The Social Meaning of Credit, Value, and Finance
Bruce G. Carruthers
WHO IS NOT PUZZLED BY MONEY? Intrinsically valueless pieces of paper or entries on an electronic balance sheet somehow enable people to acquire items of great worth and command the service of others, to project purchasing power into the future, and generally to sustain their own well-being. Intrinsically valueless, and yet money possesses value. Even if money does not literally “make the world go ’round,” it is nevertheless of great practical concern to those whose lives it governs. For anyone living in a monetized economy, which is to say for people living in the modern world, money is a key aspect of many transactions, relationships, and situations. It is a widespread feature of modern social life. However, the durable and practical interest sustained in money by regular people, who must earn it and then spend it in order to survive, is not matched by scholarly interest. The focus on money among social science researchers ebbs and flows. Classical social theorists were deeply interested in money, but that focus was not sustained by their students. Today the tide has turned, and Viviana Zelizer’s 1994 book, The Social Meaning of Money, made a signal contribution in the transition from ebb to flow.
Foreshadowed by an earlier article (Zelizer 1989), The Social Meaning of Money reframed the discussion of money in sociology.1 Arguing against a perspective that saw money primarily as a quantifying and rationalizing instrument, one with corrosive effects on human social relationships, Zelizer proposed instead that money was imbued with social meaning and significance: it expressed rather than suppressed sociability. “Contemporary sociology still clings to the view of money as an absolutely fungible, qualitatively neutral, infinitely divisible, entirely homogeneous medium of market exchange” (Zelizer 1994: 10). For other sociologists, money was the anonymous embodiment of instrumental rationality, and in mediating human interactions it also transformed those interactions, imposing a reductive quality that subverted their otherwise rich social complexity.
The classical sociologists that Zelizer criticized were not daft, of course. In the marketplace, money commensurates across qualitatively different alternatives, in the manner required by orthodox models of rationality (for example, subjective-expected utility theory). People really can compare apples with oranges when shopping at their local supermarket, because both are valued in monetary terms. Outside of the marketplace, practical enactments of rationality like cost-benefit analysis in public policy, for example, rely on money to measure trade-offs and enable optimal choices. And the anonymity of money is well-reflected in the preference for cash among traders in illegal goods and services, or in informal markets. Cash is more anonymous than other forms of payment, and this makes it easier to conceal the nature of an illicit transaction. However, as Zelizer argued, it is simplistic and erroneous to suppose that money is a kind of financial-chemical agent that dissolves social relations, or that money acts on social relations with one-sided effects.
Zelizer briefly commented on the significance of Civil War measures in creating standardized legal tender for the United States (Zelizer 1994: 13). Previously, the market value of domestic bank notes (as opposed to their nominal value) varied depending on the status and solvency of the issuing bank: not all $1 bills were actually worth $1, nor were they equal to each other. This situation changed with the National Banking Act of 1863, which mandated the establishment of a system of national banks whose bank notes would be backed by Union government bonds. The act bolstered government finances but also created a more uniform currency (Carruthers and Babb 1996). In many other countries during the nineteenth-century, there was a similar shift toward adoption of a single standardized national currency (Helleiner 2003).
One of Zelizer’s main points is that however much modern legal tender may be standardized and homogeneous in theory ($1 = $1 = $1), in practice it is made heterogeneous. Money is useful, to be sure, but how people use it cannot be inferred from money’s purely formal qualities. The introduction of distinctions and categories undercuts money’s fungibility and imparts social meaning and significance.2 The key practice is “earmarking,” a term that in its etymology references a practice in animal husbandry for how people distinguished particular cattle from the herd: an earmarked cow was no longer a generic cow. “The earmarking of money is thus a social process: money is attached to a variety of social relations rather than to individuals” (Zelizer 1994: 25). Earmarked money is no longer fungible precisely because it has been linked to social relations. These give it a distinctive meaning and use. Since money flows through transactions, earmarks can emerge from the source of money before the reference transaction, or its destination afterward, or both.
Certainly, there are important connections between Zelizer’s work and the literature outside of sociology (Zelizer 2012: 158–62). Recent work in behavioral economics recognizes the significance of “mental accounting” in how people treat money (Thaler 1999). Although modern money is by law perfectly fungible,3 its allocation into different “accounts” violates that fungibility and affects decisions both ex ante and ex post. And such “accounts” shape various aspects of intertemporal choice (Shafir and Thaler 2006). Anthropological considerations of money draw on a wider set of empirical examples and engage different classical theoretical traditions (less Georg Simmel and more Marcel Mauss and Karl Polanyi), but there is a similarly critical engagement with orthodox notions of market money (Maurer 2006; Hart and Ortiz 2014).
Zelizer’s analytical points are developed through her discussion of money in the United States between the 1870s and the 1930s. Although her arguments are quite general, the historical evidence is drawn mostly from domestic, gift, and charitable money (1994: 30). In describing various earmarking practices, for example, Zelizer considers how housewives physically earmark gift monies; how people segregate monies spatially using piggy banks, jars, or stockings; how people earmark money via specific uses, such as the purchase of children’s clothing; or how money is earmarked via users, such as an allowance for children or pin money for a wife (Zelizer 1994: 208–9). The book’s focus on households and charities means that other kinds of money, specifically “market money” are neglected, and Zelizer explains why she limited the scope of her investigation (34–35). Elsewhere (Zelizer 2012), she develops the discussion of earmarking in organizational settings. What I will do here is to extend Zelizer’s agenda into the world of formal organizations and contemporary high finance. How does money work in the nondomestic world of budgets and banks, derivatives and debts? Does her analysis still offer insight in this broader context, or are cultural nuances and social designations largely confined to the household? In short, does market money also have a social meaning?
One reason to consider such an extension is that households are themselves increasingly engaged with the outside world of finance (Fligstein and Goldstein 2015). Their informal domestic monetary practices must now link, in some fashion, with formalized market-based finance. In recent decades, “financialization” in the United States has affected corporations, financial institutions, and households. American families have become increasingly engaged with the financial system by using a broader array of financial services and increasing their ownership of financial assets. The problem of the “under-banked” continues, of course, so there is considerable variation among households in their use of finance. But if the typical middle-class, home-owning household in the 1960s had checking and savings accounts, a thirty-year fixed-rate mortgage, and life insurance for the male breadwinner, today’s households use a greater variety of more complex financial services and products (variable-rate mortgages, home equity and student loans, multiple credit cards, 401(k)’s and other savings vehicles, mutual funds, and so forth). Today’s households also increasingly purchase goods on credit and so have to service more debt with their earnings, although after 2008 overall leverage has declined (Federal Reserve Board 2006, 2014).4
The applicability of Zelizer’s arguments is also worth considering because of how much money and finance have changed, even since the publication of her book. Starting in the 1980s, the general process of financialization continued into the first decades of the twenty-first century. Deregulation of the financial system preceded Zelizer’s book, but it continued afterward. Financial innovation has transformed how financial systems work (witness the explosive growth of financial derivatives markets); financial market activity continues to grow in importance; and today’s monetary landscape includes new payment systems (PayPal, m-pesa, SMS banking) and digital currencies (Bitcoin, Lite-coin). Have these new financial objects been incorporated into social meaning systems? What kind of cultural framings have new financial relationships received?
One obvious extension is from households to formal organizations. Surely large-scale organizations operate without the accretion of private meanings and domestic sentiments that affect household behavior. But in fact, bureaucracies routinely undertake the same kind of categorization and earmarking as households (see Simone Polillo, in chapter 5 of this volume). Indeed, organizational budgeting practices typically render money nonfungible (for public sector budgets, see Rubin 2014: 1, 23, 60). Funds are put into different categories, and, subject to a specific (monthly, annual) budget planning cycle, cannot, except in special circumstances, be moved between categories: a surplus in one place will not offset a deficit in another. In other words, a dollar in the “salary” category is not the same as a dollar in the “capital expenses” category. Budgetary categories earmark money for specific purposes, and their special purpose defines their distinctive meaning. In practice, budgeted resources animate organizational activity and activate its relationships with external constituencies. Over time, of course, money can be shifted between categories. So even if budgeted funds are incommensurable in the short-run, over the long-run their flexibility and liquidity returns.5
If budgets concern the internal priorities of an organization, then what about their external relations? After all, Zelizer (1994: 25) states that earmarking is a social process concerned with relations rather than individuals. This suggests that we should consider outwardly directed actions and transactions to assess the broader applicability of her claims. What about market exchanges? In the next sections, I consider two other areas of financial activity: credit and debt, and financial derivatives.
Although a dollar bill (or euro note) most prominently symbolizes money today, in fact contemporary economic transactions usually do not involve the exchange of cash for goods. Rather, people and organizations buy on credit. They borrow in order to make a transaction, so their effective purchasing power comes from the credit they can obtain rather than the cash they possess. For example, many firms obtain trade credit in order to make purchases from their suppliers: they receive the goods and then pay their suppliers after some conventional period of time (thirty days, ninety days, six months). Or an individual might borrow money in order to purchase a home and then repay the loan over a period of years.
Cash is generalized purchasing power. Anyone who possesses cash can acquire whatever money can buy. Credit, by contrast, is always earmarked and depends on how borrowers are classified (Fourcade and Healy 2013). That is, credit involves purchasing power granted to specific borrowers or buyers. It is earmarked for their use only. And this process of earmarking is fraught with significance because, in effect, the entities that grant credit try to distinguish between those who are creditworthy and those who are not. The categorical distinction is a matter of practical necessity because a lender who lends to all who seek a loan will soon be out of business. So credit earmarking is preceded by a classificatory and evaluative process that relies on financial information and formal credit scores (Poon 2009).
Lenders have also relied on a variety of social heuristics to help identify the creditworthy (Moulton 2007). They have used features like gender, race, ethnicity, and marital status to determine who is trustworthy. They exploited direct social relationships and indirect social networks to learn about a potential borrower’s personal character, past behavior, and reputation. They also used those same direct and indirect ties to help make sure that borrowers kept their promises (by, for example, publicly stigmatizing those who failed to repay debts). To be deemed creditworthy was a form of social honor: recognition that one’s status, position, and reputation all signaled trustworthiness.
If credit is always earmarked in terms of who receives it, credit is also often earmarked in terms of how it can be used. That is, a creditor offers credit to a specific individual so that he or she might purchase a specific commodity. Such credit is not fungible. A car loan enables an individual to buy a car, but nothing else. A home mortgage enables people to buy a house, but not groceries, or clothing, or a trip to the Bahamas. Indeed, this type of earmarking helped to motivate the development of credit in the first place. Suppliers provided trade credit to some of their customers so that they could buy goods from the supplier. General stores offered credit to their retail customers so that the latter could purchase store goods. Firms that produced durable goods like sewing machines, pianos, and furniture realized that they had to provide credit to their customers, in the form of installment loans, if they wanted to sell goods (Carruthers and Ariovich 2010: 94–97). Credit drove sales, and lenders ensured that credit could only be used in particular ways.6
Recently, some of these earmarkings have been loosened, so that consumer credit gets closer to the generalized purchasing power of cash. Credit cards, for example, can be used to purchase many goods and services. But even so, such credit is tied to a particular borrower, and its terms are precisely calibrated to the economic standing of the individual debtor. This calibration relies on an increasingly elaborate infrastructure of credit scoring and credit record-keeping that accumulates and analyzes detailed information about the economic circumstances and payment histories of individual people (Guseva and Rona-Tas 2001; Poon 2012). Although credit card systems rely on elaborate information technology systems (starting with the point-of-sale electronic card reader), credit cards still invoke older symbolic associations between tangible value and color: witness payment cards that progress from green to silver to gold and then to platinum, as both the credit limit and social status increase.
Small businesses have often been treated as if the business entity were equivalent to the owner/proprietor. To lend money to a small business is, in effect, to lend to the person who owns the business. On the corporate side, however, even though corporations possess legal personhood, they do not have individual personalities that can be judged from a psychological standpoint. Nevertheless, corporate loan contracts and bond indentures (that is, the legal documents that set the specific terms of a loan) frequently impose constraints and obligations on the borrowing firm that, in effect, render the money nonfungible. Contractual provisions, known as restrictive or protective covenants, tie the hands of the corporate borrower so that the loan cannot be used as generalized purchasing power: it can only be used for those specific purposes that the lender deems appropriate. This kind of legal earmarking is usually done at the insistence of the lender, and is intended to increase the likelihood that the loan will be repaid in full. Such purchasing power is not differentiated because of some cultural logic, but it illustrates that even in the marketplace, credit money in its practical usage is not homogeneous and standardized.
Within unsecuritized credit transactions, there are many opportunities to commingle instrumental and relational considerations (Zelizer 2005): partners can be shown favor by easing the terms of the deal (for example, a lower interest rate on a loan or a higher loan-to-value ratio in the case of a loan secured by an asset) or by adjusting contractual terms if one side experiences duress (Uzzi and Lancaster 2003). Borrowers can informally prefer specific creditors over others in ways that undermine the legal seniority of claimants—for instance, by paying a particular obligation in full shortly before filing for bankruptcy.7 Most borrowers prefer to repay money they borrowed from friends before they repay the bank. Selective forbearance is a good medium for favors from lenders to borrowers, just as preferences are a way for borrowers to favor some lenders over others. Debtors can also help creditors by granting access to profitable opportunities (consider the search for returns when world interest rates are low). Going both ways, the focal transaction can be bundled with other transactions (so-called side deals) that significantly enhance the value for either of the two sides. Such bundling can be accomplished formally or informally and is another easy way to manage relationships even in a highly transactional context.
But the world of credit has been transformed by the process of securitization, where many claims over many debtors are pooled together, put into a new legal entity (called an “SIV” or special investment vehicle), and then new debt securities are issued against that pool of assets and are often ranked by seniority (Shenker and Colletta 1991; Fabozzi 2005). Traditionally, lenders kept loans on their balance sheets until maturity. For example, a bank that made a thirty-year mortgage loan to a home buyer could expect thirty years of monthly payments that covered interest on the loan as well as repayment of the principal. Securitization enabled banks to sell off their loans and get their capital back in much less time than thirty years. It also reduced their regulatory capital requirements and provisions for loan losses. On the other side, buyers of the new securities were given a chance to invest in kinds of assets that had been formerly closed to them, in a highly diversified manner. Many kinds of debts have been securitized, including credit card receivables, student loans, commercial loans, and home mortgages.
Securitization effectively dissolves the debtor-creditor relationship, dividing up the debtor’s initial obligation, distributing it among multiple creditors, and mixing it with the obligations of many other debtors. Securitization turns a credit relationship between two parties into a transferable thing-like financial asset and thus makes it impossible to address relational considerations in the same way as before. No longer could a troubled debtor call on her long-term relationship with her lender to seek needed forbearance, because after securitization that debtor’s obligation had been divided into small pieces and distributed widely into the hands of numerous dispersed investors, none of whom have had any prior contact with the debtor.
In sum, earmarking practices are very common in the nondomestic credit system, for both individuals and organizations. Credit functions as a substitute for money, and so it embodies an important alternative form of purchasing power. But it is rarely a generalized or fungible power, for the ability to complete an economic transaction on the basis of credit is constrained by either the creditor or debtor, or both. Credit is always earmarked in terms of who receives it, and it is often earmarked for how it can be used. Securitization was one of the major financial innovations of the late twentieth-century, and its implications for the relational embeddedness of credit suggests that high finance warrants a more careful examination. It involves formal earmarking, to be sure, but relational earmarks are another matter. The earmarking practices that undermine fungibility appear in some, but not all, forms of modern credit. What of one of the other major effects of money: the attachment of numerical value to objects and activities? Has financialization helped to monetize more of the world? Does everything now have a price?
Derivatives
One of Zelizer’s accomplishments is to caution against any strong conclusions about the supremacy of monetary logic. Certainly commodification is widespread in contemporary market societies, but money’s penetration into social activity is selective rather than universal, and complex rather than monolithic. Even its most direct effect, the attachment of market price to objects, services, or processes, can be problematic. It may seem straightforward to acknowledge that sacred objects or religious artifacts are hard to price in monetary terms, but it is more surprising to learn that financial objects can be hard to value, even by the financially sophisticated and market-oriented actors who create them.
The process of financialization concerns the dramatic growth of financial activities and relationships for both households and firms (Krippner 2011). This includes familiar markets in equities and debt, but financialization can also be seen in the rise of derivatives markets. Not only have these markets grown substantially in the volume and value of trading activity, but they have shifted away from older derivatives based on tangible commodities (like pork belly futures, grain options, and so forth) to those based on financial assets (like currency futures or stock index options). Some trading occurs on organized exchanges, such as the Chicago Mercantile Exchange (CME), but the biggest growth happened in the over-the-counter (OTC) market (Carruthers 2013). The total notional value of derivatives contracts traded in the OTC market now numbers in the hundreds of trillions of dollars and far exceeds the world’s gross domestic product. For decades, the OTC market was essentially unregulated, and it was marked by both rapid growth and near-continuous innovation. The dealer-banks forming the core of the market competed with each other on the “sell” side to bring new and more complex swaps into the market, tailoring these products to hedge the specific risks faced by clients on the “buy” side. Instead of the standardized derivatives contracts traded on the CME, OTC derivatives are “bespoke.”8
The OTC derivatives market represented the leading edge of global finance in the late twentieth- and early twenty-first centuries. It exploited developments in information technology, invented new and increasingly abstract ways to price and hedge risk, escaped regulatory oversight (before 2008), increasingly employed mathematicians and physicists as “quants,” transacted within and across national borders, created new ways to estimate the monetary value of financial assets, and generated big profits for financial institutions. It brought the pure quantitative logic of money to bear on intangible assets of growing complexity. And this new financial landscape was seemingly a tabula rasa, unencumbered by social legacies or the materiality of physical use-value.
One early success in derivatives markets involved the pricing of options. As described by MacKenzie and Millo (2003), the Black-Scholes option pricing model provided a powerful answer to the question of what an option was worth.9 The derivation and adoption of this model transformed options markets and evidenced a type of performativity. As this partial differential equation model was incorporated into various market calculative devices (at first computer printouts, then handheld financial calculators, and later computer screens), the ability to price an option with ease diffused widely. But Black-Scholes did more than answer a specific pricing question; it also served as a general model for how to price financial assets (through the construction of a “replicating portfolio,” and with the assumption of zero arbitrage opportunities).
Contemporary derivatives are traded in two locations: standardized derivatives are traded on organized exchanges (like the CME), and customized derivatives are traded OTC. In the first setting, the exchange offers clearing services (so that there is no counterparty risk) and “price discovery.” That is, contract prices are public information shared among all market participants, and all parties wishing to transact in a particular contract will pay the same price. In OTC, however, transactions are strictly bilateral and negotiated privately. Prices are set privately, as well, reflecting the customization involved in creating an instrument that hedges a customer’s particular set of risks.
Major financial institutions will typically operate in both markets simultaneously, and in meeting their disclosure and regulatory requirements they have to report the value of their assets, including the value of their derivatives positions. Assets and liabilities have to be priced and summed across the entire balance sheet. Modern accounting rules, like “fair value” or “market to market,” specifically require that asset values be estimated using market prices.10 But this apparently simple expression of the dominance of money’s quantitative logic is not so straightforward. In fact, application of “fair value” accounting rules in modern financial markets is highly problematic, for a number of reasons.
Current accounting rules (for example, FAS 157) mandate that financial institutions classify their assets into different categories: held-to-maturity, available for sale, or traded. Only assets in the last two categories have to be “marked to market.” And even then, valuation proceeds through a “fair value hierarchy” of alternatives, starting at level 1, and if level 1 doesn’t work going to level 2, and if level 2 doesn’t work going to level 3.11 Level 1 involves quoted prices in active markets for identical assets (or liabilities) that the reporting firm can access on a certain date. But if such market prices are not available, then the firm shifts to level 2, which involves observable inputs—things like interest rates, credit spreads, or yield curves—for such assets (or liabilities), or quoted prices for “similar” assets (or liabilities). If such observable inputs are not available, or there are no similar assets, then the firm moves to level 3, involving unobservable inputs for the asset (or liability). Level 3 is commonly known as “mark to model” because, in effect, the firm’s “fair value” valuation depends on a model of value. The model generates a value that is then treated as if it were a market-based price.12 To be sure, “fair value” accounting methods generate numerical measures of value, but those values do not reflect underlying market prices in any simple fashion. Rather, they combine a categorical exercise with social constructions that increasingly diverge from the externally based market prices, while at the same time they become decreasingly visible. As financial institutions innovate,13 creating new types of derivatives in order to hedge new types of risk, they necessarily shift from level 1 to level 3. Highly customized derivatives of growing complexity are unlikely to be traded in liquid markets, or even to be “similar” to other derivatives, so their “fair value” must be estimated using financial models.
The status of “fair value” standards became problematic in 2008. In the midst of economic chaos, the US banking community appealed to regulators and accounting standard-setters to relax the application of “fair value.” To downplay market prices, these advocates claimed that markets were temporarily “distressed,” “frozen,” and “illiquid.” They argued that because of the crisis, many financial assets were mispriced by the market, and that it would be mistaken not to acknowledge the divergence of “true value” from prevailing market prices. In fact, that divergence could force banks to write down the value of their assets, and then, in order to remain compliant with capital standards, they would have to sell off assets (see American Bankers Association 2008; Plantin, Sapra, and Shin 2008; Laux and Leuz 2010). Since banks would be dumping assets into depressed markets all at the same time, prices would drop even further, engendering yet another round of devaluations and write-downs.
Contemporary derivatives markets also incorporate non-price-based evaluations deep within their basic contractual infrastructure. For all the celebration of numerical precision that happens in modern finance, not only are there fewer pure market prices than one might expect, but there are other non-price measures that perform important functions. A telling example comes again from the OTC derivatives market. The customized contracts that govern each transaction are created out of the standardized contractual language devised by ISDA, the International Swaps and Derivatives Association. This industry group was founded in the mid-1980s in order to define the legal terms, provisions, and language that undergirds swaps transactions. The standards are contained in the so-called Master Agreement, which is updated by ISDA in order to reflect developments in the OTC market (Harding 2010; Peery 2012: 194–97).
The Credit Support Annex is an important part of the contractual machinery for OTC transactions. Unlike exchange-traded derivatives, OTC markets do not involve clearing services. This means that even after a transaction is initiated, each party still bears the risk that the other party will not fulfill its contractual obligations, called “counterparty risk” (Gregory 2010). The Credit Annex typically deals with counterparty risk, and it does so using collateral: each party is required to post collateral, and in the event of nonperformance by one side, the other side can use the collateral in compensation.14 Collateral is legally earmarked, and even cash collateral is no longer fungible. But how much risk is there, and how much collateral needs to be posted? These are key questions for an OTC transaction, and they are typically answered using the credit ratings supplied by firms like Moody’s or Standard and Poor’s (Gregory 2010: 65–68). That is, the contractual language in the Credit Support Annex often uses the current credit ratings of the two parties to calibrate how much collateral has to be posted and to specify what kind of collateral is eligible (cash, marketable securities, and so forth). So, for example, if one party to a transaction experiences a ratings downgrade (perhaps Moody’s lowers its “AAA” rating to “AA”), then it will have to post more collateral to compensate for the greater risk that its lower rating signals.15 And if the collateral consists of securities, then their rating also affects how much collateral is posted. The riskier the collateral, the more that needs to be posted to hedge counterparty risk.
Unlike monetary prices, credit ratings are not strictly numerical. They are organized into discrete ordered categories that have become durable conventions. Ratings are opinions about creditworthiness used in the contractual governance of OTC derivatives, as well as elsewhere in financial markets. Although the overall transaction will be priced (most likely using “fair value”), its internal structure depends on non-price evaluations.
Outside of ordinary investment decisions and OTC derivatives contracts, credit ratings are important for many prudential regulations and they are key to securitization. Starting in the 1930s, federal banking regulators in the United States used privately produced credit ratings for bank examinations and also to prevent banks from undertaking investments that were “too risky.” The threshold was set by the rating agencies and separated “investment grade” from “below investment grade” securities (Fons 2004). Investment in the latter was prohibited. Similar prudential rules were adopted by insurance regulators at the state level and also for money market funds (Langohr and Langohr 2008: 430–40). Later, ratings were included in global bank regulations such as the Basel bank capital standards. Partly because of their regulatory role, credit ratings also became important for securitization. The financial engineering that occurs in securitization is aimed at producing new securities that receive as high a rating as possible, preferably “AAA.” Indeed, issuing tranches of securities that vary by seniority helps to ensure that the most senior tranche receives the highest rating from the rating agencies. And because of prudential rules, institutional investors around the world are often prohibited from investing in anything that is not investment grade.
The contemporary derivatives market illustrates some significant constraints on the logic of monetary valuation, even in the hard core of high finance. The constraints I have discussed here do not arise from externally imposed social or cultural meanings. Nor do they stem from the workings of the domestic sphere. Rather, they persist in arenas dominated by markets and formal organizations, and emerge from the internal limits of the financial marketplace itself: namely, its occasional but highly problematic inability to generate “normal” or “non-distressed” prices and its deep reliance on non-price-based forms of valuation. Both instances show that even in finance, market price is not the sole arbiter of value.
Conclusion
These brief extensions reveal that Zelizer’s arguments can shed useful light in areas she did not originally consider. I have chosen the topics of budgets, credit, and derivatives not simply because they were not part of Zelizer’s original focus, but also because they are so central to contemporary processes of financialization and the operation of a modern market economy. In a variety of forms, and for a variety of purposes, earmarking occurs in many locations outside the domestic sphere. It turns out that the creation of differentiated categories and the imposition of restraint on the fungibility of money is not something done only by dependent women to manage their pin money, but also by organizations, banks, and other financial institutions, as a regular part of their budgetary allocations. In a variety of ways, fungible money is formally segregated, labeled, earmarked, and even sequestered. Given the obvious virtues of liquidity, it is important to recognize how often, and under what circumstances, public and private organizations try to create illiquidity and how they structure it. To earmark, to reduce the fungibility of purchasing power, is to constrain the discretion of money-holders and to steer them in a particular direction. The budgetary allocation of money, with corresponding levels of fungibility, therefore both enacts and reflects the politics of the budgeting organization: which units receive bigger allocations? Whose discretion is reduced via earmarking? What specific activities and priorities do the earmarks support? The budgetary decisions that answer these questions reflect the broader distribution of political power both within and outside the organization. And earmarks possess substantive and symbolic significance: they constitute important resource commitments, but they can also circulate as public messages about organizational priorities. A broader study of earmarking practices is clearly warranted, which is surely testament to the fertility of Zelizer’s insight.
Zelizer also cautioned us not to exaggerate the effects of money. The ubiquity of modern money does not necessarily mean the ubiquity of valuation via market price. The cash nexus has not encircled and throttled all of social life. Nor, it turns out, has it even encircled high finance. Although market prices are seemingly reliable accompaniments to market activity, and thus can serve as a universal basis for accurate valuation (prices reflect “what the market thinks,” so to speak), situations arise where such prices fail to arise, or to work properly. Simple, standardized assets readily beget liquid markets with public prices (Carruthers and Stinchcombe 1999), but many transactions in high finance involve complex nonstandardized assets where there is no public price. Monetary valuations have to be literally made up, albeit in a manner tempered by formal models and by the epistemic community that designs such models and assesses their “reasonableness.” The latter characteristic usually reflects some combination of experience, status, and convention as valuational practices will seem more reasonable to the extent that they have been used in the past and/or by high-status market actors, and reflect textbook treatments and widely adopted industry standards.16
During a crisis, markets that are normally liquid may collapse in distress and fail to generate meaningful market prices. “Market value,” a seemingly self-evident and natural measure of value, can under some circumstances become so problematic that market participants themselves try to jettison it. It follows that crises are not just financial, that is, about balance sheets and bottom lines, and whether firms are unprofitable or even insolvent. A crisis is also epistemic: can the value of an asset or the extent of a liability still be measured and known? Such epistemic limits challenge decision makers with fundamental uncertainties that increase their reliance on convention, imitation, and other types of herding behavior.17
Outside of crisis episodes, when conditions are more “normal,” other forms of valuation continue to play an important role in making the regulatory and contractual machinery associated with modern finance work properly. Here I focus on the example of credit ratings, an alternative valuation that is made up as a matter of routine, by private for-profit firms. Market ideologues (and critics) may celebrate (or denounce) the dominance of monetary valuation, but market practice reveals a much more complex underlying reality. Markets produce market prices, but non-price valuations help to produce markets. A broader study of the uneven application of market price, as a standard of value, to financial markets is also clearly warranted.
1. Dodd (1994) also provided a major contribution, although his book did not fully register in US sociology.
2. The central role of categorization in the creation of symbolic meaning has been obvious since the structuralist linguistics of Ferdinand de Saussure and the sociology of Emile Durkheim.
3. Legally, an obligation worth $10 can be satisfied by payment of any $10 banknote; for the purposes of payment, all such banknotes are perfect substitutes for each other.
4. Going against this trend, education debts have continued to increase (Federal Reserve Board 2014: 26–28).
5. There are doubtless many reasons for the existence of formal budgets, but one may involve the management of organizational conflict. Explicit trade-offs between alternatives can make quasi-resolution of conflict harder to achieve. Between budgeting cycles, however, money becomes incommensurable, and conflicts between categories and priorities are masked. So there are political benefits to the budgeting process. Consider also the difference between hard and soft budget constraints. The former sets a limit on total expenditures by the budgetary unit and ensures that budgetary alterations are strictly zero-sum. Soft budget constraints offer more flexibility and another way to avoid internal conflicts.
6. Another sales device that involves earmarking, but not credit, is the layaway program. This involves periodic payments of small sums that constitute savings earmarked for the purchase of a particular commodity that often will serve as a gift (e.g., Christmas presents).
7. Such favoritism is termed a “voidable preference.” See Warren and Westbrook (2009: 487, 489–90).
8. Frederick Wherry reminds me that this term is associated with high-end tailoring. Over-the-counter derivatives are not off-the-rack, so to speak.
9. An option contract bestows the right, but not the obligation, to buy or sell an asset at a given price. For example, one might have the option to sell gold or euros at a certain price. It is a relatively simple derivatives contract, with the particular asset serving as the “underlying.”
10. “Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date” (Financial Accounting Standards Board 2006: FAS 157-8).
11. See Financial Accounting Standards Board (2006: FAS 157-12, FAS 157-13).
12. Reliance on models creates a new type of risk—model risk, that is, the risk that an underlying model is fundamentally wrong. Modeling a financial variable as if it has a normal distribution, when in fact it has a Cauchy distribution, exemplifies model risk.
13. As Awrey (2013) argues, dealer banks in OTC derivatives markets have a strong incentive to innovate in order to enjoy the advantages of a temporary monopoly position.
14. This is similar to a secured loan, where the lender has the right to seize collateral assets if the borrower defaults on the loan.
15. It was a ratings downgrade, and the contractual obligation to post additional collateral across all its credit default swap positions, that made AIG insolvent in the fall of 2008. AIG could not raise the necessary collateral, thereby defaulted, and prompted a government-led bailout.
16. Consider, for example, the widespread adoption of the Gaussian copula in the model-based pricing of collateralized debt obligations (CDOs). This became the industry standard, although by assuming multivariate normality it underestimated the occurrence of extreme “tail” events (see Zimmer 2012).
17. Polillo, in chapter 5 of this volume, also notes the connection between uncertainty and convention.
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