If a bank wants to borrow money, a broker needs quickly to find someone prepared to lend at an attractive rate; if a bank wants to lend, he – it’s a predominantly male profession – needs to find a borrower ready to pay a good rate. So a broker needs continuously to know who wants to borrow, who is prepared to lend, and on what terms. As one of them said to me, a broker might ‘speak to his big clients … have conversations with them maybe twenty-five times a day, which is twenty-five times as often as they speak to their wives’.
A broker needs to pass information to his clients as well as to receive it: that’s a major part of what they want from him, and a good reason to use the voicebox rather than the screen.

The brokers’ code of conduct prohibits passing on private knowledge of what a named bank is trying to do (unless a client is about to borrow from it or lend to it), but that restriction leaves plenty room for brokers to tell traders what has just happened and to convey the ‘feel’ of the market. There’s a grey area in which euphemisms can be used: in context, a broker and a trader might both know which bank is meant when the broker says that ‘the usual German’ has just done something.

That’s from Edinburgh Sociologist Don Mackenzie’s extraordinarily rich account of brokerage in the Current London Review of Books (the broader project of which it’s a part is outlined in this 2005 paper). As they say, read the whole thing. However, as Krugman pointed out yesterday, even if these and other credit markets are ‘unlocked’ (which – if the easing of the LIBOR price is anything to go by – they look like they will be) there is still ‘real world’ economic contractions to take place: GM will close plants, regardless of how politicians ‘talk up’ or ‘talk down’ the economy.

Elsewhere: Andrew Bartlett on Boosting First Home Owners Grant:

Why spend $1.5 billion dollars of taxpayer money to push up the price of housing? There may be downward pressure on house prices in some parts of Australia, but it is from a seriously overvalued level. We should try to let the air out of that bubble slowly, not use public money to keep pumping it up, especially when there are still so many problems with housing affordability in other parts of our housing markets.

Update: Will Hutton: The nightmare continues – on a high street near you

Markets are, in very important ways, metaphors.

And three metaphors have really stuck out in my mind over the past few days. The first comes from the inimitable Daniel Beunza, who spent 34 months in a participant-observation study of an investment-bank arbitrage trading room in New York some years ago. Beunza writes:

To answer this question, one needs only ask whether tainted meat scandals ever led to the disappearance of the hamburger. In effect, CDOs and processed meat are ontologically not so different: take some parts, create a whole. Just as it is cheaper to do a single slab of hamburger meat out of different scrap parts, it is more efficient to combine mortgages in a bond that to finance them individually. It is no coincidence that the US –home of the hamburger and McDonald’s– gave the world securitization…

He draws some interesting parallels with Enron, that go beyond the obscene payouts to directors. Fwiw, things are so bad that McDonalds can’t get credit either.

Secondly, I was really struck by these remarks from Gottliebsen in response to the Short Selling ban:

The vicious practice that the hedge funds devised was to locate a highly leveraged company – it could be any trading company, investment house or even a bank. The funds would undertake incredible research looking for a weakness. Sometimes they would discover that there was a weakness in the way a major shareholder had borrowed to buy stock, so that if the shares were driven low enough, the major shareholder’s financiers would sell him out and send the stock down further, enabling the shorters to buy back at huge profits.

Another common scenario was where hedge funds would see that some of the company’s loans had a market capitalisation trigger figure that enabled banks to appoint an administrator if the capitalisation fell below a stated level. The hedge funds would drive the stock down to that level. Sometimes the information the hedge funds used was clearly an inside tip.

Once they discovered a weakness, the hedge funds would borrow scrip from index funds, superannuation funds or others and try to bring on a crisis by ruthless shorting. An essential part of the process was to flood the market with rumours – some Australian companies have reported up to 70 a day. Sometimes a journalist would write a really tough article on a company often inspired by the shorters’ research. The stock would slump. Sometimes the inside information was right and other times it was wrong. It did not matter much.

Of course, there’s more than ‘just’ words at stake here, but a peculiar system that I’m not convinced the kind of Middle Range theories of orthodox economics like Information Assymmetry capture. Rather, much in the same way that the Israeli Defense Force has developed a vocabulary from the works of poststructuralist theorists like Deleuze and Debord to talk about their urban operations, there’s a kind of celebration of the failures of ‘philosophies of the ground’ at work here; a rhizome like burrowing through the epistemic formalisms invented by orthodox economists.

The third metaphor that’s been getting a fair bit of airtime is the End of Kapitalism meme. I think it’s useful to distinguish between capitalisms and Kapitalism: the grand, modern, ideological project opposed by Socialists and championed by the IMF, and the likes of The Economist – who acknowledged that they were open to the charge that “the system we championed has merely enabled a few spivs to get rich.” Looking forward, I do wonder about the extent to which we’ll in fact return to more ‘modern’ forms of fact making as the material realities of both the work commodified by traders and their work itself is made more public. To quote Hillary Clinton, of all people:

“The real problem has always been the way our mortgage system got totally out of whack with new kinds of instruments that were sold many times over with very little regard to the realities of life, human nature and the inevitable ups and downs in the economy.”

The machine dreams of Economists may indeed by useful to account for markets as spaces where anonymity is assured and calculations can take place easily. As numerous commentators have pointed out, traders will probably be able to reach similar net positions to short trading using other tools – a point seemingly lost on the market yesterday.

But, and this is a point largely orthogonal to the Regulation is Part of the Problem chorus, from the ashes of this crisis we need to confront more than ever that social relationships pervade markets through imitation. I suspect that just as the success of LTCM was in no small part due to the reputation of Merton himself, the great unravelling of contracts and elegant instruments will uncover the incredible ambition of economics in practice.

“It is a chicken-and-egg issue,” said Tanya Azarchs, an analyst at S&P. “When Lehman looks as if it’s having trouble raising capital, shares fall. When shares fall, raising capital by selling shares gets harder. Regardless of whether the rumour is true or not, in a way it becomes self-fulfilling.”

Dodging Moral Hazard flagellation left, right and centre, The Fed has attempted to plug the whole. However, the move

… opens a door to a vicious circle. The markets where the stocks used as collateral are traded are the same markets that are now recording sharp drops… So, the collateral that will now be offered to the Fed for the loans will possibly be worth less, indeed, a lot less, than the loans against which it offered. In fact, if the securities firms use the loans to restore liquidity in the markets (and this is a big ‘if’) then prices will be established at lower level. Hence, even in such a situation, the Fed will be left with under-collateralised debts on its balance sheet.

Peter Levin sees worse to come:

This is an institutional collapse, in that we should expect to see a number of institutions falter and then either get bailed out by the federal government, “bailed in” by a consortium of other firms (who would guarantee credit, take on some assets, or both), or bought out. Some of these firms seem like they cannot fail. But they will. We’re talking about JP Morgan, Goldman Sachs, Morgan Stanley. Effectively, all the independent broker-dealers are potentially on the block. More traditional banks with commercial deposits, less leverage, and less exposure to the financial markets as such are in better shape.

(cf. FT.com) He has some excellent suggestions about who to blame, including Robert C. Merton and his disciples.

Similarly, Ben Eltham points his finger, via Quiggin’s proclamations after the Frannie bailout, at teh neoliberalism. There’s certainly some governance reform on the table, not least because Lehman Bros was operating within the relevant guidelines and legislation. As John Carney plaintively queries:

maybe we should start paying attention to the kind of corporate governance reform that works rather than the kind the experts favor

As I’ve noted here before, what ‘works’ – what is considered to be economic – is a thoroughly contingent but not arbitrary process that begins with each actor’s interpretations of a situation. So questions like ‘when will it [the bailouts] end?’ beg questions like, ‘when will publics reestablish matters of fact?’ I don’t think recourse to metaphors like ‘external concrete objects’ is particularly useful in this situation, because in the context of markets, these are always the outcome of agreements on what should count.

Elsewhere: Tyler Cowen engages in some public circumspection about Glass-Stegall.

Joe Stiglitz on comparisons with 1929

Earlier: Kim on the Subprime crisis. nb. If you found Blackburn’s piece enlightening, I suggest you have a go at Martha Poon’s prize winning work on consumer credit score cards

Tigtog has intiated a discussion post here

Update: AIG bailout announced. Quiggin: This is, purely and simply, a case of a speculative financial enterprise that’s too big to fail.. Yuval Millo points out the ‘leakage’ connections.