Teaching the Crisis: A Primer

Abstract

In this article, we provide a ‘road map’ for teaching the global economic crisis (the Crisis hereafter) sociologically, using Kindleberger’s schema of financial crises. The causes of the Crisis are often associated with financial and economic technicalities, and we provide readers who are unfamiliar with the jargon of Collateralized Debt Obligations and Credit Default Swaps with a summary of the role played by these and other financial products. We seek to situate technical finance within the sociological frame of reference, where rationality and reality are areas of contention, rather than mathematical certainty. The article seeks, throughout, to foreground the social processes behind the credit bubble which burst in 2007. We argue for an understanding of the Crisis which takes into account the social totality, taking in culture, ideology and discourse, as well as political economy.

Keywords

crisis financialization ideology Kindleberger pedagogy sociology

Introduction

In our article, we offer reflections on our experience of teaching the Crisis from a sociologically informed perspective. We should be clear that our audience is a diverse group of final year undergraduate students of economics, business and finance, with some also following pathways in politics and social studies. Thus our aim is not primarily to teach business and finance to sociologists, but to teach business and finance sociologically. Engaging in this article with a wide sociological audience, we have also tried to include thoughts on how to make a sometimes technical subject accessible to those coming more recently to economics and finance, and much of our literature is selected for its sociological applicability, and its accessibility to students and scholars of sociology. We hope that our reflections are of interest not only to those of us seeking to inject sociological relevance into ‘unexpected places’ (Greenfield, 2013) such as business and finance, but to sociologists working in sociology departments, teaching sociology – and explaining the Crisis – to sociology students.

Teaching across Knowledge Contexts; Finance, Economics and the Social

A central challenge in teaching the Crisis sociologically stems from the nature of the fields of knowledge most closely associated with it – finance and economics. The causes and consequences of this particular crisis have been widely debated by academics and policy makers across the world (Engelen et al., 2011; FSA, 2009), and a plethora of preventive policy recommendations have been devised on the back of reviews by technocratic elites (BIS, 2012). Yet what is puzzling (to the sociologist in particular) is this framing of crisis as a distinct technical/economic problem. Studies of the Crisis too often focus on the financial architecture of derivatives – on complex mathematical formulae such as Gaussian Copula and Monte-Carlo estimations (Callon, 2007; MacKenzie, 2010), and examine institutional and expert interactions associated with the Crisis (Engelen et al., 2010; Montgomerie and Williams, 2009). These explanations are vital to increasing our understanding of what went wrong, but at the same time they are often presented as technical reports, filled with jargon and abbreviations (BIS, 2012; FCIC, 2011). This discourages those without technical economic knowledge from participating in debate.

Our aim of teaching the Crisis sociologically within a business school context is situated in the long-established tradition of connecting sociological and economic thought dating back to the late 19th century, as well as a fundamental belief that ‘business’ and ‘society’ are not two distinct realms. Early socio-economic accounts by Marx, Durkheim, Simmel and Weber remain influential, because they open up a dialogue between two poorly interacting disciplines (Swedberg, 2003: 1–22). Yet following these works that studied and combined economic and social phenomena, the division of intellectual labour driven by the emergence of disciplinary university departments (Ingham, 1996) has meant that an adherence to disciplinary norms has remained.

In the wake of the Crisis, a Keynesian resurgence driven by high-profile economists such as Galbraith (2008), Shiller (2008) and Stiglitz (Newsweek, 2008) has advocated greater government control over the market’s ‘hidden hand’. We believe that distinctly sociological aspects are equally relevant to this debate, particularly those that combine economic awareness with awareness of social processes, cultures, and (irrational) human behaviours in economic life (Clarke, 1990). We build on concepts from Hegelian and Marxist thought and developed through the work of later scholars such as Lukács, Gramsci and the Critical Theorists. Adorno and Horkheimer, for example, followed Marx in positioning the economic substructure as the determining factor in the last instance – but importantly, a factor which is in constant interrelation with other elements of daily life (Horkheimer, 2002[1949]; Horkheimer and Adorno, 1973: 56). We inherit this notion of a totality of social relations, where the task of the sociologist is to uncover ‘the social processes that underlie the historical development of capitalism, processes which appear in a fetishised form as the quantitative determination of economic magnitudes’ (Clarke, 1979: 4).

Pedagogic Philosophy and Strategy

Our pedagogic philosophy recalls that of Freire in seeking to develop students’ ‘critical consciousness’ (1972: 47), rather than follow a purely didactic, ‘banking’ model of education (1972: 45–59). Exploring complex ideas with large student groups does not always lend itself to a ‘dialogical’, ‘problem posing’ approach (1972: 53–4), but the small group seminars making up an additional dimension of the course gave students a forum for critical engagement with lecture content and the Crisis more broadly, in a collegial context. In our approach to assessment, we made it clear that students’ essays on the Crisis should demonstrate skills of individual research and critical thinking. Students have begun calling for economics syllabi to engage with heterodox theories of the Crisis (for example, the Post Crash Economics Society at Manchester), and our article is in this spirit of moving beyond the mainstream, and beyond disciplinary boundaries. To strengthen the sense of interdisciplinarity, and to help students get a sense of the Crisis as the object of global debate across various fora, we encouraged them to follow discussions on the topic in the contemporary public sphere, broadly conceived. Students certainly have access to the internet, and to quality international news media through the university. We decided that creating a Pinterest page would provide students with an appropriate starting point, and guide their sense of what constitutes suitable material beyond formal academic writing. On a similar theme, although we have not yet fully explored these, we feel that online social media such as blogs and micro-blogging (Twitter, etc.) would offer students an opportunity to strengthen the dialogic and participatory nature of their learning experience.

Our pedagogic strategy aims to give students a ‘workable map’ (Greenfield, 2013: 3) of the ‘interconnections between the economic and the other social dimensions of the crisis’ (Clarke, 1979: 6). To help facilitate this, we chose Kindleberger’s schema which emerged from his seminal book Manias, Panics and Crashes (2001). Building on the work of Minsky (1972, 1975), Kindleberger argues that finance is inherently unstable and that financial crises are caused by a series of events beginning with an exogenous shock to the macro-economic system, opening up new sources of profit. This promise of future profits attracts speculators who enter the market, and the intensity of inflowing funds creates a bubble that ultimately bursts, resulting in crisis. This process can be understood in five steps: 1) Displacement, 2) Credit Expansion, 3) Speculative Mania, 4) Distress and 5) Crash and Panic. Crisis in Kindleberger’s schema is not only a product of economic processes, but is linked to mania which emphasises ‘irrationality involved in the process’ (Stearns and Mizruchi, 1994: 294). Kindleberger’s recognition that the causes of economic crisis go beyond technical, quantitative issues of finance and into the realm of discourse and rationality opens up the wealth of sociological themes which we wish to explore, but which often remain unspoken in mainstream explanations.

Freire calls on teachers and researchers to look upon the social:

… as a totality, and visit upon visit attempt [sic] to ‘split’ it by analyzing the partial dimensions which impress them. Through this process they expand their understanding of how the various parts interact, which will later help them penetrate the totality itself. (1972: 83)

As we demonstrate in this article, each stage of Kindleberger’s schema situates the unfolding of the financial crisis in a way that allows us to tie together the ostensibly disparate elements which make up the social world. If elements of social life (working, consuming, believing …) are to be seen as ‘moments’ within a totality (Clarke, 1979: 9), we found Kindleberger’s schema useful in helping students develop a way of thinking about crisis as a ‘moment of moments’ where ostensibly independent processes in social, economic and political life come together to trigger crisis. Students also get a sense of the Crisis as lived experience, rather than simply an academic topic, and can relate the prevailing beliefs and behaviours of each stage not only to the path-dependent action by elites, but to the various sociocultural and political-economic dynamics that fed into the Crisis. As we have refined our strategies of linking theoretical academic debate and ‘real-world’ observations, students have told us that this is something that they particularly like about the course. This approach has been mirrored in many of the students’ written assignments, with the strongest drawing not only on theoretical frameworks, but on contemporary social processes and relationships we have observed, and discussed together.

Our strategy is to outline each stage as comprising the following elements:

Finance and economics

Policy and institutions

Social structures and relationships

Culture and human behaviour

Ideology and discourse

If appropriate to the course structure, each element of the ‘displacement’ stage could merit a lecture in itself, covering these as longer-term processes of socio-economic change underlying the current crisis. In lectures on the Crisis, we used headings to guide students as we progressed through the realms of the financial, political, social, etc., connecting them together as we went. This was done then, not to highlight any demarcation between these realms, but on the contrary to reduce any sense of them as separate in reality, and to build students’ ability to make connections between spheres in the sense of their analytical strategy.

Kindleberger’s Schema

Displacement

In essence, this stage outlines a large event (or displacement) that changes expectations of market participants and introduces a new source of profit. The emergence of the financial crisis is not in fact a result of one clearly identifiable event, but can be traced back to a number of events that influenced the behaviour of financial market actors.

Finance and Economics

It makes sense to start by discussing developments within modern finance and institutional arrangements that govern finance, because they are fundamental to understanding what happened. It is important to stress that modern finance has become increasingly powerful since the 1970s because it provides business school academics and students with analytical tools, yet remains closely connected to macro-normative economics (Miller, 1999). Miller and others (Caldentey and Vernengo, 2010; MacKenzie, 2010) point out that at its core, finance is underpinned by four models that are instrumental to the growth of the industry, financial innovation and the regulation of the sector: Capital Asset Pricing Model, Efficient Market Hypothesis, Modigliani-Miller theorems and the Black-Scholes Option Pricing Model.

Leaving aside the technical content of these models, students must understand that they are based on unrealistic assumptions that do not reflect the ‘real world’; perfect information, market equilibrium and rationality. Unlike economics, finance does not task itself with interpreting and predicting reality, but makes it its business to shape and transform real world developments exemplified in regulatory practice, shareholder value maximisation and financialization. Advances in finance and the conviction that risk is manageable contributed to the development of increasingly complex derivative products whose primary functions were to hedge and mitigate risk, and to open up new markets for speculators by exposing them to otherwise non-tradable markets (weather derivatives for example).

Collateralized Debt Obligations (CDOs) and Credit Default Swaps (CDSs) are two products that illustrate these primary functions and students need to understand these at a basic level, because they are implicated in causing the financial crisis (for a lively and accessible introduction see Lanchester, 2010; Mason, 2010; and Hirsch’s YouTube videos, 2008a, 2008b). A CDO is an asset-backed security in which various forms of debt obligations (loans, mortgages, bonds, etc.) are structured in tranches. Because each tranche is associated with a certain risk of default, investors can invest in tranches that match their risk appetite; thus, this derivative, in theory, spreads the (default) risk associated with a specific type of asset amongst investors. Investor returns are generated from the underlying fixed-income assets – monthly debt repayments and interest. Investors in the riskiest tranches receive the highest rates of return but also suffer first from default.

CDSs are swaps – the seller agrees to compensate the buyer if a credit event occurs (bankruptcy or loan default of the reference bond). The buyer pays the seller a quarterly premium (of x basis points) to insure against a credit event from happening. If a credit event occurs, the seller of the insurance pays the buyer a pre-agreed compensation; otherwise the seller books the premium as profit. However, unlike regulated insurance contracts, CDSs are unregulated; they are a bet in the market. Neither party is required to own the underlying asset. Initially, CDSs had been designed to hedge against credit events an investor is exposed to; for example, banks hedge the risk that borrowers default. Later on, CDSs came to be used by investors to speculate on the performance of bonds without the cost of buying the bond. The latter point illustrates to students that although designed or engineered for a specific purpose, derivatives are used for purposes other than those initially intended, and have become available because of changing regulatory, social and cultural environments discussed below.

Policy and Institutions

Students need to know that changes in market regulation and policies have been influenced strongly by the rise of neoliberal economic thinking beginning in the 1970s, a movement that gained momentum on the back of Friedman’s (1970) seminal page and a half spread in the New York Times, asserting that business has no social responsibility other than maximising profit and must not be regulated by governments.

Many changes to financial market regulation were implemented under Carter and Reagan in the USA, and Thatcher in the UK (Sherman, 2009). Relaxation of regulation in the USA – the repeal of Glass-Steagall via Gramm-Leach-Bliley (GLB) in 1999 and the Commodity Futures Modernization Act of 2000 (CFMA) – was instrumental in causing the Crisis. It enabled banks to combine (risk-averse) commercial banking and risky investment activities, and ensured that over-the-counter derivatives traded between sophisticated parties would become, de facto, unregulated.

The deregulation of financial markets can be understood as a result of changing attitudes towards market regulation informed by neoliberal economics. Lobbyists push for more deregulation and continuously challenge existing rules. One example is the merger of Citicorp and Travelers Group in 1998 which went against regulation at the time by merging insurance, banking and securities businesses. The Federal Reserve issued a temporary waiver until GLB passed, essentially approving the merger. Finance lobbyists asked for further relaxation to open up lucrative markets based on their new-won ability to join commercial and investment activities via CFMA. They are amongst the most influential – their spending power second only to healthcare lobbyists (OpenSecrets.org, 2013). With neoliberalism and free-market thinking deeply enshrined in the everyday of politics, it is hardly surprising that attempts to re-regulate finance after the Crisis were successfully stalled by industry lobbying (Taibbi, 2013a). Students were particularly interested to hear about the importance of lobbying; like many others perhaps, they were largely unaware of the extent of the penetration of liberal democratic processes by sectional interests – and the central role of money in this penetration.

Social Structures and Relationships

Drawing out the connections between business and political elites in the discussion of lobbying foregrounded for students the human relationships, institutional and indeed personal motivations behind apparently formal political processes. In concert with critical scholars across the social sciences (Blackburn, 2008; Clarke, 1988; Harvey, 2011; Kotz, 2009) we extend this sense of interconnection, and position the rise of neoliberalism as not just an economic doctrine – an ideological framework for financial deregulation – but a force reshaping every aspect of society.

We introduced students to processes such as deregulation, privatisation, and downsizing (Lazonick and O’Sullivan, 2000), in order to demonstrate the socially embedded nature of the causes of the financial crisis. As well as discussing the more immediate human costs of downsizing, we encouraged students to think of it as a process that has shaped the way they live their lives. What particularly caught the students’ attention was a discussion of how life in the UK has changed over the last 30 years; the decline of mass manufacture and the rise of mass unemployment as a way of life and across multiple generations, the tendency for competition for jobs to become ever more intense, to the extent where young people are required to work for free as ‘interns’ – unthinkable only a generation ago.

Processes such as privatisation, deregulation and downsizing can be seen as particularly important because ‘within the totality production is the dominant moment’ (Clarke, 1979: 11), and they are elements related to the theme of class conflict (Clarke, 1988: 311–22). While the concept of class conflict so expressed will be more useful in some teaching contexts than others, it is clear that these continuing processes are connected to the growth of income inequality, an area of clear sociological relevance. CEO pay in the USA ‘grew from 42 times the average worker’s pay in 1980 to 531 times the average worker’s pay in 2000’ (Business Week, 2002), reflecting the power of elites to enrich themselves. The concomitant stagnation in real term wages for workers (Dumenil and Levy, 2008: 224) is a factor that we used to show how interlinked, long-term, socio-economic processes are connected to the most technical elements implicated in development of the financial crisis: new financial products underpinned by the expansion of credit.

A range of authors (Bellamy Foster and Magdoff, 2009; Crotty, 2009) discuss this connection in respect to the most recent crisis, and Clarke (1988) grounds his wider treatment of capital and contradiction in an exploration of the ‘crisis of accumulation’. Helping students engage with this concept not only through but beyond the literature, we chose a YouTube video animation featuring David Harvey as a teaching resource. In Crises of Capitalism, Harvey (2010) explains that since contemporary capitalism depends in large part not only on reducing costs through wage repression and downsizing but on a continued expansion (of consumer spending) it runs up against a contradiction.

To try and connect apparently abstract concepts such as accumulation, value and contradiction, we suggested that in order to overcome this latest crisis of accumulation, access to consumer credit was vastly expanded, and with it came the mania for mortgage securitisation and speculation through CDOs, CDSs, etc. Because it is in the next stage in Kindleberger’s schema that we discuss credit expansion in more detail, our aim here is primarily to link a central cause of the financial crisis with underlying and longer-term socio-economic changes.

Culture and Human Behaviour

Alongside introducing the concept of neoliberalism, we brought in a ‘companion concept’ – financialization: ‘the increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of the domestic and international economies’ (Epstein, 2005: 3). Work on financialization has been gaining traction in sociology for a number of years (Brown, 2012), and as well as introducing students to the political economy of financialization, which focuses on the growth of financial sources of profit in modern economies (Krippner, 2005) and thus the growing importance of finance as a sphere of capital accumulation at both national and global levels, we wanted students to understand how finance becomes culturally embedded, shaping human behaviour.

A number of readings in Erturk et al.’s Financialization at Work (2008) help students understand finance as a cultural phenomenon. In his contribution on the dot.com bubble of the late 1990s and early 2000s, Thrift explains how a ‘cultural circuit’ (2008[2001]: 260) of capital coalesced around the idea of a new economy. Thrift’s piece illustrates three hidden dynamics that are central to the more recent crisis. Firstly, how networks of different social groups interact to produce and reinforce a discourse. The cultural circuit of business school academics, consultants, star financial analysts and the media would be instrumental in inflating the property and derivatives bubble in the lead up to the financial crisis. Secondly, the way in which discourses about finance are able to ‘jump’ from describing trends in the economy to actively shaping them. Thirdly, how gains and losses involved in financial bubbles are unequally socially distributed are discussed. Tellingly, investment bankers and venture capitalists are discursively positioned as taking the big risks, but somehow it is pension funds and ordinary investors who tend to suffer the greatest relative losses.

Ideology and Discourse

Thus are themes of culture, behaviour, ideology and discourse interconnected. For students more steeped in the traditions of political sociology, it would be interesting to extend the discussion to bring in the concept of ideological hegemony, as discussed in Gramsci (1971), following Marx’s observation that ‘the ideas of every epoch are the ideas of the ruling class’ (1970[1845]: 64).

Studying the financial crisis does provide something of a case study of ‘hegemony in action’. Simon Johnson’s article ‘The quiet coup’ (2009) shows how political elites were mesmerised by the cult of finance. Johnson’s focus here is, like Thrift’s, on the cultural circuits that saw political and financial elites intermingle, with the power and mystique of the latter trumping that of the former. The vocabulary of ‘seduction’, ‘illusion’ and ‘oligarchy’ is sometimes imprecise, but articles such as Johnson’s do supply concrete examples of the revolving door between business and politics that help students see the real human relationships behind these more nebulous concepts. In a similar vein, Lanchester talks of belief in the free market and deregulation becoming a kind of ‘secular religion’ (2010: 174), and devotes a chapter to the cultural connections and ideological changes – the ‘funny smells’ that saw finance capital ascend to a position not of primus inter pares, but ne plus ultra.

Discussions of rationality/irrationality have great relevance to the Crisis. One of the most readable accounts of the role of the perceived status of knowledge and reason in the financial crisis is Davies and McGoey’s ‘Rationalities of ignorance’ (2012). The authors portray the discursive frameworks that enabled the financial crisis as a form of ‘social silence’ or ‘strategic ignorance’ (Tett, 2009: 65, 66). In a phrase reminiscent of Gorz’s (2011) concept of economic rationality, Davies and McGoey show how, in the case of the financial elite of bankers, regulators and other intermediaries, ‘it can be economically rational to be scientifically wrong’ (2012: 75).

The contingent, contested and ultimately strategic nature of knowledge and discourse is also the theme for Caldentey and Vernengo (2010). Whilst elements of modern finance they discuss are fairly technical, their core argument is sociological. Although the Efficient Market Hypothesis is in itself of questionable rationality, it served as intellectual legitimation for the deregulation of financial markets; it ‘was an instrument for promoting the increasing power of financial groups at the expense of other groups in society’ (see Cooper, 2010: 79). Interestingly, Caldentey and Vernengo draw attention to the social neutrality of the language of financial modelling – the tendency for neoclassical economic theories to ignore the role of power and conflict in the distribution of income in society. It is this sort of lacunae that our course seeks to address.

Credit Expansion

Ideologies, Finance and Institutions

At this stage we introduced students to changing attitudes towards risk. Instead of viewing risk as something that can threaten business success, risk became an integral part of modern finance expressed in literatures on risk management (Bouchaud and Potters, 2003; for a critical summary see Power, 2008, and Jorion’s 2007 book on Value at Risk). Our ability to measure and manage risk is hugely dependent on data, for example on high frequency trades, available thanks to the growth of information technology, and this successful initial implementation of VaR has transformed the relationship between risk management and shareholder value (Power, 2008: Ch. 3).

Risk modelling uses assumptions to limit the informational input and to make models manageable. These assumptions, often taken straight from macro-economic thinking, change the applicability of the models in the real world. The rationality assumption, in particular, is criticised by many, including Bourdieu (2005), because it moves social agents’ actionability so far away from reality. Crucially, we point out that risk measures are not only used to understand, control and minimise risk; finance has used them to develop markets to trade and capitalise on the origination of new products associated with risk (through arbitrage trading).

The underlying idea of risk management (which the Crisis revealed as fundamentally flawed) is key to understanding the rise of CDOs, because these structures were recognised to minimise risk. Different underlying assets (mortgage, loan, credit card debt, etc.) had different risk profiles. In the event that assets of one class would default, other types would continue to perform; thus losses were limited. Gaussian Copula was used to estimate the probability of default, but according to the model’s estimations, only the lowest tranche (equity) was at significant risk (MacKenzie and Spears, 2012). As a result, CDOs were understood as a riskless investment by many investors, creating a surge in demand that triggered the origination of CDOs worth over US$ 1.3 trillion at the end of 2007 (SIFMA, 2013).

We explained to students that the expansion of the CDO market is linked to lax regulation and oversight, and government policy that encouraged homeownership as part of its asset-backed welfare programme (Montgomerie, 2013; Shlay, 2006; also see ‘Speculative Mania’, below). Credit rating agencies (CRAs) have been pivotal in causing the Crisis. It is the primary task of CRAs to assign credit ratings to a debtor’s ability to repay debt. FCIC (2011) verified that CRAs failed to provide accurate ratings of CDOs because CRAs relied on mathematical models to rate huge quantities of structured debt which would have been impossible had they judged each structure separately. Students should understand the competitive market conditions which lowered rating standards and limited human resources. Accordingly, individual CDOs were assumed to contain the same risk as those rated previously. This misjudgement meant that over 70 per cent of CDOs (and MBSs) were rated AAA, thus they could be bought by any investors, including pension funds who are required to invest in safe products only. Students should read at least two discussions: Benmelech and Dlugosz’s well-written overview The Credit Rating Crisis (2010) and Taibbi’s critical The Last Mystery of the Financial Crisis (2013b).

Social Structure and Culture

Although in lectures we simplified the definition of sub-prime lending to ‘mortgages and loans given to poor people who clearly couldn’t pay them back’, a more technical definition can be found in NCRC (2002):

… a loan to a borrower with less than perfect credit. In order to compensate for the added risk associated with sub-prime loans, lending institutions charge higher interest rates. In contrast, a prime loan is a loan made to a creditworthy borrower at prevailing interest rates.

Nguyen and Pontel (2010) and Taibbi (2011) explain how the unregulated yet lucrative sub-prime loan market made it easy for sub-prime lending to become predatory and fraudulent. Networks of relationships between mortgage agents at different levels led to ‘perverse incentives’ to take on clearly unmanageable risk, since relevant actors were able to pass it on through the securitisation chain with little possibility of adverse consequences for the agent concerned.

Linking back to our earlier discussions of the connection between stagnating wages and the financial crisis, Mason (2010) provides a whole chapter on ‘how the low-wage economy fuelled high risk finance’. Again, our themes of de-industrialisation, downsizing, social change and inequality can be brought into the discussion. As Mason notes, ‘a disproportionately large number of [predatory] loans went to black and Hispanic people: 55 per cent of loans to African Americans were sub-prime, but only 21 per cent of those to whites’ (2010: 89). In terms of social relationships, even the IMF has reported that:

… the financial industry fought, and defeated, measures that might have allowed for a timely regulatory response to some of the reckless lending practices and consequent rise in delinquencies and foreclosures that most think played a pivotal role in igniting the crisis. (Igan and Mishra, 2011)

The Centre for Public Integrity (www.publicintegrity.org) provides excellent resources for students wishing to explore further issues of lobbying and hidden social connections between politics and finance.

We considered it important to link these issues of policy, inequality and ethnicity to the broader social changes we already discussed, in a theoretically informed way. Using financialization as a key part of our theoretical framework, it seems appropriate to direct students to authors such as Aalbers (2009), who shows how the state-centred social rights associated with Fordism (housing, healthcare, education, etc.) are increasingly integrated into the financialized world of markets, derivatives and risk. This is a world where the individual must increasingly take charge of their destiny in negotiating the neoliberal landscape of responsibilities and risk. And so the financial and the quotidian spheres merge. This ‘financialization of everyday life’ is engagingly, sociologically evoked by Martin (2002).

Speculative Mania

Finance and Economics

The growth of CDOs, CDSs and other asset-backed securities has far outweighed growth in the real economy (see Cochrane, 2013) and was financed by creating financial debt on a massive scale (Exhibit 10 in Nie, 2011) using market functions to originate, distribute and repackage debts repeatedly (Engelen et al., 2010). Sociologically, the development can be explored through Marx’s fictitious capital: the origination of (corporate) bonds allocates capital to the borrower (investable funds), yet the bond itself holds a monetary value (for example in form of collateral) for the bondholder (investor) so long as the debt seems recoverable. As Harvey (2011) explains, a shift in the 1970s saw fictitious capital becoming an important source of liquidity, fuelling market bubbles and the dominant source of financial accumulation.

This speculative mania was fuelled by abnormal profits booked along the chain because the actors involved in the process managed to transfer risks to the next party down the line. So it was not only the investment banks who made money by repackaging risk, selling it on to investors and betting on the default of structures and their owners, but also the mortgage broker, originator, the bank that sold the mortgages to the investment bank, and the investors who benefitted financially from the sub-prime mortgage and CDO market mania (see FCIC, 2011; Muolo and Padila, 2008; Taibbi, 2011). To illustrate the huge increase in profits, we discuss with the students charts showing financial versus non-financial profits which can be found on Bloomberg (2010).

Social Structures and Cultural Change

We have already discussed the fact that social inequality has increased since the rise of neoliberal ideology and policy. The ‘mania’ stage is another point at which we can reflect on the way the Crisis was linked not only to financial technicalities but to differentials in power across social groups. In the wake of the Crisis, the 99% and Occupy movements provide a topical backdrop to these discussions, and, in more academic terms, there have been a number of publications linking executive pay in financial organisations to excessive risk taking (Bebchuck et al., 2014). Bebchuck et al. (2009), for example, provide a case study of Lehman and Bear Stearns’s executive pay arrangements in the lead up to the Crisis. Both of these firms were wiped out by the credit crunch, and yet, as the authors show, senior executives can hardly be seen to have suffered the same fate in financial terms, even though their pay structures were supposedly linked to performance:

Altogether from 2000–2008, the firms’ performance-based compensation structures provided the teams of top executives at Bear Stearns and Lehman with cash flows of about $1.4 billion and $1 billion, respectively. (2009: 2)

Kindleberger’s ‘mania’ stage is clearly linked to human behaviour and culture and we stress this to students in various ways. First, we point out that citizens have been actively encouraged to buy homes by the Bush administration’s ‘Ownership Society’ which aimed to increase homeownership to replace public welfare with private responsibilities for individual welfare (Klein, 2008). In the neoliberal era – the era of financialization – homes are seen to represent a safety net in old age and a good investment, as house prices increased dramatically over the last decade (see Census Bureau, 2010). The mass media extensively promoted homeownership as part of the American Dream, further reinforcing demand for second homes as investment through TV programmes such as Flip that House and Property Ladder. Such a cultural spiral of speculation led Shiller to draw attention to the problem of ‘Irrational Exuberance’ (2005).

The notion of consumer culture is a key theme. In a discussion which references sociological classics such as Lasch’s (1979) analysis of cultural narcissism, Konings (2009: 116) draws our attention to the world of consumer capitalism, where the pressures of modern life are temporarily alleviated, but where the reliance on credit for the facilitation of this consumerism means that people are drawn ‘further into their disciplinary regimes’. This discussion opens up a range of sociological pathways on consumerism and (Post-) Fordism, ranging from Foucault and disciplinarity (Fraser, 2003) to Marcuse (1986[1964]), to Baudrillard (2000[1970]). The debate around the supposed liberatory nature of consumerism is summarised in Granter (2009).

Questioning Ideological Norms and Institutions

The notion of a bubble conveys to students the sense of ‘emperor’s new clothes’ associated with the mania stage of Kindleberger’s schema. Looking at the reception of those who sought to draw attention to the dangers of unmanaged risk expansion is instructive. Raghuram Rajan ‘was mocked by almost all present’ (Krugman, 2009) when he did so. Once again, the financial ideologies underpinning financialization are open to critical analysis. One of the founders of the Efficient Market Hypothesis, Eugene Fama, found that talk of bubbles ‘drove him nuts’ and that contrary to what seemed to be happening in reality, ‘people are very careful when they buy houses. It’s typically the biggest investment they’re going to make, so they look around very carefully and they compare prices. The bidding process is very detailed’ (Krugman, 2009).

Whilst the personal stake of Chicago School economists may be opaque, the more prosaic motivations behind the mania associated with key financial actors is easier to grasp. So profitable was the world of high finance in the run up to the Crisis that very few players could afford not to participate in the mania. During the first half of 2007:

Financial companies had been up 5.4 percent through the first five months, according to Standard and Poor […] Citigroup, for example, reported second-quarter net income of $6.23 billion, up 18 % Bank of America had a 5.2 percent increase, to $5.76 billion; JPMorgan’s profit rose to $4.2 billion, up 20 percent. (Dash, 2007)

Distress, Crash and Panic

When a rise in US interest rates caused house prices to fall in some formerly ‘hot’ areas, the value of outstanding CDSs designed to protect investors and speculate on loan quality reached $42.5 trillion in 2007 (Bellamy Foster, 2008). The stage was set for what became known as the credit crunch, which was the proximate cause of the financial crisis. It is not necessary to go through this stage in detail in the current article, but a useful resource here is the BBC’s Global Recession Timeline (2010) and Soros (2008: xiii–xxiv).

Orthodox economic explanations for crash and panic focus on liquidity crisis, but once again the supposedly formal sphere of finance was revealed to be underpinned not by technical models but by ‘unknowables’ and ‘sentiment’, the animal spirits of which Keynes, and later Schiller (2005: 10), wrote. Another counterpoint to mainstream economic characterisations of crash and crunch is given in Clarke (1988). Since it predates the recent crisis by around 20 years, the fact that Clarke’s summary of financial crash (1988: 107–10 inter alia) now evokes such a sense of plus ça change supports understanding and teaching the Crisis not as something exceptional, but as part of the ‘DNA’ of capitalism.

Conclusion

The aftermath of the Crisis has brought anxiety and hardship, with tent cities (Ehrenreich, 2009), food banks and riots becoming emblematic of its human cost. It has also become part of the cultural sphere, with films like Inside Job (2010 – a superb resource for teaching), and Margin Call (2011) alternately explaining, and dramatising, the financial crisis. The Crisis has produced a slew of literary contributions, from Lanchester’s Capital (2013) to Dee’s The Privileges (2010). Other ‘popular’ books such as Ward’s (2010) The Devil’s Casino aim to give an insider’s view of corporate hubris on the part of Lehman Brothers and the like. In the humanities, scholarship around the place of finance in visual culture has surged, as the Show Me the Money project (Knight et al., 2013) demonstrates – a treasure trove of visual resources for lectures.

We have shown how we teach the Crisis in a way that goes beyond finance and economics to uncover the social, cultural and ideological causes of the global economic crisis. In this sense our course is an exercise in totality. Although the epistemological underpinnings to this concept, ranging as they do from Hegel, through Marx, to Lukács and the Frankfurt School, were somewhat beyond the remit of the course, we sought to stay true to this sociological tradition. The concept of financialization helped with this, and we found the literatures of socio-economics and critical political economy followed a similar path. In the era of financialized capitalism, sociological understanding is unlikely to forestall the next cycle of displacement, mania and crash. Be that as it may, it has a crucial role to play in uncovering the discursive contingencies, the hidden inequalities, and the structural continuities behind the global economic crisis.

Footnotes

Funding

This research received no specific grant from any funding agency in the public, commercial, or not-for-profit sectors.

Edward Granter is a lecturer in Organisation and Society at Manchester Business School, University of Manchester. His research interests focus on the Critical Theory of organisations and business strategy, and the changing nature of work from industrialisation to the present day.

Daniel Tischer is a Research Officer at the Centre for Mutual and Employee-Owned Business, University of Oxford and a postdoctoral fellow at WZB Berlin Social Research Center. His research interests include alternative forms of banking, the financial crisis and the process of financialization.

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