Melinda Cooper
Shadow Money and the Shadow Workforce:
Rethinking Labor and Liquidity
April 2015
Deal banking regulations, into a shadow space of federally uninsured transactions and private collateral.1 This new source of private money creation
known as the shadow banking systemwas at the heart of the recent financial crisis, an event that might be more accurately described as a crisis of
money.2 It is therefore imperative that we look to the novelty of this new
form of liquiditywhat I refer to as shadow moneyif we are to understand
the politics of money today.
The broker-dealer banks that constitute the shadow banking sector
fulfill many of the traditional roles of New Deal depository institutions,
albeit on behalf of institutional investors and firms rather than everyday
depositors (Gorton 2010a, 2010b; Mehrling 2011; Ricks 2011, 2012). Like traditional banks, they perform the function of credit intermediation or maturity transformationthe conversion of short-term IOUs into long-term
investmentsalthough they do so outside the regulated institutional space
of the New Deal commercial bank. Instead of collecting deposits from individual savers, broker-dealer banks finance themselves in the money market
by raising short-term IOUs (sale and repurchase agreements, or repos) that
they then invest in portfolios of longer-term financial assets in the credit
marketsasset-backed securities composed of mortgages, student loans, or
consumer credit. Their IOUsrepos, rather than depositsexhibit many of
the properties conventionally attributed to money.3 They are highly liquid, of
continuous, instantaneous maturity, and subject to negligible price fluctuation (Ricks 2011: 92; 2012: 731).
Unlike New Deal depository institutions, however, shadow banks issue
money without explicit access to central bank liquidity or risk management
backstops such as federal deposit insurance or the federal discount window
(Mehrling 2011: 118; Pozsar et al. 2012; Adrian and Ashcraft 2012: 1). Shadow
money is uninsured moneymoney whose value is not formally underwritten or backstopped by the state. Instead, right up until the financial crisis,
investors in the repo markets attempted to provide extrastate guarantees for
the value of shadow money by using collateral in exchange for deposits and
securing this collateral with the use of a credit derivative instrument known
as the credit default swap. In lieu of federal deposit insurance, depositors
in the repo markets would receive a bond in exchange for the cash lent
(Adrian and Ashcraft 2012: 14). The nature of these bonds changed as the
market became more heated. During the early 1990s, Treasury bills were
presumed to be the safest form of collateral, but as T-bills became scarce,
they were increasingly replaced by private forms of collateral such as AAArated asset-backed securities, which were in turn protected by credit deriva-
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on the other. It argues that the rise of the shadow banking sector must be
understood as a long-term response to the crisis of the New Deal social
statea crisis that precipitated the breakdown of the Keynesian monetary
consensus in the 1970s and the subsequent restructuring of labor around
uninsured or contingent labor contracts. The New Deal architecture of
money, credit, and securitization was viable only as long as the US state was
willing and able to sustain a core workforce of standard, long-term, insured
workersa workforce that excluded minorities and women of all races.
When this consensus was challenged from below in the 1960s and 1970s,
then defeated from above by the Volcker shock, the United States sought
to counteract the political fallout from the long-term precarization of labor
by a corresponding expansion of consumer credit into the frontier space of
uninsured risk. In a context where labor itself was increasingly insecure,
the market for securitized consumer debt could not expand any further
unless it adapted to include the nonstandard risk and the nonconforming
borrower. In other words, the migration of money creation, from the depository institution to the shadow bank, and the changing form of money, from
insured deposit to uninsured repo, represents an ongoing response to the
evolving risk profile of labor itself. Shadow money creation has grown in
concert with the expansion of the shadow workforcethe sector of the
post-Fordist workforce engaged in contingent, nonstandard, and uninsured
laborand, until recently, has offered a solution of sorts to the social insecurity of labor. It is this solution that broke down in the recent financial crisis, engendering a wholesale crisis of value whose tensions are far from
being resolved today.
The Fordist ConsensusUnderwriting Money and Insuring Labor
In 1933 Henry Steagall persuaded Congress to include federal insurance of
private money creationthe Federal Deposit Insurance Corporation (FDIC)
in the New Deal Banking Act. This innovation was designed to prevent the
bank runs that had devastated commercial banks and thrifts during the
Great Depression and, as such, was charged with the task of insuring deposits to a maximum limit, using premiums contributed by banks themselves.
By simultaneously guaranteeing consumer savings against bank default and
staving off the threat of bank runs, the FDIC sought to establish a consensus
of mutual confidence between bankers and savers (Russell 2008: 69). In retrospect, its promise seems to have been confirmed by the relatively few bank
failures that occurred from 1933 up until the 1980s, when banks themselves
began to outrun the regulatory limits of New Deal banking reform.
Federal deposit insurance, as Martijn Konings (this issue) notes, can
be understood as emblematic of the New Deal class compromise. Its
model of public-private social insurancecollective insurance delegated to
the private sector but backstopped by the statewould be replicated, in various guises, in the panoply of social insurance, welfare, and credit programs
that were implemented by the New Deal social state. At their most ambitious, these programs offered a form of comprehensive social insurance to
a core labor force of unionized workers, establishing the insured industrial
worker as the privileged partner of the Fordist class compromise. The actuarial calculations of social insurance were literally built on the foundations
of Fordist laborwithout the standardization of work time and wages
implicit in the long-term contract of employment, it would have been
impossible to calibrate the difference between short-term deposits and longterm investments or to calculate average risks into the long-term future.5 In
this respect, the stabilizing role of federal deposit insurance extended well
beyond the realms of the banking sector. By underwriting the private creation of money, the FDIC stabilized the relationship between depositors and
banks and laid the foundation for a new class compromise between unionized labor and the state.
From the very beginning, this compromise rested on the rigorous
exclusions of the Fordist family wage, which defined white men as a privileged class of insured workers only by virtue of relegating minorities and
women of all races to the more marginal, nonunionized, and uninsured
sectors of the workforce. These divisions of labor were everywhere inscribed
in the social insurance policies of the New Deal. The Social Security Act of
1935 is hailed as the most comprehensive social policy creation in US history (Mettler 1998: 53). And yet until the 1960s, national old-age insurance
was unavailable to domestic, agricultural, and service workers as well as
those engaged in periodic or seasonal employment, with the result that
very few African Americans or Latinos had access to public pensions at all,
while white women benefited only through marriage (Mettler 1998: 5373;
Lieberman 1998: 2325). Unemployment insurance, which was also created
under the terms of the Social Security Act, remains rigorously tied to the
regular, long-term contract of employment until this day and as such offers
no protection to nonstandard and seasonal workers (Katz 2008: 22225).
Importantly, the Social Security Act did not overtly voice its exclusion of
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minorities and women but rather structured provision around the normative presumption of full-time, standard employment. The sexual and
racial divisions of labor that shaped the Fordist workplace therefore became
the decisive criterion in determining inclusion or exclusion from social
insurance.
New Deal labor legislation only entrenched these divisions still further by assigning distinctive social protections to different classes of worker.
The National Labor Relations Act (NLRA) of 1935, also known as the Wagner
Act, established the right of industrial workers to join trade unions, engage
in collective bargaining, and take legal industrial action. Over the following
decades, some of the most powerful industrial unions would avail themselves of this act of legislation to forge generous workplace compacts with
their employers, while also lobbying for improvements to universal social
insurance (Klein 2003). But as it became clear that the New Deal state was
never going to deliver the universal welfare system that many had hoped for,
the special bargaining powers awarded to unionized labor by the NLRA also
served to create a separate system of private workplace benefits for a powerful sector of the industrial working class, who were able to negotiate private
pensions that were much more generous than standard Social Security benefits and health insurance plans that were entirely unavailable to other workers. The privileges accruing to unionized industrial workers were tightly
linked to standard employment and closely modeled on a white male model
of participation in the workforce: the full-time, full-year worker (Klein 2003:
228). African Americans and women of all ethnicities were marginalized
from this system by virtue of the fact that they were underrepresented in
the most powerful industrial unions (Mettler 1998: 5051). Moreover, their
employment in agricultural, domestic, and seasonal work rarely conformed
to the model of full-time, standard employment that went along with private
workplace coverage (Klein 2003: 230).
Perhaps the most visible and lasting materialization of the New Deal
actuarial compact was the creation of a private housing market sustained by
federal insurance. In 1933, as the housing crisis of the Great Depression
intensified, President Franklin D. Roosevelt signed into law the Home Owners Loan Corporation (HOLC) and charged it with the task of protecting
small home owners from foreclosure. In its first few years of existence, the
HOLC refinanced tens of thousands of home owners in danger of default
and, in the process, replaced the short-term interest-only mortgages that
had hitherto dominated the market with a new and safer form of mortgage
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to favor safe, standard forms of credit such as the vanilla mortgage and conforming borrowers. Inevitably, this commitment to safe lending criteria
came into tension with the overt mission of the government-sponsored entities to overcome discrimination in credit markets. Under the impetus of
new antidiscrimination laws, these entities set out to redress personal bias
in the allocation of consumer credit by introducing standardized, nationwide credit risk scores that would evaluate borrowers according to employment rather than race or gender (Poon 2009: 660). Yet despite these considerable legislative and bureaucratic efforts, no antidiscrimination law could
alter the fact that high-risk, nonstandard workers were disproportionately
African American, Latino, and femaleclassified as nonconforming by virtue of their distribution in the labor market rather than any personal prejudice on the part of bank managers (Hyman 2011: 21517). As such, the antidiscrimination politics of the late Fordist era was only partially successful in
redressing some of the normative exclusions of the Fordist credit regime.
Most of the social programs implemented under the umbrella of the
Great Society sought to expand the provisions of social insurance without
altering the basic architecture of the New Deal class compromise. These
programs were designed to reduce inequalities and placate dissent without
challenging the limits of US Keynesianism, which rested on the distinction
between private and public social insurance, unionized and nonunionized
labor, social insurance for the deserving poor and public assistance for the
undeserving. These enduring distinctions were structural to the Fordist
family wage. But the militantism of late Fordist labor and welfare movements was such that it challenged these limits and pushed the state to pursue deficit spending beyond the sex- and race-based distinctions that were
written into the New Deal. The resulting increase in federal and state expenditures, pursued alongside the war in Vietnam, was enormous. By the end
of the decade, the Great Society programs led to a doubling of social expenditures, outpacing even defense spending on the war (Panitch and Gindin
2012: 128). Along with the rise of anticolonial movements in the global South,
whose power was made manifest in skyrocketing food and oil prices, the
domestic movements of the late Fordist era played a decisive role in the
destruction of the New Deal/Bretton Woods monetary order.6 They would
ultimately force the Republican administration of President Richard M.
Nixon to liberate the US dollar from the fiscal limitations imposed by gold,
thereby undermining the very architecture of money that had sustained US
power throughout the postwar era.
By the late 1960s, the growing militancy of Fordist social movements
had led to plummeting levels of corporate profitability and a vicious circle of
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1960s and 1970sits refusal to accept the normativities of New Deal social
insurance. By the end of the 1970s, however, this new order of floating
exchange rates and destandardized money, in combination with the austerity politics of monetarism, would be refashioned as a weapon to neutralize
the inflationary demands of the Fordist labor movement.
The Volcker ShockDestandardizing Labor and Money
Ultimately, the New Deal consensus was broken in 1979, when the chair of
the Federal Reserve, Paul Volcker, definitively abandoned Keynesian monetary and fiscal policies in favor of the austerity politics espoused by monetarists such as Milton Friedman. The monetarist turn was eminently political:
without the discipline of gold, there was no longer any external economic reason for limiting fiscal expenditures on welfare and wages. Yet Volcker was
determined that wage and price inflation needed to be curbed and that the
standard of living of the average American [had] to decline (quoted in Rattner 1979). By restricting the money supply, the so-called Volcker shock drove
up nominal interest rates to 20 percent overnight and induced an almost
immediate recession. In this atmosphere of heightened austerity, President
Ronald Reagan was able to launch a full-scale assault on unionized labor and
its expectations of a continuously rising standard of living (Panitch and Gindin 2012: 171). The strategy of targeting the trade union movementthe
most privileged sector of the labor movementappeared especially designed
to halt the momentum of Fordist militantism. Under the full employment
conditions of the 1960s, these movements had pushed at the limits of the
Fordist class compromise by calling for an extension of social insurance
beyond the standard subject of labor; the Reagan revolution radically shifted
the balance of powers in the other direction, by dismantling the entire edifice
of standard Fordist labor, along with the social insurance programs it made
possible. Its long-term effect was to prompt a three-decades-long decline in
wages and to restructure the entire workforce around nonstandard labor.
Over the following decades, the overall proportion of the US workforce
covered by standard work contracts would decline in favor of old and new
forms of nonstandard employment. Throughout the 1980s and 1990s, the
ranks of casual workers, on-call workers, temps, employees leased or subcontracted from business service firms, day laborers, independent contractors,
and the self-employed swelled across the entire workforce (Gleason 2006: 1).
Under the influence of Chicago school labor law, employers sought to replace
the insured, long-term contract of employment that had defined the unionized Fordist workplace with commercial contracts that were breachable at
will, in the process redefining the worker as an independent contractor
(Epstein 1983; Fudge, Tucker, and Vosko 2002). These labor practices were
first introduced by temping agencies that employed an overwhelmingly feminized workforce in the 1960s and were later adopted by the public service sector as it sought to divest itself of newly powerful service-sector unions (Hatton
2011; Boris and Klein 2012). During the 1990s, nonstandard work arrangements spread throughout the labor force, extending beyond low-wage and
feminized service work to affect the professional business-service and knowledge sectors (Kalleberg 2013: 90, 102). By 2001, even the most conservative of
estimates identified one-third of US workers as nonstandardan estimate
that excluded informal workers and the many tens of thousands of migrant
agricultural workers on temporary entry visas (Parker 2002: 109). This
reserve army of nonstandard workers now represents a shadow workforce of
monumental proportions whose precarious attachment to New Deal labor
protections and social insurance coverage continues to sanction the erosion of
work conditions in the standard employment sector.
The trend toward the destandardization of labor has no doubt been just
as overwhelming in other OECD (Organisation for Economic Co-operation
and Development) countries. The effect on social insurance, however, has
been particularly acute in the United States because of the historical relationship between New Deal social protections and the collective bargaining powers of standard, unionized labor. As Jacob S. Hacker (2012: 45) explains, the
US New Deal was unique in having established a system of public-private
welfare that supplemented minimal universal rights to social insurance with
more generous workplace benefits for unionized workers (see also Katz
2008: 17480). This historical peculiarity of the US welfare state meant that
workers in the strongest, unionized sectors of Fordist industry enjoyed access
to workplace insurance benefits (particularly health and pension plans) that
were far more ample than the minimum offered to other standard workers
while nonstandard workers were entirely excluded from the basic minimum
until the 1970s (Mettler 1998: 6873). The Social Security Act of 1935 did not
include a provision for universal health insurance, and the United States only
achieved a minimal form of public health insurance in 1965, when Medicare
and Medicaid were introduced to help the aged, the disabled, and the poor.
With the exception of these programs for the nonworking poor, health insurance was always directly tied to full-time, standard employment in unionized
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did everything in their power to counter income and consumer-price inflation while allowing assets (nonconsumables such as housing) to appreciate
without discernible limit. This peculiar combination of fiscal austerity and
financial abundance was to become an enduring feature of US and other
Anglo economies from the mid-1980s onward.
Post-Fordism, then, has been able to survive to the extent that it offered
a class compromiseor, rather, concessionof its own. As the social wage
of the post-Fordist workforce has stagnated, consumption has been sustained by the burgeoning of low-cost credit, leading to historically unprecedented levels of household indebtedness (Barba and Pivetti 2009). Heterodox economists have proposed the concept of privatized Keynesianism as a
way of understanding this process, arguing that post-Fordism has more or
less reinvented Keynesian demand management by substituting private deficit spending for the public deficit spending of the welfare state (Crouch
2009; Bellofiore and Halevi 2012). Their continuing deference to Keynesian
economics, however, obscures the extent to which the very institutional and
contractual forms of credit creation have had to mutate as an effect of the
changing profile of the post-Fordist workforce. The New Deal banking system
presupposed the existence of a core workforce of regular, insured workers
a workforce that could be relied on to maintain the long-term financial obligations of social insurance and consumer credit. Today these conditions no
longer hold even for the most privileged sectors of post-Fordist labor. As
work histories become less predictable, money and credit have had to evolve
to price nonnormal risks and, in the process, have migrated beyond the regulatory spaces of the New Deal banking system. In other words, the postFordist expansion of credit would not have been possible without a profound
transformation of the New Deal banking system itself, a transformation that
was facilitated by both external forms of deregulation and institutional innovation from within. I turn to this process in the following section.
Shadow Banking, Securitization, and Uninsured Labor
The rise of shadow banking can be traced to the early 1980s, when nonbank
financial firms began to compete with commercial banks to provide services
that were restricted under the terms of the New Deal Banking Act. In many
respects, commercial banks had been the privileged beneficiaries of New
Deal financial regulations. Federal deposit insurance guaranteed the security
of consumer deposits and insulated depository institutions from bank runs.
Regulation Q of the New Deal Banking Act restricted the interest payments
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In the meantime, commercial banks were changing the way they managed loans in the long term. Heightened competition from nonbank institutions was making it unprofitable for banks to keep passive loans on their
books until maturity. The classic originate-to-hold model of bank lending was
therefore progressively replaced by the originate-to-distribute model of securitized credit intermediation, as banks chose to pool, repackage, and sell on
loans to securities markets, where they found ready purchasers among foreign and domestic investors looking to diversify their portfolios of Treasury
securities (Dymski 2009: 159; Gorton 2010a: 4). The turn to securitization
liberated the commercial bank from some of the risks that were endemic to
traditional credit creation: by separating loan making from the default and
liquidity risks that went along with holding loans to maturity, securitization
allowed banks to create risks they would no longer have to absorb, effectively
removing one of the intrinsic limits to credit expansion as it had existed under
the New Deal banking regime (Dymski 2009: 174). Using nonstandard mortgage products to attract uninsured or exotic borrowers and securitization as
a way of repackaging these risks into an ostensibly safe product that could be
sold on to third parties, the federally insured depository institution was able to
escape some of the limits written into the New Deal Banking Act. These innovations brought it into ever-closer alliance with the shadow banking sector
since the broker-dealer banks that issued repo were some of the principal
investors in mortgage-backed securities and other securitized debts.
Between the 1980s and 1990s, securitization itself evolved, moving
beyond the purview of government-sponsored enterprises such as Fannie
Mae, Freddie Mac, and Sallie Mae, whose portfolios were implicitly guaranteed by the state, into the market for private-label consumer credit that had
no public backstop. During the 1980s, the market in asset-backed securities
was dominated by the government-sponsored entities, which followed strict
underwriting criteria and favored standard, vanilla or conforming, loans
that is, loans made to borrowers with minimal default risk and a regular,
documented source of income. Default rates on these loans were traditionally as low as 0.5 percent. As Herman Schwartz (2009: 184) suggests, vanilla
securitization was a product of the (late) Fordist era, testimony to the efforts
of Johnson and Nixon to expand the market for social insurance and stateinsured consumer credit as far as possible without questioning the racialized and gendered divisions of the labor market. Despite successive antidiscrimination laws prohibiting personal prejudice in the allocation of credit,
vanilla loans were always subject to the premise of a standard labor contract
and therefore ended up excluding most women and minorities on purely
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excluded from the New Deal social consensus, seeming to confirm the notion
that financialization would usher in a superior form of social democracya
social democracy beyond the norm (Shiller 2003). Not surprisingly, however,
the rates of interest it extracted from these nonstandard borrowers proved
unsustainable in the long run.
No doubt much of this lending was predatory. It is estimated, for
example, that up to 50 percent of subprime borrowers could have qualified
for standard loans at the height of the housing boom (Brooks and Simon
2007). But the charge of extortion, repeated by so many critics on the left,
cannot account for the evolving, symbiotic relationship between the organization of labor, the form of money, and the terms of credit. Above and beyond
the obvious and undeniable cases of extortion, the increasing recourse to
nonstandard loan structures and exotic securitization also reflected a rational response to the evolving profile of the US workforce as more and more
workers moved into the space of shadow employment and standard labor
itself came under the shadow of social insecurity. How is one to standardize
risk when so few workers are protected by long-term employment contracts
or reliable social insurance? And how is one to sustain the consumption levels
of the Fordist era when wages are not only stagnant but also unpredictable?
The actuarial requirements of federal mortgage institutions established during the New Deal and Great Society era are supremely incompatible with the
contingent working conditions of the post-Fordist labor force. If consumption levels have nevertheless been maintainedat extraordinary levelsit
is thanks largely to the proliferation of private, federally uninsured forms of
money and credit that have sprung up beyond the regulatory parameters of
the New Deal banking system.
And yet the stabilizing promise of financialization became less and
less plausible as labor itself became increasingly contingent. What the subprime crisis made abundantly clear is the fragility of a system that depends
on the continuous extension of consumer credit to workers who have very
little chance of sustaining any form of long-term financial obligation at all.
The financial crisis may have originated in the most high-risk segments
of the subprime market, that is, among the ranks of the lowest-paid nonstandard workers. But what it points to is a more pervasive fault line that cannot so easily be confined to the post-Fordist underclass. The looming student
debt crisis, unfolding in a context of declining graduate job prospects and
stagnant professional wages, is more indicative of the full amplitude of the
problem, since it suggests that the fault line extends well beyond the lowwage service sector to implicate even the most privileged echelons of the
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domestic credit and global asset markets. Until the crisis of 2007, this elaborate system of money and credit creation operated without the formal backstop of the Federal Reserve; indeed, its participants claimed to have developed their own parallel system of private risk management and collaterala
claim that was duly confirmed by the AAA classifications granted by ratings
agencies. When this private system collapsed, however, the Federal Reserve
was willing (some would say compelled) to absorb unprecedented levels of
private debt onto its books, in the process transferring the nonstandard risks
assumed by private investors onto the public balance sheet. As Andrew Bowman and colleagues point out, the scope of central bank interventions after
the global financial crisis has gone well beyond the limited and temporary
lender of last resort role advocated by classical theorists of money management from Walter Bagehot to John Maynard Keynes and Hyman Minsky.
Indeed, central banks after the crisis have operated in a post-normal
world of non-Gaussian risk, involving nonstandard monetary-policy crisis
measures applied on a heroic scale (Bowman et al. 2013: 457). These nonstandard interventions on behalf of private investors stand in stark contrast
to the fiscal austerity measures imposed on social servicesa politics that
has remained more or less unchanged, although applied with varying
degrees of intensity, since the late 1970s. What has changed, no doubt, is the
political context in which decisions concerning fiscal austerity are made.
Having undertaken such extraordinary measures to bail out private investors, it is no longer so simple for the central bank to deflect calls for political
accountability or to hide behind the screen of scientific expertise. Whether
this change in context will lead to some kind of new social democratic compromise, to some effort by the state to recollateralize the risks of labor,
remains to be seen. At present, such a compromise seems far from the political agenda. What I have attempted to suggest, in any case, is that moments
of social democratic consensus such as that achieved during the New Deal
always come at the price of new lines of exclusion and new inscriptions of
social valuedivisions of labor and welfare that invariably anchor value in
the proper reproduction of sex and race (i.e., in the proper form of the family)
and on this basis distinguish between the deserving and underserving poor.
A truly ambitious anticapitalist critique, then, cannot limit itself to the task
of reconstituting labor as the foundation of value. If any lesson can be drawn
from the social movements of the late Fordist era, it is that political activism
is at its most interesting and disruptive when it refuses to settle for either the
politics of austerity or the constitutive exclusions of consensus.
Notes
1
2
3
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