Money should flow like water … but should water be like money?


This week marks a dubious milestone for the financial industry: Monday was the first trading day for NQH20, a water futures contract. According to CNN, this is the first water futures contract ever offered.

The offer has obvious advantages, including giving farmers greater price transparency in a crucial resource. And maybe putting a price on water will increase the incentives to keep it clean. But more broadly, NQH20 is a disturbing advance in the process of financialization – a process with many clear and concrete advantages and major risks, more difficult to quantify.

Much of the growth of the financial sector over the past three decades has been in placing dollar signs next to new areas of human existence, such as water – or, through futures and d ‘other derivatives, on the uncertainties of time itself. Financialization is also a driver for much of the fintech world, as are the many blockchain projects that have aimed (often ridiculously) at doing everything. diamonds to real estate “easier to negotiate”.

Water isn’t the only recent flood line (ahem) in the trend. Also this week, Harper’s immersed in the rise of revenue sharing agreements (ISA), a new type of education funding that pays for the school up front in exchange for a share of a student’s future income. For some, ISAs are a promising new mechanism for financing education. But others fear they will simply reinvent contract bondage for the 21st.st century (Putting prices on human beings has been fundamental advance of financialization).

ISAs are also being transformed into more complex instruments, as income streams from student repayments are reduced and sold to investors. This echoes our biggest lesson on the dangers of financialization, the 2008 housing crisis, which was caused in large part by the rise in secured debt securities, or CDOs. In these instruments, home loans made and held for generations by local banks were broken up into vehicles containing thousands of anonymous mortgages and released on the open market. (A great recent explanation for all of this came from banking vet Christopher Varelas’ 2019 tell-all How money got dangerous.)

The most dangerous effect of turning individual mortgages into more abstract vehicles was to separate lenders from borrowers, who had met for so long in person to make deals. The problem was encapsulated by the classic scene of The big court in which the character of Steve Carrell (based on the investor Steve eisman) discovers that an exotic dancer has five mortgages. This is information a more traditional pre-financializing banker would have been more likely to know, and the information gaps inherent in removing human relations from transactions may still prove the Achilles heel of the march towards financialization.

There is also a deeper risk for financialization, with water as the ultimate example. Turning water, education or housing into entries on a ledger allows them to be traded for each other, or for anything else, thus increasing the efficiency of the market.

But this flattening may hide much broader truths: For example, water scarcity has been exacerbated by decades of corporate pollution, itself driven by stock market abstractions. Or even the simple idea that water, as a universal necessity for human life, should be worshiped as precious and managed for the common good, instead of being reduced to a stock symbol that produces fees for the elite. banking.

David Z. Morris

@davidzmorris

david.morris@fortune.com



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