How our lives became hedge funds

Risking Together: How Finance Is Dominating Everyday Life in Australia
Dick Bryan & Mike Rafferty
Sydney University Press, 2018

In Risking Together, Dick Bryan and Mike Rafferty look at how the financialisation of the global economy has swept up the lives of ordinary people who had nothing to do with playing the financial markets. In the process, their lives have come to mirror the risks of stock exchange, derivative and currency market speculation.

One of the ways in which ordinary households are tied to financial markets was revealed in the Global Financial Crisis, when problems with residential mortgage-backed securities (RMBSs) caused a financial crisis.

RMBSs are formed by the "securitisation" of home mortgages. Originators of mortgages — banks and some other financial institutions — often trade on their mortgages. Many mortgages are bundled into securities and sold.

What for most people is their major lifetime purchase then becomes the basis of financial markets. But the process of securitisation extends further to other contracted household payments.

Asset-backed securities can be formed out of car loans, phone or internet contracts and utility bills. In the US, even childcare payments have been securitised.

Another major way in which ordinary lives have been incorporated into financial markets is through superannuation. Once, the state would take care of retirement incomes, but Australians are now forced to put part of their income into superannuation funds to fund their retirement. Thus, they become involuntary players in various financial markets.

As of June 2014, Australia’s superannuation assets were $1.84 trillion, or 116% of GDP. Fund members pay about $23 billion in fees to the finance sector from this. That is 1.3% of GDP, or about $2000 per person.

Bryan and Rafferty draw a contrast between the period starting around the 1970s and the earlier 20th century. Tied up with the trend of financialisation is a general shifting of risk away from business and onto households, who can less afford it.

In the earlier period, “governments and employers took responsibility for many life-course risks. Governments tightly regulated finance and employment conditions, they provided pensions, public education, public hospitals, were often the sole telecommunications and utilities providers …

“Employers provided many people (but predominantly men) with secure, full-time jobs, effectively offering a stream of income until retirement, after which there was the government’s aged pension.”

More household payments are becoming contracted, providing generally stable, predictable and potentially securitisable incomes for business. But the risk of having to meet these contracted payments are carried by households.

The shift from stable full-time jobs to part-time and casual work, or workers being expected to become self-employed contractors, is also a part of this risk-shifting.

Business has always had to deal with the risk of ups and downs in the economic environment, but casualisation lets them shift much of this risk onto workers.

Likewise, the enforced move toward private superannuation is a move away from a stable, guaranteed pension to one dependent on the ups and downs of the markets.

This shifting of risk means that households are now expected to manage financially in a manner that Bryan and Rafferty liken to that of a hedge fund.

Hedge funds are typically highly leveraged, borrowing large sums of money in excess of the equity they actually own in order to invest in and profit from the difference between income on their investments and the interest they have to pay.

Households are leveraged as never before, primarily in the form of mortgages. In 2017, household debt as a proportion of income was 180%. During the 1980s, it was around 40%.

Importantly there has been a cultural shift with home buyers watching the housing market rise and fall (mostly rise) and seeing their homes as an asset class rather than merely a place to live.

Likewise, gaining educational qualifications now typically involves taking on a large amount of student debt. But people are expected to weigh this debt against the extra earning potential they gain.

Hedge funds are so named because they typically engage in hedging — making certain investments designed to offset the risks of losses in other investments. Households are now expected to take out insurance to manage risks — home, car, health, income, life insurance.

However, Bryan and Rafferty point out that there are important differences between hedge funds and households.

Hedging for households is still relatively thin. A 2012 survey revealed that 19.5% have no house, home contents or comprehensive vehicle insurance. The explanation is simply that for many people, all these insurance costs simply eat too much into disposable income.

Also, in comparison to typical hedge funds, most households’ assets are neither diverse nor very liquid.

Their main assets tend to be their home, car and educational qualifications. Hedge funds can quickly and easily change their investments from one asset class to another, shares to bonds or whatever, in response to risks. Households can’t readily respond to risks by trading their home or educational qualifications for bonds or shares.

When markets turn bad, household illiquidity is a virtue for financial markets. Households are forced to maintain the contracted payments that make up the income streams behind household-backed securities, making these financial instruments so stable and desirable. The risks of the market are increasingly absorbed by households.

Of course, this risk-shifting strategy backfired during the GFC when the risks shifted onto households became so severe that mortgage payments became impossible to keep up and erstwhile secure financial assets became toxic. But, in general, this is how financial market risk-shifting works.

Bryan and Rafferty note that it is mainly households in the middle 60% of incomes that bear the brunt of this financial risk.

Generally lacking home ownership or mortgages, the poorest 20% tend to face the danger of poverty rather than financial risk.

At the other end of the spectrum, wealthier households’ assets are not so concentrated on the family home. They are more diverse and also more liquid, more likely to be readily tradeable shares, and so more able to be shifted to avoid risk.

The book concludes with some suggestions of how to push back against financialisation and risk shifting, especially given the decline in unionisation and the fact that many of the issues lie outside the workplace.

The GFC showed that the financial world’s security is susceptible to large-scale non-payment of debts.

Bryan and Rafferty argue that this suggests that coordinated strikes against payment of contracted debts — mortgages, electricity and insurance bills — could be a way for workers to use their “leverage” against the financial world.

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