This week marks a dubious milestone for the financial sector: Monday was the first trading day for NQH20, a water futures contract. According to CNN, this is the first water futures contract ever offered.
The offer has obvious advantages, including giving farmers greater price transparency in a crucial resource. And maybe putting a price on water will increase the incentives to keep it clean. But more broadly, NQH20 is a disturbing advance in the process of financialization – a process with many clear and concrete advantages and major risks that are more difficult to quantify.
Most of the innovations that have broadened the expense base of merchant and investment banking over the past thirty years have involved the expansion of prices and markets into new areas of human existence – such as water. – or towards new levels of complexity, such as futures contracts and others. derivatives. Financialization is also a driver for much of the fintech world, like the many blockchain projects that have aimed (often ridiculously) at doing everything. diamonds to real estate “easier to negotiate”.
Water isn’t the only recent flood line (ahem) in the trend. Also this week, Harper’s immersed in the rise of revenue sharing agreements (ISA), a new type of education funding that pays for the school up front in exchange for a share of a student’s future income. For some, ISAs are a promising new mechanism for financing education. But others fear they will simply reinvent contract bondage for the 21st.st century (Putting prices on human beings has been fundamental advance of financialization).
ISAs are also being transformed into more complex instruments, as the income streams from student repayments are reduced and sold to investors. This echoes our biggest lesson on the dangers of financialization, the 2008 housing crisis, which was caused in large part by the rise of secured debt securities, or CDOs. In these instruments, home loans made and held for generations by local banks were broken up into vehicles containing thousands of anonymous mortgages and released on the open market.
The most dangerous effect of turning individual mortgages into more abstract vehicles has been to separate lenders from borrowers, who have met for so long in person to make deals. The problem was encapsulated by the classic scene of The big court in which the character of Steve Carrell (based on the investor Steve eisman) discovers that an exotic dancer has five mortgages. This is information a more traditional pre-financializing banker would have been more likely to know, and the information gaps inherent in removing human relations from transactions may still prove the Achilles heel of the march towards financialization.
(Side note: A late but brilliant entry into the ‘how did the financial crisis come about’ genre, and a more in-depth exploration of financialization, is the 2019 revealing of banking vet Christopher Varelas. How money got dangerous.)
There is also a deeper risk for financialization, with water as the ultimate example. Turning water, education or housing into entries on a ledger allows them to be traded for each other, or for anything else, thus increasing the efficiency of the market.
But this flattening may hide much larger truths: For example, the water scarcity has been exacerbated by decades of corporate pollution, itself driven by stock market abstractions. Or even the simple idea that water, as a universal necessity for human life, should be revered as precious and managed for the common good, instead of being reduced to a stock symbol that produces a fee for the elite. banking.
David Z. Morris