Table Of ContentARBITRAGE: A CRITIQUE OF THE POLITICAL ECONOMY OF FINANCE
Carolyn Frances Richter Hardin
A dissertation submitted to the faculty at the University of North Carolina at Chapel Hill
in partial fulfillment of the requirements for the degree of Doctor of Philosophy in the
Department of Communication Studies in the College of Arts and Sciences.
Chapel Hill
2015
Approved by:
Lawrence Grossberg
Sarah Sharma
Michael Palm
Dick Bryan
Michael Pryke
© 2015
Carolyn Frances Richter Hardin
ALL RIGHTS RESERVED
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ABSTRACT
Carolyn Frances Richter Hardin, Arbitrage: A Critique of the Political Economy of
Finance
(Under the direction of Lawrence Grossberg)
In the wake of the 2007-09 financial crisis and growing economic inequality
fueled by financial activity, it cannot be left to mainstream economists to define and
explain finance. This dissertation reexamines finance and the political, social and
cultural foundations ignored by economists. In the first chapter, I argue for the
importance of arbitrage, a trading strategy defined by buying low priced securities and
selling the same securities for higher prices in two different markets. Arbitrage is the
conceptual linchpin of modern financial economics but that discipline fails to explain the
source of arbitrage profit. In the second chapter, I explore whether Marxist economics
can offer a theorization of arbitrage profit. While much of Marxist scholarship too quickly
dismisses the significance of finance, there is room for considering arbitrage to be a
form of exploitation. In line with innovative Marxist work on finance, I apply a new
framework for understanding value to arbitrage in the third chapter. I suggest that
arbitrage can be understood as an apparatus of capture in which value founded on
social mattering is captured in uneven relations of power.
In the fourth chapter, I review the history of arbitrage and suggest that arbitrage
is most successful when arbitrageurs can use advantageous differentials in
communication networks and/or price stabilizing derivatives contracts to simulate
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instantaneous trading. A special form of arbitrage I call money machine arbitrage takes
place when structural inequalities of price allow for continuous profit making.
In the fifth chapter, I offer a final concept necessary for understanding arbitrage
as an apparatus of capture: the axiomatic. The axiomatic is the complex system of
regulative statements and social relations that enable capture. In the final substantive
chapter, I detail the arbitrage in subprime mortgage backed securities in the run up to
the 2007-09 financial crisis and sketch some aspects of the axiomatic that can be
gleaned from that story. I conclude that the taken-for-granted notion of “risk,” as a
necessary way of making wealth and the correlate of return in financial economics, is
central to the axiomatic of finance and thus financial profit making.
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To my husband Ted, for your love, support, and endurance.
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ACKNOWLEDGEMENTS
I’m amazed that I actually wrote this dissertation. In the beginning stages,
thinking about the size of the project was overwhelming. But one chapter at a time, I
sent it out, got it back, revised, rewrote and sent it out again. I remember glancing at the
growing stack of revised chapters, trying not to get too excited because so much work
remained. I trusted the process, because I knew that my advisor, Larry Grossberg,
would lead me right, and he did. Larry was instrumental in helping me shape the
direction of the research and shepherding me through the writing, revising and
defending processes. I respect Larry for his brilliance and his bravery, but even more
now for his generosity as a mentor.
I’m also grateful to Dick Bryan, who steered me to focus solely on arbitrage,
offered very constructive comments on early drafts and gave a vigorous examination in
the defense. I appreciate his unending support and friendship. Sarah Sharma, Michael
Pryke and Michael Palm have also offered generous support to me during my
dissertation research and writing, answering my queries, offering advice and
reassurance, and reminding me of the responsibility of interdisciplinary work.
The ideas in this dissertation were often stimulated and refined through
conversations with two partners in crime: Robert Wosnitzer and Adam Rottinghaus.
Robert offered his technical expertise as a former bond trader, his critical perspective as
a scholar working on the culture of finance and his almost unbelievable kindness as a
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cheerleader and friend. Adam provided the amazing figures in chapter six as well as
generative conversations at the Carolina Coffee Shop about the ideas in chapter four.
Some of those ideas ended up in a co-authored article we published in the Journal of
Cultural Economy.
Adam was one of many fellow travelers pursuing Ph.D.s in Communication
Studies at UNC-Chapel Hill who formed a sometimes loving, sometimes crazy group of
comm-rades. Shout-outs to Erin Arizzi, J Beckham, Bryan Behrenshausen, Jen Cronin,
Chris Dahlie, Andrew Davis, Jade Davis, Jonathan Foland, Julia O’Grady, Kashif
Powell, Jes Speed, Armond Towns, and Grover Wehman.
Chris Lundberg offered an incredible combination of intellectual stimulation,
material support and spiritual guidance. Rachel Taicher kept me grounded in
mommyland. Carolyn Ellison calmed my nerves. Barry Katz, Belinda Novik and Pablo
and Hunter Vega knew I could do it.
Finally, my family supported me in countless ways. My mother, Mary Richter,
read every word at least twice and helped me enormously with editing and formatting.
My husband Ted held the fort during long months of writing from the wee hours of the
morning until far too late at night. And my beautiful children, Tyson and Troy, who
gestated and grew through the process, gave me excellent reasons to keep going, and
to take breaks to play Legos.
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TABLE OF CONTENTS
LIST OF FIGURES………………………………………………………………………………x
LIST OF ABBREVIATIONS……………………………………………………………………xi
INTRODUCTION…………………………………………………………………….…………xii
CHAPTER 1: ARBITRAGE AND THE EMBEDDED DISEMBEDDEDNESS
OF FINANCE…………………………………………………………………………………….1
Economics and the Context of Prices……………………………………………….10
A Topical History of Financial Economics…………………………………………..12
The Paradox of (No) Arbitrage……………………………………………………….33
Conclusion……………………………………………………………………………...44
CHAPTER 2: ARBITRAGE AND MARXIST THEORIES OF FINANCE………………....47
Marx on Finance……………………………………………………………………….52
Conclusion……………………………………………………………………………...72
CHAPTER 3: ARBITRAGE AS CAPTURE………………………………………………….74
Rethinking Value……………………………………………………………………….75
Arbitrage as Capture…………………………………………………………………..85
Conclusion…………………………………………………………………………….104
CHAPTER 4: ARBITRAGE AND “RISK”: TIME CONTINGENCY AND SIMULATED
INSTANTANEITY…………………………………………………………………………….108
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Time Contingency…………………………………………………………………….109
Simulated Instantaneity……………………………………………………….……..115
Money Machine Arbitrage…………………………………………………………...132
Conclusion…………………………………………………………………………….134
CHAPTER 5: ARBITRAGE AND THE AXIOMATIC………………………………………137
Postone’s Critique of Traditional Marxism………………………………………....139
Axioms and Social Relations………………………………………………………..141
A Contextual Theory of Value……………………………………………………….144
A Critique of the Political Economy of Finance……………………………………146
Conclusion…………………………………………………………………………….147
CHAPTER 6: ARBITRAGE AND THE SUBPRIME MORTGAGE CRISIS……………..149
Subprime Mortgage CDO Arbitrage………………………………………………..153
The Context…………………………………………………………………………...163
The Axiomatic………………………………………………………………………...181
Conclusion: The Crash………………………………………………………………195
CONCLUSION: THE EMPEROR IS NAKED……………………………………………...202
BIBLIOGRAPHY……………………………………………………………………………...214
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LIST OF FIGURES
Figure 1 – Typical Subprime Mortgage Securitization……………………………………156
Figure 2 – Typical Collateralized Debt Obligation Deal…………………………………..158
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Description:to take breaks to play Legos Designated Order Turnaround .. It also challenges the notion that “true” arbitrage is riskless. analytical force, other than the conclusion that finance went the way of the other social . In reading.
