I know that The Atlantic ran these stories in part for the absurdity of their headlines. It’s in vogue with populist rage to run stories demonstrating the excess and absurdity of those on Wall Street, to show the unrepentant and illogical nature of the concentrated wealth of America. But these stories, though they seemed intensely bizarre (and I did walk into them thinking, “What the hell, Wall Street?), actually demonstrate some interesting developments in the world of finance—there’s a sign here that individuals are looking for more stability and less risk, and there’s a teachable moment as to what we can expect when we leave massive gaps in our society for the private market to pick up with its own demented, but genius, creativity.
Story one: In the most zeitgeisty move imaginable, some suites have started a hedge fund whose strategy is centered around Twitter. The thing is that the plan isn’t so insane as it sounds—the market being driven by human sentiment about current events and concepts, and Twitter not being able to predict sudden shifts, but being able to measure unbridled human interests well enough, with the proper algorithm you can gauge market behavior three days later using Twitter with almost eighty percent accuracy, barring sudden changes in the national environment.
This is actually rather brilliant. The goal here is to game the system for investors, yes, but it intends to do so in the least risky way possible: through a relatively robust metric of market behavior. It’s not a 1:1 ration so it’s not as if there’s a fix on the market or insider information. But as opposed to using hedge funds to play massive gambling games, the use of Twitter as a guide is an attempt by some on Wall Street to maintain high gains without entering into high risk scenarios. It’s a marriage of technology and finance, of risk aversion and wealth accumulation that isn’t careless, nor is it dishonest and unfair to other investors.
Twitter’s a good call, too, as the self-identification of individuals means that one can both select for opinions most relevant to the market of interest and find information that is actually circulating and serious, rather than testing the truly random anonymous information in comments on sites or the somewhat ambiguous and limited information of Google searches (although there’s a learning opportunity here—compare different online user information sources [comments, Twitter, Facebook, Google] and find which best predicts the market, identify the difference between the sources in what aspects of human thought and reaction they speak to, and better understand the way humans operate as actors in the marketplace and as financial-emotional decision makers). Facebook would be a good target for other hedge funds attempting the same tactic, of course.
The main risk here is the self-awareness factor: what happens when this tactic reaches a critical mass of usage and of awareness such that those most apt at manipulating the Twit-o-sphere can effectively fix the market or commit insider trading? What happens when the metric, which is inextricably tied up now as a cause of market behaviors (given the influence on emotion and knowledge of Twitter and its ilk), becomes autonomous of and begins to attempt to manipulate the measurer? It’s the doomsday scenario, but there are telltale signs of such things happening, so it’s worth consideration.
Story two: Less novel and much sketchier, the financial industry has recently developed something called “death derivatives.” The idea is that investors will sink their money into pension plans alongside the investments of individuals and businesses in the same pension plans. When individuals die before collecting their full pension, the excess payoffs are returned to the investor, whereas when individuals live longer than they paid into their pension to cover, the angel money of the investor will cover the remainder of their life under pension. In the middle scenario, the individual pays as much into their pension as they take out of it and thus the investor breaks even on the risk, having sunk no extra investment into that individual or reaped anything out of their investments.
The icky factor in these investments is that, for an investor to make money, they essentially have to bank on the premature death of individuals in the derivative. It feels a little weird, but in the end is it really so bad?
The population’s getting older, but there’s a significant pushback to moving the retirement age up as compensation, and jobs haven’t magically started to match age with income, so it’s getting harder and harder to pay for our aging and infirm populations. Borrowing against the future is also our first step in reacting to financial duress, meaning in the current environment, with pensions decimated by the financial collapse and being chipped away by the current financial constellation of the U.S., it’s even harder to fund a full pension for an aging population.
Betting on death is unsavory, but someone please provide a better explanation. Outside of the Soylent Green and the Logan’s Run solutions, so long as we continue to age the population through better life extension science, but fail to increase the capability of those elders to work, we will face financial distress. Sure the population creates a boom in industries centered around their care, but without proper pension plans, those industries can’t be financially supported, making this a three-way disaster. If one doesn’t want pushback against longevity itself, and one refuses to alter the way we think about aged workers or government involvement in pensions, then betting on death may be the only option that we have.
Like with the Twitter hedge fund, though, there’s a catch—there’s always a catch. There’s some incentive here for inside trading by medical providers and pharmaceuticals, who might have some gauge on the age of the population and changes therein. That’s not to say we can’t regulate against that sort of thing, but it is to say that where there’s a bet, people will try to cheat. And betting on death opens the doors for some really nasty cheating: lobbying against health care, defunding for medical investments, and (most likely) the recognition of industries most likely to produce premature death and significant investment in the pension plans of those industries.
The first two are doomsday scenarios and any iteration of them we see realized will probably be low-level and ineffective (the sentiment behind it will still be disturbing, though). But the third option is by far the most frightening. It will make financial sense as an investor to bundle together low-level pensions of high-risk jobs. Usually these pensions, often in dying industries, will be highly unstable and that unstable pension will disincentivize the job. But shoring up the security of the pension, in fact making it more robust, through such investments runs the risk of making high-risk, low-life jobs much more desirable by increasing the payoff to the worker taking a necessary gamble on his own life. There’s a chance that the supply-demand logic here will select against workplace reforms and select for dying or impractical industries by making them attractive for workers and more viable for businessmen. It’s an underdeveloped critique, but a valid one. But until we get a handle on national-level ideas about age, aging, employment, social security, and pensions, what else can we fall back on?
Ramble While You Ramble 
Shay
May 23, 2011
I’ll agree that its somewhat comforting to watch the private sector devise ways of coping with the almost inevitable economic instability posed by rising pension costs and the ongoing increases in the numbers of retirees across the developed world. But I think a healthy dose of skepticism is necessary here. I’m not convinced that such (admittedly creative) financial instruments as “death derivatives” are truly a way of making the global financial system more balanced and stable.
In any discussion of the creativity and innovation of the financial sphere, its important to remember how novel the financial sector’s dominance of the global economy is. 40 percent today, less than 10 percent in the 1970’s. This ascendance of the financial sector has had a number of causes – I think the most convicing explanation is Robert Brenner’s diagnosis of a “crisis of overproduction” in the developed world, which required some way of boosting consumption to absorb all of those surplus goods.
So, beginning in the 80’s, artificially-boosted consumption is what we got. As industries left the developed world (with its powerful, living-wage-demanding labor unions), big financial institutions began devising ways of encouraging the American consumer to consume as much as possible even though he or she didn’t have the assets to support that level of consumption. Beginning in the 80’s, household debt exploded (along with a bunch of other embarassing by-products of our consumption-based lifestyle). This boosted consumption has been extremely profitable for finance and other major industries – give loans to the American consumer in the form of a credit card, earn back interest payments; give loans to major industrial corporations, earn back interest payments from a newly profitable company making money off of the American consumer’s debt-spending. But this boosted consumption didn’t solve the underlying contradiction – industry wasn’t as profitable as it had been in the “golden age of capitalism” of the 40’s, 50’s and 60’s.
So what’s the outlet? Financial innovation! Beginning in the mid- to late-80’s, you start to get all sorts of instruments (credit-default swaps, mortgage-backed securities, you’ve read the list…) that can literally create an asset out of something wholly non-material. And those non-material entities can then be turned into commodities, traded, become outlets for investment (by pension funds, among others), and in various other ways bring returns to investors in the form of profits.
One of the most important drivers for this kind of financial innovation – that is, one of the most reliable means for creating value where none had existed before – is risk. Since “risk” is just another word for uncertainty, its extremely amenable to the kind of gambling that finance is most adept at. Credit default swaps are the most striking and obvious example of financial institutions exploiting the inherent uncertainty of the market, but other examples abound – and these “death derivatives” are, I think, simply the latest iteration.
So rather than standing as a way out, as a step towards greater “stability and less risk”, I read these new instruments as yet another sign of the dangerous excesses of capitalism in its neoliberal phase. These are really just a continuation of the same types of “innovations” which steadily led us into the ongoing mess of 2007 onwards. They’re not steps on the ladder. They’re nails in the coffin.
meh2191
May 24, 2011
I wouldn’t say that I think they’re a means of balance and stability in a large and almost philosophical sense. Rather, within our current state of affairs, I think it would be hard to argue that there wouldn’t be a little more instability without this vital plug to a vital market. Even if the answer itself does impose instability, it decreases a level of risk and trades evils.
Let’s put it this way: there’s nothing you’ve said that I don’t agree with. But when we compare the types and levels of risk associated with other forms of immaterial gambling in the financial sector, I find it hard to see death derivates as equally dangerous in their scope or their potential to others. It’s true that they are still risky propositions, but not so much so as past propositions for financial gain. It’s true that they employ old tactics of bundling, etc., so they ought to be watched like a hawk.
You’re right that it’s a nail in the coffin on a larger scale—the failure of any solution to the larger situation you describe is terrifying. Especially in the wake of near financial collapse, to think that no alternative (no viable or popular alternative) could be proposed is horrifying. It’s dread.
But working within the frame of “this is what we have and it doesn’t seem to be going away” these steps, comparative to their past brothers, seem a little less on the grim side. Whether that presents an opening for future wide scale reforms … well it probably doesn’t. Expecting larger endogenous change from within the financial sector, though, is foolish. So looking at it from the perspective of “this is the prevailing system that has little incentive to change its outlook,” a decrease in the risk of a venture (the same type of venture) in a high-risk world is cause for some optimism. You’re right, not much optimism. A grim optimism. But until some better comes to the table from inside or outside, a small decrease in risk within the existing risky institutions is a slight sparkle of a value change or of potential within a sickening but perpetual symbiosis.
Hope found in strange places. Hope remains small just so it can stay alive. Hope is not replaced by a larger or worthier hope until someone can find that hope. And when someone finds a viable hope for a way out of what you’ve described, I’ll be overjoyed.
Shay
May 26, 2011
I feel as if I’ve just been getting progressively more cynical about the current state of global affairs, and have essentially begun to read every political or social development anywhere in the world as in some way either a product of a) the developmental logic of a now-globalized financial sector perpetually seeking continuous gains or b) that sector’s clash with existing social or cultural norms (call me a Marxist…it’s kind of a shame that that umbrella term encompasses virtually every critique of capitalism, but it is what it is). The “Arab Spring” revolutions, current and past political/populist movements in Latin America, the Tea Party…pretty much any political movement can fit into this framework.
But in a way the very fact that some sort of articulated structure is this globalized and universal is, kind of, a cause for hope, or at the very least some sort of anxious, white-knuckled half hope. For the past thirty or forty years, depending on your point of view, the general political and social logic towards the economy (and the financial sector in particular) has favored deregulation, liberalization, privatization, all that crap. I think (hope) we might, collectively – you know, as a species or whatever – be starting to move away from that absolute irrationality. I really think we are, and I feel that, as this crisis worsens or continues (which it certainly must, as we have in no way addressed the underlying contradictions which caused it), the search for some sort of alternative that favors the use value and the social benefits of investments over those benefiting the major financial houses will gain ground. If you follow that logic far enough, a couple of years down the line, you see what is perhaps the only solution or alternative to the current state of completely chaotic and unregulated global finance (and production, distribution, consumption, etc.).
It’s socialization. It has to be socialization. A complete, globally-consensual (to the extent that that’s possible) socialization of the financial sector. It’s really quite beautiful when you think about how, as awful as the consequances of finance’s (read capitalism’s) globalization has been, globalized finance has in many ways provided some sort of skeletal architecture for some sort of global government. Granted, not a government in any way similar to those of existing nation-states today, but one that I think/hope would be able to respond to the 21st-century emergencies which must and can only be addressed by some sort of species-wide collective action.
Of course, this is purely speculation. I don’t know if you’re a Hegelian, Mark, but its really a quite neat and pretty dialectical twist, and if our species is to survive in any acceptable form I think the needed transformations are going to be something along these lines.
meh2191
May 26, 2011
Well I don’t know if I’d say we’re even quite to the point of hope of global financial structures, hah, sorry to rain on the white-knuckled hope parade. But when you think about it, there’s still a lot of valence and contestation … say between the Beijing, Delhi, and Washington models. And then there’s the question about the intersection of finance and local politics and values and whether we value one more than the other and what some regions are willing to sacrifice in the way of rights and political values in return for some manner of economic change. Systems are big and complex (mainly because of all the squirming local components), so I suppose I pessimistically see far too much inertia for much broad-spectrum hope. My only hopes are really within the asylum, as it were.
Again, normatively speaking I see it in a way similar to your vantage. But I don’t believe that my normative beliefs have much sway or value unless I can see a clear, realistic, pragmatic path towards their attainment through the pathways and incentives existing in the current system. And as of yet, I can’t really see any, save for logic and popular desire, which, let’s face it, no matter how lofty we like to make them, tend to actually be rather feeble forces in the end.