Georg Simmel and the Subprime Mortgage Crisis

     Sociology sometimes forgets the wisdom of its founders. In many universities courses in theory are taught like an obligation to endure ancient history rather than a wonderful chance to experience the living insights of great minds. This is especially true of Simmel’s, The Philosophy of Money. It is, admittedly, excruciatingly hard to read. But, manage to get through the book, and you are left with crucial insights into the nature, logic and meaning of twenty-first century life.

      Simmel said that Marx was wrong. Labor had little to do with economic value. In reality economic value derived from a comparison between two or more objects. Alone a watch, a house or a share of stock was of “little practical importance” to the economy. Economic value existed only when the demand for something was compared with the demand for other things. People therefore created economic value because when they bought and sold anything the exchange (my money for your stock) was always rooted in an “objective measurement of subjective valuations”. In The Philosophy of Money, it is the demand for the object that creates value; without demand the object is as valuable as a remaindered novel or a movie nobody wishes to see.

         Since demand always represented subjective evaluations of the objects being compared, Simmel stressed “the lively interaction which is the substance of economic value”.   Ups and downs –fluctuations forever! - were built into any economic system because valuations changed in relation to an indefinite number of variables. In April of 2008 the rising price of oil is linked to, for example, the political situation in Nigeria. If the rebels destroy more pipelines, that limits supply and, based on that comparison, I can get more for my oil today than yesterday. Or, if it is not Nigeria, I can wonder about investments in Russia. Since the government takes 80% of anything over $27 a barrel, will private investors furnish the funds needed by Russia’s oil industry. And, if not, will my stock of oil be worth even more in six months or a year?

     Money fit into this equation for two reasons. First money was “interchangeability personified”; you could use it to buy and sell anything on earth. Clothes and pigs, diamonds and cement, computers and antiques: You name the object and money was the perfect means to facilitate and conclude the transaction. Thus, Simmel stressed “that if money was a specific object, it could never balance every single object or be the bridge between disparate objects”; but, since money is nothing but the relation between economic values themselves (e.g., oil before and after violence in Nigeria), money served as the perfect go-between.  It was such a miraculous means that it could even be exchanged for itself! Convert dollars into Euros based on a comparison of subjective valuations and money literally made money.

     Simmel saw money’s uses but he despised its importance in his world. Simmel argued that money, the perfect means, had somehow been converted into the ultimate end of many people’s lives. “The inner polarity of the essence of money lies in its being the absolute means and thereby becoming psychologically the absolute purpose for most people….”  This was bad enough. But Simmel spotlighted a great “irony of history”.  Since god was dead or dying for many people in the early twentieth century, “precisely that value that is exclusively a means and nothing else” takes the place of religious and other ultimate values.  Money actually functioned like the concept of god because money as the ultimate means served as “the unifying point of innumerable sequences of purposes.”  Forget heaven or hell. Get enough money and you could have anything on earth.

    Throughout the book, Simmel alludes to capitalism but he never specifically examines its nature and logic. However, if we agree that two of capitalism’s hallmarks are the M-C-M dialectic and the endless accumulation of wealth, then capitalists must, by definition, ceaselessly use their money to create commodities that acquire value –and produce demand- when they are compared to other objects.  Especially in 2008, capitalists are inescapably exposed to the competitive efforts of others, so they must forever invent new ways to make money. With cell phones, it might be the features offered by a BlackBerry. And, with financial services, it might be the returns offered by the creation and marketing of subprime mortgage securities.

   It is really quite inventive. I take bonds -rooted in questionable mortgages- merge them into a new security called a collateralized debt obligation, and have it labeled triple A by the “best” rating agencies. Compared to other securities, I offer a higher rate of return and, as long as the subjective evaluation of the securities keeps them in demand, I can, along with Bear Stearns, leverage myself to the tune of 33 dollars to one.

   But, suppose you disagree with the conventional wisdom. You think the securities are overvalued. Well, you buy another inventive way to create economic value; you buy credit default swaps. They offer the buyer an “insurance policy” against the securities going bad. So, since you think the housing bubble will explode, you buy an army of the default swaps and the more misery there is in America’s housing market, the greater the value of the swaps you own. One hedge fund manager, John Paulson, made $3.7 billion in 2007 betting that more and more Americans would lose their house, or at least, be unable to pay what they owed.

       Simmel knew how to assess this bonanza. Indeed, he was at his best when he stressed that money’s “quality consists exclusively in its quantity”. When it comes to money “we do not ask what and how but how much.” Thus, at least on Wall Street, Mr. Paulson receives a mountain of accolades because he earned more in one year than anyone else. He won the grand prize by betting on desolation and he has extraordinary power because it is “quantity” – and nothing else- that determines the importance of money, namely its power as a means.”

    To Simmel “the complete heartlessness of money is reflected in our social culture.” He was appalled in 1899 and we have even more reason to be appalled in 2008. With financiers in the lead, capitalism is now the dominant economic system in the world. It spreads its demands into every society on earth and creates a “soullessness” predicted and perceived by Georg Simmel. As Mr. Paulson put it to the Wall Street Journal in January of 2008, “in betting on it ((the housing market) to crumble, I’ve never been involved in a trade that had such unlimited upside with a very limited downside.”

    It is a systemic “heartlessness” that eagerly profits from the misery of millions.