I’m working on a piece that tackles more directly the sociological causes of the financial crisis. Here is a marker in the sand, my overall assessment. Short, probably cryptic, but what I believe is going on. Yes, I think every section needs elaboration. It will eventually be about abstract finance:
The financial crisis was driven by a confluence of 4 factors: 1) a social technology that transformed specific assets into abstracted risk; 2) a communications and computational technology that allowed these new financial instruments to be calculated and traded; 3) an institutional environment that facilitated the creation of unregulated investment vehicles and rated the resulting derivatives that they produced; and 4) a large pool of leveraged, conventionally-allocated investments that exacerbated systemic shocks by translating them into other markets. In this alternative view, the causes of the financial crisis are a social and technical trading technology, a specialized set of investment vehicles, and a conduit between these vehicles and the rest of the world of finance.
When you have (1) abstract risk, you increase the danger that the people who know how to manage the originating risk are not going to be the same people (or even kinds of people) who are actually managing the risk. When that abstract risk is (2) reified by a pricing technology, it lends a kind of stability and confidence in the qualities of risk that are quite likely unwarranted. If, by law and custom, you can then be (3) able to ‘package’ that into a discrete entity like a fund or trust or structured investment vehicle, you make it seem like there is a really big separation between the new, abstracted, measured risk and the originating risk. And when you have organizations and investors who trade these packaged entities alongside other kinds of entities, all now measured in terms of their abstract risk, you create avenues to spread risk systemically from one kind of market to others.
If you think of the financial meltdown as a sub-prime mortgage crisis, or a credit crisis, you are, in my humble opinion, mistaking the catalyst for the cause.