Anthony J. Pennings, PhD

WRITINGS ON DIGITAL ECONOMICS, ENERGY STRATEGIES, AND GLOBAL COMMUNICATIONS

Electric Money Never Sleeps

Posted on | June 27, 2011 | No Comments

Money used to sleep a lot. It would nap while waiting for a telex message to go out. It would doze off while waiting for a telephone connection. It would slumber on railroad routes. It would hibernate on transoceanic crossings. By the mid-20th century, money developed insomnia.

Computers and telecommunications were being used together to add a new immediacy to financial transactions. Reuters created a new online facility for international currency trading in the early 1970s and Bloomberg followed up in the next decade with the “Bloomberg Box” to allow traders to analyze and trade Treasuries and other equities. Geosynchronous satellites and undersea fiber optic cables provided a new technological environment for the movement of money and news. Combined with faster micro-processing capacity, it created new transactional spaces so that money did not have to sleep; it became continuously active. Electric money was 24/7, and it was global.

I wrote my Masters thesis on international finance and telecommunications deregulation, so I had a lot of interest in two of Oliver Stone’s films: Wall Street (1986) and the recent Wall Street: Money Never Sleeps (2010). In Deregulation and the Telecommunications Structure of Transnationally Integrated Financial Industries, I examined the forces that were transforming the technological infrastructure for banking, currencies, derivatives and other financial activities. These financial industries have been a major driver of computerization and communications technologies since the 1970s. Consequently, the emergent financial technologies have transformed the spatial and temporal limitations on OTC (over-the-counter) transactions and bypassed the barriers to international data communications and the flows of information and money.

These developments that led to money’s insomnia provide the backdrop for Stone’s Wall Street: Money Never Sleeps (2010). This film is not as enjoyable as his classic Wall Street (1986) which I argued used the icons of a gangster film moved from New York City’s outer boroughs to heart of its official economy. In “Figuring Criminality in Oliver Stone’s Wall Street” I examined both the iconographics that Stone uses to dramatize his morality tale as well as the dynamics of the new era of global electronic finance.

In this latest film, Michael Douglas revives his role as Gordon Gekko, but he is no longer the “Master of the Universe”, pontificating the “greed is good” mantra. He emerges from jail in the beginning of the movie to find instead that his universe is a lonely one, having lost his wife to divorce, his son to drugs, and the affections of his only child, a daughter named Winnie, to Jake Moore, a young trader. Jake works at a venerable Wall Street company caught up in the credit crisis. Played by Shia Labeouf, he seems to lack Charlie Sheen’s Adonis DNA, but the comparison is unfair. More palpable is his character’s lack of depth emanating from the dramatic and narrative limitations of the story.

It’s clear that the story that Stone wanted to tell was the one about the financial crash and the resultant “Great Recession” so that is the direction I’m going here. The story is personal for Stone whose father was a stockbroker on Wall Street and Wall Street the film series has been his main vehicle to grapple with this issue. But Wall Street has changed a lot since Stone’s father was a broker in 1960s. He might have seen the automation crisis that accompanied the turn of that decade but not likely the financial derivatives phenomenon which started in Chicago during the 1970s and began to take hold on Wall Street in the 1980s.

What drove the derivative markets were the combination of algorithms such as the Black-Scholes equation and microprocessing power that enabled quick calculations on the trading floors. But even the exchanges notable for their frenetic energy and strange hand signals are seeing their demise as online trading platforms replace the face-to-face “open outcry” trading floors. Soon traders spent most of their time behind desks, coolly scanning economic data and trading trends while setting up parameters for automated trades.

By the 1990s, automated systems merged with hedge funds to trade a global buffet of new electronic instruments. The new hedging strategies not only exploited the global diversity of financial trades from developed and emerging markets, their risk models depended on them. “Dynamic hedging” was based on the capability to trade anywhere and all the time. Money truly never slept.

Most notable of the new hedge funds was Long-term Capital Management, the Greenwich Connecticut-based financial firm that John Meriwether, the famed bond trader from Salomon Brothers put together with 2 Nobel Prize winners and 80 founding members putting up the minimum investment of $10 million. LTCM’s computerized trades made good money for three years before the “Asian Contagion” and the collapse of the Russian market in 1998 sparked a major disturbance in the global markets that their systems hadn’t anticipated. When Russia defaulted on its debt in August of that year, LTCM lost billions and put a trillion dollars of trading at risk throughout the world. The subsequent global flight to US treasuries and the tech markets destroyed LTCM and nearly brought down the US financial system.

This Frontline video with the same name provides an interesting historical analysis.

Oliver Stone’s Wall Street: Money Never Sleep picks up the story and addresses the financial crisis of 2007-2008. One could say it started with the securitization of student loans for college students in the 1980s, accelerated in the 1990s when Freddie Mac and Ginnie Mae used these techniques for home mortgages, and turned a major fiasco when Wall Street began to package mortgage-backed securities into collateralized debt obligations (CDOs) for global distribution. The low-interest rates set by the Federal Reserve Bank that was trying to recover from successive “dot-com”, 9/11 and telecom crashes set off the housing bubble that was fueled by this securitization process.

As in any bubble, people leaped in to buy lest they are left out. Add to this ratings agencies that were paid for their evaluations by the over-leveraged banks and the credit default swaps set up as insurance policies on futile instruments and you have the recipe for the greatest financial disaster since the Great Depression.

Anthony

Anthony J. Pennings, PhD was on the NYU faculty since 2001 teaching digital media, information systems management, and global economics. © ALL RIGHTS RESERVED

Category: books and films, digital destruction, digital monetarism, dystopian economies, electric money, financial technology
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    Professor at State University of New York (SUNY) Korea since 2016. Moved to Austin, Texas in August 2012 to join the Digital Media Management program at St. Edwards University. Spent the previous decade on the faculty at New York University teaching and researching information systems, digital economics, and strategic communications.

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