Financialisation and the downsides of liquidity

January 20, 2019 (1140 words) :: One of the justifications behind the rise of the financial industry is that it provides liquidity. But liquidity isn't always a good thing.
Tags: financialisation, public-services

This post is day 20 of a personal challenge to write every day in 2019. See the other fragments, or sign up for my weekly newsletter.

If you ask someone who works in finance why they believe the financial industry is necessary, a lot of the time the answer will boil to: it provides liquidity. It removes inefficiencies when it comes to spending money on the part of consumers (who want to, say, buy a house) and businesses (who may need access to credit in order to start up, expand or just maintain their everyday operations). It’s this provision of liquidity, and the implied efficiency gains that result, which legitimates the industry.

But the pursuit of liquidity as an end in itself is misguided. Liquidity is only valuable insofar as it removes inefficiencies from a process that is good - when the asset in question should, indeed, be an asset. That isn’t always the case. There are loads of things that are currently being treated as financial assets when they shouldn’t be, but for this post, I want to talk about housing.

Max Haiven’s Cultures of Financialization (which I also quoted in yesterday’s blog post) has some thoughtful insights on the liquidity provided by financialisation, and why we should think of it as entwined with the phenomenon of precarity.

Generally speaking, for an asset to be considered liquid, it must be easily transformed into money at the expected price. When it comes to financial assets, liquidity depends on fairly simple factors, like how much you’re trying to sell and how many other people are trying to buy that asset. For example, if I buy one share of Amazon at $1,696, then immediately try to flip it, I should be able to find a buyer pretty quickly at roughly the same price (minus some transaction fees). Jeff Bezos, on the other hand, would have a lot of trouble liquidating all of his 79 million shares of Amazon; it would be very difficult to convert that all to cash at anywhere near the expected value (of ~$130 billion).

For less virtual assets like housing, the calculation is a little more complex, because sometimes work needs to be done to actually make it tradeable on the market. For example, if I owned a house in central London and wanted to sell it off, then usually one condition is that it has to be empty. (This is actually not always the case, as houses are sometimes bought solely as rental properties, whereby the renters just pay rent to a different landlord after the property switches hands.) Let’s say I don’t live in the house, but instead am renting it out, and the current tentants can’t be legally evicted with less than 2 months’ notice.

That limits my liquidity. Now, if maximising liquidity were my primary goal, then my options would include: paying the tenants a small amount of money in exchange for them voluntarily leaving; evicting them anyway and hoping that they don’t know about their legal rights; hiring someone to kill them and dump their bodies in the Thames. Once the place is empty, and maybe fixed up a bit to make it more saleable, then liquidity is bound to be quite high, given the state of London’s housing market.

So liquidity, in this case, implies treatment as a financial asset. It implies commodification. But when something as fundamental as housing becomes a commodity assessed primarily for its potential value on the market, the outcome for individuals is precariousness. People get evicted because their landlord, who sees the property solely as a vehicle for generating returns, decides they can charge more rent for it, or because they want to sell it off entirely (because they want to reclaim liquidity). In the context of public services, liquidity means privatisation, which means the provision of essential goods and services becomes first and foremost a financial asset. Haiven writes:

When state programs, social movements or resolute communities resist the commodification of life (for instance, the privatization of water, the transfer of child- care into the corporatized service sector, or the degradation of their environment), markets are rendered less liquid. (p.52-53)

But the greater the liquidity of the market, the more precarious life becomes. And in that precarity, individuals are cajoled and sometimes forced into turning to finance itself as their saviour, in a vicious cycle of ever-increasing financialisation. They take out pay-day loans or rack up credit card debt in the hopes of staying afloat. They “invest” in themselves, as good little entepreneurs-of-the-self, by taking on student loan debt. As Haiven puts it:

Financialization, then, drives and benefits from both precariousness and is presented as its purported antidote. […] market pressures to privatize, deregulate and otherwise dismantle the social welfare of the state have created conditions in which social life is rendered more precarious than ever, with access to old-age security, healthcare, education, disability benefits and other forms of insurance increasingly left up to individuals and their lonely financial accumen. In the atmosphere of precariousness, the market then offers itself as the solution. (p.51)

It never ends. It’s a self-fulfilling prophecy. There is no internal feedback mechanism to put the brakes on the system if things go wrong. Instead, the system periodically just crashes spectacularly, as we saw in the 2008 financial crisis, with catastrophic consequences for so many.

If you consider it from this perspective, liquidity is not always a good thing. Sometimes liquidity means kicking people out of their home for no real purpose other than increasing your likelihood of transmuting your property deed into more zeroes in your bank account. Sometimes liquidity means causing unnecessary human suffering.

On the other hand, if you view housing as an asset, then of course you’ll want to optimise for its liquidity. That’s the rational thing to do within our current economic paradigm: if it’s an asset, then it should be as liquid as possible, to maximise efficiency. It all makes sense within the axioms of the system.

But the consequences of viewing housing as an asset are demonstrably monstrous, and once you realise that, you basically have two choices. You can construct an ideology that allows you to ignore that link between cause and effect, in order to still believe that housing should be an asset (and the financial system, more broadly). Or, once you have truly grasped the perversity of the outcomes incentivised by the system, you can start the difficult process of rethinking the whole thing … retrace the assumptions that led to the current conjuncture, and follow them back to the origins in order to understand how to reverse them …

To sum up: financialisation is bad, and housing in particular should not be a financial asset. There are lots of other things that shouldn’t be treated as financial assets (peoples’ attention, in the context of advertising; education; and even workers’ income), which I’ll cover in future posts.

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