I have argued that speculative capital -- capital involved in the trade of financial instruments -- is a subset of finance capital in general, but comes to dominate not just finance, but capital in general during the stage of capitalism known as "globalization." (For more on see a paper on speculative capital, also a paper of networks and globalization which has more on this.) The transition of Goldman-Sachs from private partnership investment bank -- making its money primarily from advising corporate clients, helping companies go public, and facilitating mergers and acquisitions -- to speculation powerhouse underscores the dynamics of how speculative capital rises to the position of control. As a companion Business Week piece (" Inside Wall Street's Culture Of Risk" by Emily Thornton) noted:
Investors argue that trading is booming now while most traditional banking businesses are languishing. Big firms can no longer subsist on underwriting or stock and bond trading as the combination of more rivals and cheap electronic trading drives down profit margins. "Wall Street doesn't get paid to not take risk anymore," says Merrill Lynch & Co. financial-services analyst Guy Moszkowski. The big investment banks add value by 'absorbing the risk that their clients are looking to get rid of.'"
The article quotes financial market historian James Grant: "The world is stretching for return." Speculation can achieve that, while traditional banking activities can't. (Another aspect of speculative capital's clout is the number of Goldman-Sachs alumni in positions of political power: see "The Leadership Factory", another Business Week item.)
I think it is also important to note that large volumes of risk cannot be managed without the aid of computers and digital networks; or, speculative capital can only come to the fore with the introduction of electronics into production. E.g., according to Thornton's article,
Yet for all the risks they're taking on, banks insist they're safer than ever. They've hired many of the greatest mathematical minds in the world to create impossibly complex risk models...
The bank [Bear, Stearns & Co. -- the transition is happening throughout the financial industry - jd] has built such powerful computing systems that Alix [chief risk officer at Bear, Stearns] can reevaluate every day the risks of thousands of positions across the firm's trading businesses under various stressful scenarios to be sure the firm doesn't hold too much of any risky investment at any one time. That type of analysis used to take a week to complete. "The machine works," he says. The degree to which risk management has evolved in the past few decades is astonishing, say analysts.
The transition at Goldman-Sachs from old-line banking services to speculator was overseen by Paulson, including investing mightily in the technology that required to successfully manage the risk. According to a May, 2000 Forbes cover story on Paulson and G-S, "Goldman Sachs will by year's end have spent $5 billion in five years on all this technology, building an arsenal aimed at making money whichever direction the market goes. So long as it goes somewhere. 'Volatility is our friend,' Hank Paulson says serenely. 'If it wasn't for volatility, why would you need Goldman Sachs? Why would you need to take positions or risk?'". Michael Mandel, in Business Week noted that "Goldman, under Paulson's leadership, became one of the greatest and most profitable risk-taking machines ever built."
So what does Paulson's nomination to head up the Treasury Department mean? Because Paulson is such a big deal on Wall Street, the general assumption in the news of the nomination is that Paulson was guaranteed a seat in Bush's inner circle and more clout in domestic and international economic policy than his two predecessors. Paulson's nomination might help calm jittery markets, the "Rubin effect" as Liz Moyers reported on Forbes.com. Through G-S dealings with China, Paulson might have influence on economic relations with China, including moving them to a market-based currency exchange rate. As a big-time conservationist (Paulson is chairman of the Nature Conservancy) he might bring some sanity to the government's policy on climate change.
Michael Mandel argues that Paulson brings to Washington is the ability to explain to Congress and the public the nature of risk in the new economy. This can be translated into explaining why the sources of risk for most people -- cuts in government programs, "free trade", job flight, downsizing, market volatility, etc. -- are good. Neoliberalism is creative destruction of the old bureaucratic, timid ties that bind, freeing up the entrepreneurial risk-taking adventurous spirit blah blah blah. The two previous secretaries of the Treasury came out of old-economy industry (aluminum and railroads), where debt and risk are "bad". In new-economy terms, growth means risk, risk means debt, and no risk, no reward. Goldman-Sachs increased its long-term debt five-fold from 1999 to 2005 ($20 billion to $100 billion). Looked at in "new economy" terms, the U.S. national debt, trade deficit and currency weakening can be seen as "leveraging up" -- taking on risk for big rewards down the road. Paulson will be able to explain why this is good. And maybe he will be able to explain why privatizing social security will be ... ummm ... good. Mandel writes, "Within Goldman, Paulson is known as an exceedingly effective communicator. If he can translate Wall Street's language of speculation into something the public and politicians understand, the President's gamble in appointing him will pay off for everyone."
Paulson has been a supporter of Bush (helping to raise over $100,000 for his campaign in 2004). As a Wall Street Journal article by Deborah Solomon the day after the announcement noted:
Mr. Paulson has generally taken positions that hew closely to the Bush administration's. He has called for open markets, favored Bush economic policies and said deficit reductions should come through spending cuts, not tax increases. In an op-ed article in this newspaper in 2003, Mr. Paulson said the Bush dividend tax cut would spur growth and said the notion that such a reduction "somehow favors the wealthy at the expense of the poor harkens back to an earlier era when only the rich held equities." Last year, Mr. Paulson said that while he was "concerned" about the deficit, he viewed it "as being a necessary and understandable side-effect of what needed to be done to stimulate the economy."
However, the economic policies listed above are not that much different from Clinton's policies. They describe the general neoliberal program of the past 25 years. And one could argue that Bush's actual policies -- the cost of establishing the police state, the cost of the war in Iraq, Congressional pork -- run counter to the neoliberal agenda.
Another, entirely (pardon me) speculative thought: Speculative capital requires some degree of stability in the underlying world economy -- volatility yes, but not so much that it reaches a systemic tipping point. And the Bush administration is making a total mess of things, from the war in Iraq to oil prices to climate change to China to budget deficits and trade imbalance, that "Wall Street", or the representatives of speculative capital, are saying "Enough!" And Paulson is stepping up to try and restore some order.
Time will tell.
jd
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