The Construction of Financial Authority

• In Event: Entanglements of Economics and Politics

Abstract

This paper develops a theory of financial authority that helps make sense of how financial markets have continued to be a powerful force in global politics despite deep crises, widespread failings of liquidity, and (some) material losses. I contend that financial market actors' authority, understood as a mode of power distinct from persuasion and coercion and involving the perceived right of a set of actors to make politically consequential decisions, lies in public regulators' perception of them as competent managers of risk. This perception is based on a set of practices that assure regulators that financial market participants are valuing assets consistently, allowing the price mechanism to function, and guarding adequately against default. I find that particular market practices, including risk models and standardized accounting methods, made regulators overly confident in the benefits of derivatives and the abilities of market actors to prevent crises. However, because of pervasive uncertainty, opacity, and complexity in the market that financial actors constructed through these practices, many of the practices failed to predict and prevent systemic contagion during the 2007-2009 financial crisis. Indeed, the widespread use of some of these practices produced correlation in trading strategies that made the market less predictable and more vulnerable to crisis. Nonetheless, because these practices were so deeply entrenched in the operation of the market, the space for post-crisis regulatory change was and remains highly constrained. Because these practices are constitutive of the market, fundamentally altering them would jeopardize the existence of a market that regulators still perceive as providing a valuable social function by distributing risk. The authority invested in these practices in combination with the structural position of financial markets in national economies and the global economy, has, over time, produced a ratcheting up effect, making it increasingly difficult to subject financial markets to public oversight for both material (financial markets are increasingly enmeshed in state economies) and ideational (as authoritative practices produce financial returns, regulators are increasingly likely to regard them as politically neutral markers of expertise) reasons. This paper has important implications for understanding the conditions of possibility for both the historical depoliticization of financial markets, as well as the potential for destabilizing their authority going forward.

Author

• Erin Lockwood, University of California, Irvine