Deleuze on the Volcker Rule

The Deleuzian dynamical model of our financial system, theoretically synonymous with the view of “the plumbing behind the walls,” as Perry Mehrling calls it, provides not only a multidimensional, topological map of interlocking markets, banks, hedge funds and the Fed to name a few, but an empirical, constitutive understanding of the ripple effect of certain regulations, especially in regards to the shadow banking sector, which Mehrling correctly notes “relied symbiotically—some might say parasitically—on ties with [the traditional banking system][1]. As we now understand, a posteriori, there were a few driving forces behind the growth of the shadow banking system, to which a recently approved regulation has the symbiotic potential to contribute.

Explained simplistically, within the traditional system, or Jimmy Stewart banking, banks used deposits to make loans to other community households and faced four general risks—repetitions, or singularities, in the morphogenetic process—solvency risk, interest rate risk, liquidity risk and credit risk.[2] As a semi-bifurcated system, shadow banking arose as these trajectories continuously attempted to meet the aforementioned singularities to alleviate risks through the purchase of credit default swaps and the utilization of securitized loans as collateral for borrowing asset-backed commercial paper and repos in the wholesale money market.[3] As the name entails, trading within the shadow banking system predominantly exists off banks’ balance sheets, often in the unregulated territory of Cayman Island hedge funds. However, from the traditional perspective, as a pseudo-entrained[4] system, Mehrling notes that a traditionalist perspective backed the acceptance of shadow banking, which for all intents and purposes was, and to an extent still is, the Ghost of Jimmy Stewart’s Past.

So in 2013 what has the rise, fall and subsequent post-crisis rise of shadow banking taught the political economist?  On Dec. 10, 2013, five regulatory agencies approved the long-awaited Volcker rule, which seeks to set a ban on propriety trading.[5] As the history of shadow banking has shown us, and as some critics[6] have rightfully pointed out, a simple regulatory ban on propriety trading does not take in mind the multidimensional potentialities of financial instruments, which, as intensive properties of a hyper-fungible dynamical system, hold the potential to bifurcate into a new system (i.e. shadow banking) when faced with an external perturbation (i.e. the Volcker Rule).

Herein lies, to the most recent and literal extent, what a Deleuzian approach to financial case studies (or with the Volcker Rule, a lack-thereof) ought to provide the spectrum of heterodox political economy. When we understand the multidimensional nature of the dynamical system that is finance—i.e the symbiotic relationship between shadow banking and propriety trading, which further coincides with liquidity in both money and capital markets—we, by proxy, understand the virtual potentiality of the paradoxical Volcker Rule, a regulation that in its roughly 1,000 pages, makes only one mention of its potential to “drive risk-taking to the shadow banking system”[7] and, thus, increase the very trading it sought to deplete.

With every move toward risk-averting singularities, the shadow banking system has become differentiated and bifurcated from on-balance sheet proprietary trading. As these singularities act as a substratum of repetition, the singularity of proprietary trading will continue to act as an attractor. But now, with the institution of the Volcker rule, these trajectories hold the potential to pass into the continuously expanding bifurcated multiplicity that is shadow banking. Because, as we now know, what is shadow banking but the actualized potential of intermediaries attempting to consistently meet the singularity of risk alleviation through the shadows of off-balance sheet proprietary trading?

Arthur Winfree’s work on the seemingly untraceable phase singularities of cardiac arrhythmias may offer the best coda in regards to what a Deleuzian approach provides the political economist when observing the potentiality of regulatory attempts to change the trajectory of risk securitization:

“What does any of this mean? Perhaps not much. Our situation is like that of the anonymous industrial consultant whose final report concludes; ‘We have not succeeded in answering all your problems. The answers that we have found only serve to raise a whole new set of questions. In some ways we feel we are as confused as ever, but we believe we are confused on a higher level and about more important things.”[8]

by Alex Montero

[1] Mehrling, Perry The New Lombard Street pg. 116

[2] Mehrling, Perry The New Lombard Street pg 117. While, Mehrling only lists solvency and liquidity as the prominent risks faced by traditional banks, Saunders and Allen introduce interest rate risk (as interest rates rise, long term loans become unprofitable) and credit risk, and leave out solvency risk in their empirical study of the crisis. However, it appears that the banking system’s consistent exposure to all four as repeated driving forces, or singularities to some extent, played a part in the creation and growth of the shadow banking sector.

[3] Mehrling, Perry The New Lombard Street pg. 118

[4] I say pseudo-entrained since, while shadow banking ostensibly appeared as an unregulated–and unsecure–independent reincarnation of traditional banking, the crisis proved its symbiotic relationship with money market liquidity, which in turn affected capital market liquidity.

[8] Winfree, Arthur. When Time Breaks Down page 29.

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