Doug Henwood has a talent, remarkable as it is rare among observers of the financial scene, for making the obscure clear, the complicated simple and the arcane understandable. His irreverent take on Wall Street is a provocative challenge to conventional wisdom that's great fun to read. Alan Abelson, Barron's columnist
In February 1998, $1.4 trillion a day crossed the wire connecting the world’s major banks. That figure — which captures most of the world’s financial action with the U.S. dollar on at least one side of the trade — was a mer e$600 billion around the time of the 1987 stock market crash. After that inconsequential cataclysm, daily volume resumed its mighty rise, passing$800 billion in 1989, and $1 trillion in 1993 (Grant 1995, 1996). It is a prodigious number: an amount equal to a year’s U.S. gross domestic product (GDP) turns over in a week, and total world product in about a month.
Where does it all come from, and where does it go? Open the Wall Street Journal or the business section of a major metropolitan daily, and you get a clue. Every day, they publish an overwhelming array of price quotes — thousands upon thousands — for stocks, bonds, currencies, commodities, options, futures, options on futures, indexes, options on indexes, mutual funds…. If you own a hundred shares of Iomega, or you’re short wheat for April delivery, then you have no problem deciding what they all mean — your money is at stake. But do all these prices, with acres of type and graphics devoted to analyzing and charting their often fevered movements in loving detail, have any meaning beyond the narrowly mercenary? Is the movement of the Dow, reported in about 30 seconds on every evening network newscast, of interest to anyone besides the half of the population that owns stocks, or the 1% of the population that owns them in meaningful quantity? And do these price gyrations have any relation to the other news reported in the paper or on TV — to the fate of corporations, to the real standard of living, to our public lives?
Figuring that out has to start with a picture of the elements of this financial universe — the instruments and institutions that construct the claims that people make on each other over time and space. These claims are denominated in money, the stuff that economists study, but economists forget that money is a form of social power. One of the persistent delusions of conventional theory is that money is “neutral,” a lubricant with no influence of its own, one that mer ely simplifies transactions in an economy based on the exchange of goods.1 In a barter economy, the seller of wheat would have to find a personal buyer; in a money economy, the wheat-holder can sell for money, and let the system take care of the rest.
Money is a richer phenomenon than that explanation allows; it is one of our fundamental principles of social organization. Ownership is represented through monetary claims, and the exchange of those claims in the financial markets amounts to the social construction of ownership.
Over the last decade or so, these “markets” — usually conveniently referred to as an anonymous external force, as pervasive and inevitable as gravity — have grown enormously. It’s a cliché of the daily press that the markets are now more powerful than governments, that the daily votes cast by the bond and currency markets are more important than elections, legislatures, and public budgets. The cliché contains a partial truth: these markets are tremendously powerful. But they are social institutions, instruments of power, that derive their power in part from the sense of powerless awe they inspire among non-initiates. Say “the markets won’t like” a minimum wage increase or a public jobs program, and critical scrutiny often evaporates, like wishes crushed by the unfriendly voice of God.
While modern financial markets seem sublimely complex, they’r e essentially composed of several basic instruments and institutional participants. Most of the instruments, despite their apparent novelty, are quite old, their age measured better in centuries than decades.