Financial risks – two notions of power

Teppo Eskelinen

Neoclassical / financial economics

• Risks as objective features of reality, financial market merely reallocates risks

• Risk / reward -balance• Efficient market hypothesis• Failure of the financial market: VaR models

could not produce information to predict the financial crisis

Financial crisis and politics

• The crisis demonstrated, that risks are not contained within the financial market

• The very concept of ”financial risk” as a scientifically objective notion is questioned (again)

• Intensification of social disparities

Critique 1: The making of ”risk”• Keynesians criticise the very idea of risk as a (negative) commodity. • For example: the vague demarcation btw gambling and finance• Mathematical calculation of future uncertainty is an impossibility:

risks cannot be ”optimised”.• For example VaR calculations: essentially based on the belief that

no downturn will occur• The fantasy of risk calculation can itself be seen as a form a power:

who is in a position to claim "objectivity" in risk assessments (credit rating agencies etc)

• Recommendation: deconstruct the concept. Criticise by etymological notions which show how rationality and risk are arbitrary concepts.

Critique 2: Social misallocation

• Any social system has an order of who is to be saved in an event of crisis.

• Extreme cases: logic of saving to a lifeboat• More real-life cases: who lives in the house first to be flooded?• Social security: How do incomes and liabilities change in a

time of economic downturn?• From government-based to finance-based social security

sytems, political move to increase competition between banks• ->While risks might be constructions, they have a real

distribution (also beyond the financial market)

…continued

• Risk allocation thus determines, whose interests and claims are priorised in a time of crisis - even though the very underlying notion of risk might rest on a false claim to scientific objectivity.

• Allocation of risks take place both by the enforcement of the financial contracts and by the extra-market political manouvers to save the financial market.

• Social priority orders are shaped by a) risks distribution within the financial market; b) political negotiation between financial interests and other

• Recommendation: distribute risks more equally

Conclusions

• Contradiction between these two critiques of financial risks and power:

• 1 Finance as cultural power to claim objectivity in assessment of future uncertainties

• 2 Finance as political power to arrange social priority orders.

• ->How are social security systems formed in order to give people control of their preferred exposure to financial risks; how egalitarian societies are?

• ->Political inequalities cannot be fully adressed without adressing underlying cultural constructs