncompromising term makes clear that the interest of financial investors in enrichment modifies traditional calculations with ?real economy? markets; it can readily come into conflict with the success strategies of a management clinging to traditional products and markets, and occasionally with the state?s industrial policy. That being the case, modern companies in all industries organize their ?real economy? activities with the aim of making themselves attractive to speculative investors; the highest criterion of success is a positive valuation of the securities they issue; they respond to the attacks of non-industry buyers ? ?locusts?[18] who discern unexploited speculative potential in the firm and force management to unlock it ? with a business strategy that copies their methods preemptively. In demand and on offer are generally innovation and mobility: the capital market offers established companies the opportunity to break free of their traditional industries and capture new fields of business; for instance, that is how a German pipe manufacturer turned itself into a modern telecommunications company. On the capital market, start-ups with new business ideas find speculators who in turn are constantly on the lookout for crazy but lucrative ventures in which to invest their money, preferably others? money, until ? ideally ? a software tinkerer becomes a global conglomerate. The securities trade is in constant need of such investments to grow.[18] For that reason, the list of finance capital?s demands includes the privatization of services, which traditionally include government-regulated ?public services?: an investor doesn?t have to know anything about medicine or water lines, rail transport or education to discover the same thing in all pertinent sectors, namely, an insatiable need for capital, and to turn universities, nursing homes, or highways into profitable investment opportunities.
With their solid judgment that a country needs nothing more than capital to flourish, but quite a lot of it, capital market actors don?t just go after companies whose ability to issue paper money-capital they see as not yet exhausted, but after entire nations whose economy, according to their expert opinion, suffers from a lack of capital. They know, demand, and offer the necessary treatment: the establishment of a capital market on which money ? from outside, but also all that can be made available locally with their expertise ? can flow into freely tradable promises of returns. Of course, for a flourishing securities market, these returns, depending on the situation, have to turn out particularly high, especially when the earning power of the country is in a bad way. And they must be guaranteed by the local government, especially if it only has few and poor financial resources at its disposal. In this manner, finance capital turns whole nations into objects of speculation. And it either establishes a base for itself in this way ? a comprehensive, fully functioning, profitable command of money over societal labor ? because the targeted nation manages to turn itself and its people into a site for ?real economy? business profitable for finance capital, or it reduces the object of its speculative interest to exploitable ruins. In some cases, such as in the former members of the Eastern Bloc, the results of its development work are then called ?transition economies.? In other cases, they are called ?developing countries?; and if the financial world retains its optimism, it speaks of entire states as ?emerging markets,? whereby ?market? means nothing more than their business of turning debt into money-capital.
So it is not surprising that for managers of financial capital, the whole world ultimately represents an ensemble of investments, better or worse, actual or potential. Unfortunately, that is not just the narrow-minded view of people whose profession after all consists in creating loans of all types and trading with them profitably. Throughout the business world, the capital markets, where credit institutions accumulate asset values, hit upon a need that turns all social endeavors relating to the production, distribution, and consumption of any useful stuff into use cases for applying the techniques of finance capital.
This need aims at the disposal over additional money of others with which the result of capitalistically used private property ? its increase ? can be improved. And it does not limit itself in any way to the use of commercial credit and loan capital, but discovers in every invention of the money economy an instrument that provides access to others? money and helps them succeed in competition for profits. The familiar achievements of a ?competitive enterprise? always come about through the use of these indispensable instruments; it achieves its success as both object (target) and subject (initiator) of the speculation that resourceful bankers devise. In both roles ? that of object and subject of finance-capitalist calculations ? industry and commerce are steadfast in their ?confession? that they have no purpose other than to increase the power of their capital,[19] and attest to the exact same purpose pursued by food or car manufacturers as by banks.
The extensive involvement of all significant ?real economy? companies on the capital market, where they act as both suppliers and buyers, makes convincingly clear what is meant by the ?procurement of others? money? in these spheres of economic activity: by taking advantage of the equation, ?credit = capital,? in all its established variants, private companies take part in the business success of all other capital; their own capital accumulation is the means to enrich themselves on the growth of competitors, and the capital market provides access to all the profitable ways to use money. With their command over trade in investments, banks and stock exchanges serve as trustees of the capital of society; and they occupy this position in the form of a separate business, whose size enables them to join ?on their own account? in the competition they organize for shares in the overall growth of the ?economy.?[20] This is how they face the competition in which their colleagues from the ?real economy? offer the most significant evidence of their competitiveness: they seek the favor of all who trade in capital.
Conversely, this function confirms the task of the houses of finance to conscientiously maintain and extend their fostering of ?fictitious? capital.
5. Speculation on speculation: the derivatives business
For companies that operate in the financial sector, the capital market is the perfect means for their growth. Here they refinance their business activities; here they accumulate assets; here they create capital on their own by marketing debt as money-capital. This advantage of the capital market has its price: for financial companies, the trade they pursue there is the condition for their growth. And they have no control over this condition. When they invest money, they are speculating on future returns from others? businesses; what they post as self-accumulating assets ? which, for the most part, their working capital is composed of ? rises and falls and alters its value with the competitive success and failure of the issuers of their investments. In addition, other investors speculate along with them; through their investment decisions, the value of a portfolio is constantly altered, either increased or weakened accordingly. The same effect is produced by new and by changed basic conditions that make accumulated investments look better or worse, without the business and the creditworthiness of the issuer of the affected securities having changed at all. Conversely, financial firms expose the bonds and stocks that they market themselves on their own or others? account to critical scrutiny, one that takes into account anything that affects the value of a security; they create investments and leave it to ?the market? to determine how much they are worth, if anything. With their offers and demands, they exercise their power as agents authorized to command the capitalistic capacity of money; however, the success of their activity as competing individual enterprises, the increased value of their portfolios, depends on the accuracy of their speculative decisions and on their profiting from trade in ?fictitious? capital, which they participate in by issuing and investing in securities. They act as if they have their business perfectly under control, all on their own, and yet are neither more nor less than part of the general course of business.
Hence the risk of ?nonperforming? loans and the devaluation of ?fictitious? capital are part and parcel of the lending business in general and the trade in debt, juridically redefined as money-capital, in particular. Financial companies have to take precautions against the constant threat of falling victim to the markets? judgments on their assets. To that end, they supplement the management of their portfolios ? their speculative dealings with the supply of, and demand for, investments ? with measures that avoid or compensate for ?excessive? losses. The risk-happy community expands its business practices with the need for insurance.
For the demand side, suitable offers are made by specialized firms in the same industry. Of central importance in practice ? and an example of the transitions the speculation business brings about here ? are forward or futures contracts, which have expanded into a complete, enormously high-volume branch of business. The practice of concluding contracts for the supply of a commodity at a later date, but at a currently agreed-on price due on delivery, in order as buyer or seller of a commodity with a volatile price to create certainty for one?s own calculations, did not first arise with securities speculation. Contracts of this kind are commonplace in the trade with raw materials, whose market price has little to do with the cost of production, but rather is heavily influenced by the ups and downs in supply and demand. Financial companies, which hold nothing but risk in their portfolios and constantly take on new risk in managing their portfolios, resort to this business technique. They, too, buy and sell assets with fluctuating prices on a forward basis in order to secure their responsibly managed financial assets against losses or to lock in a desired increase in value in advance.[21] Of course, insuring the accumulation of ?fictitious? capital in this way costs a portion of capital gains if these turn out higher than stipulated in the hedging transaction, or if the feared depreciation turns out in fact smaller than expected. Or, in the case of an ?option? ? a hedging transaction in which the ?insured party? gains a potential advantage by not being obligated to make the transaction as agreed if the price moves in a favorable direction ? there is a fixed premium to pay, the option price. In any case, security comes at the expense of the growth for which security is sought.
This contradiction finds its suitable, forward-pointing resolution in that futures contracts ? already, by the way, in the case where real goods such as oil and coffee are traded on a forward basis ? have long since become the stuff for a speculation of a special kind. On the one side, from the simple, commercial point of view, the ?volatility? of the market price of a commodity to be bought or sold in the foreseeable future represents a threat to orderly transactions calculated down to the last detail; on the other side, a futures contract that is binding for both suppliers and buyers of a commodity acts to remedy the situation. This volatility and its remedy contain an interesting risk to a counterparty who doesn?t want to have the commodity itself, but the difference between the agreed purchase or selling price ? the ?futures? price ? and the actual market price on the date of fulfillment of the contract. For he makes a profit when the then actually prevailing price is greater that the futures price in the case of a committed purchase, or is lower in the case of a committed sale. Otherwise, of course, a corresponding loss is incurred, but apparently that hardly bothers finance capitalists. They have, in any event, always made risk their business, indeed on all the markets where they find a commodity with price risk, so also of course on their own market for their own highly speculative commodity, capital. As a rule, what is stipulated is no longer the ?physical? fulfillment of the futures contract, but a right to the amount by which the stipulated and the prevailing market price on the closing date differ;[22] and so a transaction will in the majority of cases no longer be concluded with a merchant who wants to eliminate the price risk for a good he handles, nor with a security holder or manager who wants to safeguard his asset against rate fluctuations, but between speculators who speculate equally, but in opposite directions on a difference between the futures price and the market price on the agreed date. From the outset, this eliminates the costs for delivering or receiving the goods, whether it be shares or coffee beans, that constitute the basis of futures trading. The commodity, with its characteristics and in its designated quantity, ranks only as a standard of comparison for the futures price, agreed upon now, and the market price on the closing date, if the parties to the contract buy or sell at all. For this reason, the number and scale of the contracts have nothing more to do with the amount of specified goods actually for sale or even existing;[23] they are limited solely by the willingness of the community of speculators to enter into such transactions with each other. In practice, of course, this willingness requires an institution in which interested parties can find each other. This exists in the form of futures exchanges ? each one specializing in particular ?underlyings.? Their crucial achievement consists in operating in a very broad sense as a mediating body ? for which they, of course, charge a reasonable fee. They bring together contrary, speculative assessments of a price or rate trend in a kind of permanent auction that establishes a ?futures? price according to the rules of stock exchange transactions. In this case, one cannot really speak of supply and demand determining price, but rather of a price at which speculators betting on rising numbers agree to do business with those betting on falling numbers. The exchange does not establish a business relationship between the various counterparties, but acts toward both sides as a party to the contract and ensures all the conditions necessary for a steady course of business: it defines the characteristics of the commodity that serves as standard of comparison, the units of quantity that can be contracted over, the amounts of money that can be staked, the dates on which contracts will be regularly payable; for underlying assets that are themselves not a commodity, that have a rate but no price, and are of particular importance for forward transactions with financial risk, namely, for stock market and other indices, they set monetary values per index point. The transactions, so perfectly standardized and structured, then proceed according to a fixed pattern: an affiliated clearing house maintains for each client a clearing account into which an amount is paid for each transaction as security and proof of the seriousness and solvency of the speculator; the amount constitutes a portion of the futures price that, depending on the financial standing of the businessman or the size and solvency of the financial institution involved, lies between 5 and 15 percent; this ratio between the futures price and the amount actually deposited is called ?leverage? in the jargon of the industry, and will yet prove to be a very critical parameter. Posted daily in these clearing accounts are the gains and losses that, for each concluded contract, result from the fact that the speculative transactions of each following day produce a new ? higher or lower ? futures price:[24] when this price rises, the increase is credited to the speculators who bet by purchasing at a lower price, and deducted from the sellers as a loss; when this price falls, it?s the other way around; when posted losses become greater, the account may have to be remargined with an additional security deposit. Otherwise, the contracts will continue as if they were concluded at the currently prevailing futures price, and participate on this basis in the price movement of the next trading day, and so on. At the same time, the exchange provides its clients with the further, important advantage of being able to get out of their contracts unilaterally at any time by entering into a complementary ?offsetting transaction? at the currently prevailing futures price on the same underlying product with the same terminal date; the first contract is thereby ?closed out,? meaning liquidated. The deposit remains on the settlement account plus gain or minus loss, reduced by various fees. A gain ? and this finally makes the matter economically important ? arises from a change of the futures price, i.e., the ideally agreed-on purchase price for the object of value that functions as a standard of comparison. For a speculator, however, the gain ? thanks to the ?leverage? effect ? is measured in relation to that 5 to 15 percent of this sum, which he had to invest in his ?financial bet? by depositing into his settlement account; hence for the counterparty, each percent change in the futures price, calculated as interest on his investment, gives a gain of between approximately 7 and 20 percent. The better the financial standing of the customer, the larger the gain, resulting on an annualized basis in yields of 100 percent or even multiples thereof.
With that, the course of business is complete for the time being: appropriately standardized and organized down to the last detail; and whoever speaks in a professionally competent way about it never tires of informatively ? tending toward warningly ? pointing out that in all this speculation, every gain is matched by a complementary loss of exactly the same size, i.e., no value is created; rather, a ?zero sum game? takes place. This undoubtedly accurate statement, however, raises a question that never finds a satisfactory answer in all the critically advising accounts of the situation: how can a mere ?zero-sum game,? whose implementation causes a lot of business expenses to boot, make it to being a large and respectable component of the honorable financial industry? After all, the info pack includes the fact that the insurance interests of traders and securities portfolio managers makes only the slightest contribution to the magnitude of this line of business, rather it?s the speculative interest that has here created a field of activity for itself. Then come well-meaning, functionalist presumptions, expressed from a higher, national-economic, overall view, about the higher value of this industry, about the wonderful contributions of the futures markets to the transparency of the spot and cash markets and to the correspondingly ?fair? pricing of the underlying securities. Central banks investigate hot issues such as whether the derivatives market rushes ahead of, or lags behind, the market for bonds and shares. But nobody would really maintain that a huge, lively, and ? because it?s perfectly and completely organized ? quite expensive financial speculation business takes place in order to provide speculators with clarity about the parameters of their speculation. And anyway, the truth about such suggestions is entirely different, going more in the opposite direction: the futures markets are a playground for the constant efforts of experts to profitably exploit the lack of clarity in market operations, insider knowledge, and differences of opinion ? their own appraisals held to be true, those of others? always held to be false ? about the course, direction, speed, and effects of speculative operations at various venues. In this case, volatility is good, indeed indispensable, while transparency is dangerous for business. What is important for making this completely organized, speculative uncertainty a source of income, on balance, are the funding and personnel needed to ensure a permanent presence on the market, in order to get in and back out of transactions at any time, to profit from every price variation however small and short-lived, also to realize losses and liquidate bad contracts before anything worse happens. Secondly, sufficient financial wealth is required in order to be able to withstand even greater losses and therefore not have to give up speculating right away.
These actual business conditions make it a bit more clear as to why speculation in futures contracts is a considerable branch of business for finance capital, that is, for whom something like this pays off at all as a permanent field of activity. Of course it pays off for its organizers, the exchanges and financial companies that back it; but their interest in income from fees does not explain the transaction for which fees are charged. Of course, the futures exchanges are, in principle, open to everyone; but the retail investor who tries his luck with a ?financial bet? is not the character to whom this industry owes its size and stability. Of course, all traders and asset managers who actually use futures transactions for hedging purposes are represented there; but that allegedly makes up just three percent of sales. Perhaps the pros ?on the spot? do carry greater weight, the agents and brokers who, for their own account and for the very short term, enter and then exit from the very developments they keep in play on others? orders and with others? money; but this also illustrates how limited their role is. The real players of the industry are the financial companies that have the people and the means to turn futures into one of their regular sources of income, those who maintain permanently large settlement accounts at the clearing houses and only have to deposit a low percentage of the futures price. The fact that the profits they generate are balanced by equally high losses for some other party, that in this respect investment bets are ?merely? redistributed here and no ?value? gets ?created,? leaves these market kingpins quite cold: they do everything possible to be the ones to whom the ?merely redistributed? funds flow and, in any case, who accumulate more gains than losses. For them, this is no breach of the rules of financial value creation, but its essence, the qui
Source: http://mostlywater.org/finance_capital_0
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