Why finance feels like magic
What global markets have in common with necromancers.
This article originally appeared in Issue 14: Risk. Subscribe to the print magazine to get future issues delivered to your door.
Everything has a price. It’s a warning you might receive from a hedge fund trader, along with your “welcome to the firm” fleece vest. Or you might hear it from a skeleton, with flaming eyes, holding you by the cloak and ready to drop you into a pit. For “lawpunk” author Max Gladstone, the parallels between finance and fantasy sparked his Craft Sequence of novels (nine books and counting). While Tolkien and Lewis created their otherworlds under the shadow of their service in World War I, Gladstone’s books are his attempt to make sense of the global financial crisis.
Gladstone returned home from a stint teaching in China in 2008, just as the bottom fell out at Bear Stearns and Lehman Brothers. Part of what captured his attention was that so much value could vanish without leaving a physical mark on the world. “There was no smoking crater that was AIG,” he told Locus in 2015. So his books gave physical stakes to the abstractions of financialization.
His first Craft Sequence novel, Three Parts Dead, could sound like an ordinary fantasy: A god has been murdered. A necromancer comes to town to find the culprit and reassemble the god as best she can. But the plot has a lenticular quality — turn it the other way, and it’s the story of a corporate bankruptcy. Gladstone drew on his mother-in-law’s experience as a bankruptcy lawyer, translating it into epic. Something huge and ineffable, which once animated the city, can’t go on as it was. Something will have to be reassembled from the pieces by hard-minded men and women who work in a somewhat disreputable profession. A god — or a bank — is too big to be allowed to fail. Everything has a price.
Fantasy is a genre where readers expect to encounter hyperobjects, philosopher Timothy Morton’s term for objects that are “massively distributed in time and space relative to humans.” Hyperobjects exist out of human scale and confound human patterns of thought. Morton found his way into this language through his concern for environmental philosophy and the specter of climate change. The idea of hyperobjects helped him talk about why people flinch away from thinking about climate change — it’s too big to hold in your mind, it feels too big to address. In contrast, finance can feel like a too-big idea that someone else does have mastery of, and they’re wielding that ineffable power against the rest of us. But those working in finance are more prone to the language of mystery and supplication of strange gods than you might expect from the outside.
Hyperobjects provoke the painful awe of the sublime — they remind us of our littleness and “make this fragility conspicuous.” In response, Morton thinks, human beings need to be able to sit with the terror of our smallness. Morton proposes an “iterative, circling style of thought” in order to reason well about phenomena that dwarf us. He reaches for object-oriented philosophy to build up the habits we require, but this kind of problem isn’t as alien to the reader who haunts the genre fiction shelves.
You must not pick up the palantir to set your strength against Sauron. You must not call up what you cannot put down. There is a worm at the heart of the tower, there are armed hunters in the dark forest, there is always the option to go mad from the revelation. Thus, Gladstone found, “I could talk about this stuff with magic: In fact, it was easiest to talk about it with magic.” Within a novel, the “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money” doesn’t have to be a metaphor at all.
A story that can only be told slant, if you want to tell the truth. A powerful, inhuman force you can harness, but mustn’t look directly at and whose name must be kept secret. What sounds like the novelist’s specialty isn’t so far from how the finance bros might describe their own work, once they’re several shots or bumps into the night. Four times a week, Bloomberg’s Matt Levine tells the stories of the latest (mis)adventures in finance in terms that don’t sound too different from those of Gladstone’s novels.
In 2021, Levine coined the “Elon Markets Hypothesis,” a principle of what he called “postmodern finance.” As he put it: “The way finance works now is that things are valuable not based on their cash flows but on their proximity to Elon Musk.” A meme like Doge (the cryptocoin, not the liquidation of AIDS infrastructure in Africa) didn’t trade based on anticipation of future cash flows (none were anticipated). It rose or fell the way a plant follows the sun, depending on Musk’s fleeting attention.
If Musk’s attention is valuable, there’s a trade to be made. But you won’t learn these black arts from your business school professor. Per Levine:
How can you obtain Musk proximity? I don’t really know — nothing in this column is ever Musk proximity advice — but, look, in these circumstances, it would be understandable if you resorted to techniques of ancient magic? Like if you were to sculpt a giant metal idol of Musk, you might go ahead and assume that the idol would have some valuable magical effect on your crypto project? And if you were to offer up that idol as an gift to Musk himself, and if he were to see it and bless it and accept it and perhaps tweet about it, then that would instill your crypto project with Musk’s divine spirit in a way that would probably make the price of your tokens go up? Is this all stupid? I don’t know? Yes? And yet? All I am saying is that humans have been offering precious idols to divine powers for thousands more years than they have been building discounted cash flow models in Excel. Do the idols have a better long-term track record than the DCF models?
This wasn’t speculative fiction. Crypto peddlers spent $600,000 building a sculpture of a goat with Elon Musk’s head. The goat wore a gold-plated dogecoin necklace, and straddled a rocket that could shoot real flames out of the back. They left their offering at the gates of Tesla’s headquarters as hopefully as a Slavic housewife leaving a little saucer of milk for the domovoy. “Elon tweeting us would legitimize the token,” Ashley Sansalone told the Wall Street Journal. He did not, and their token went, deservedly, to zero. They might have done well to consult the books of deeper wisdom: “I can call spirits from the vasty deep … Why, so can I, or so can any man. But will they come when you do call for them?”
Little wonder then that critics of the market no longer worry only that elites are exploiting real people beneath them. Now the concern is that they are trafficking in fictions, and that they have sunk from sharps to marks. Brink Lindsey levels the charge in “The Retreat from Reality,” calling the modern system of finance, “a parasite that creates the appearance of dynamism while rendering the economy less vital and less capable of bona fide innovation.” The problem, as Lindsey sees it, is that the masters of financialization are reaping windfalls while creating nothing:
Figuring out ever more elaborate ways of trading existing financial assets, including recombining them into derivative forms, is an essentially sterile enterprise; it can make enormous money for people who are good at it without creating anything of cognizable social value — just like lotteries, slot machines, and poker … Finance acts as a parasite by draining off some of the most talented people in the country who, instead of working on AI or fusion or at least building a better mousetrap, fritter away their productive energies on building castles in the air.
I’m half sympathetic to Lindsey’s critique. There’s something fundamentally dishonest sounding about taking a pool of cash flows and debts, separating them out into higher risk claims and lower risk claims, and selling the differentiated products for more than you could have gotten for the original pool, sold as a set. Where else, in the “real” economy, can you sort a bundle and sell the pieces for more than the value of the whole, or turn right around and pool differentiated products and sell the whole for more than the value of the parts? Something from nothing is a magic trick, and, in our world, everything has a price. If you don’t know what it is, you’re the one paying.
And yet, step away from the abstractions and hyperobjective scale of finance, and it’s obvious that bundling and unbundling can provide real value to consumers. As a parent of young kids, I pay dumb per-unit prices for individual packs of cheddar bunnies, so that I can disclaim responsibility if the sisters do not receive the exact same amount of snack at my hands. I send them to our local Catholic school, to receive a bundle of lessons and examples that I could theoretically provide, but I find the diversity of teachers and peers within the pool more valuable than what I could compile myself. At the same time, my homeschooling neighbor sends her kids to drop in for tutoring at Mathnasium, for the single item in my bundle that she is missing.
Markets made a big difference for charitable organizations when Feeding America changed how they allocated grocery donations to the food banks in their networks. For a long time, Feeding America used a turn-based method, trying to allocate goods fairly. Each food bank was placed in a long queue; when a particular food bank’s turn came, they were offered the chance to say yes or no to a particular bundle of goods. Whatever they chose, they went to the back of the line to wait for their next turn. This led food banks to say yes to goods that were a poor match for the groups they served, for fear of missing out on getting anything at all.
In 2005, Feeding America allowed food banks to bid on lots of goods with an artificial currency of shares. The shares were roughly proportional to the number of people the bank served. The auction system helped the participating food banks get the goods they valued most. It increased donation volume since donations moved quickly. The central auction gave all the food banks a way to speak simultaneously through the prices they bid. The abstraction of the auction made an enormous difference at the concrete, personal level of poor families sitting down to dinner.
It’s the excesses, absurdities, and catastrophic failures of financialization that capture our attention. When financialization functions well, it operates below our level of attention, in the same way that you only think about exactly what your stomach is doing to your dinner when something has gone wrong in your digestion. People sleep peaceably in their beds at night because analytic men and women stand ready to run models and set prices on their behalf.
It takes an act of deliberate distancing to see what has become so natural that we forget anyone ever had to invent it. Once again, fiction offers the heightened tone that gives us space from our reflexive judgement and an invitation into original seeing. In The Lehman Trilogy, a spectacular 3½ -hour stage play, Stefano Massini follows the Lehman family through boom and bust, invention and overextension. The financial behemoth that felt too big to fail is built out of small decisions and sudden insights.
The three original brothers arrive in America in the mid-1800s and begin their lives as ordinary businessmen. The Lehmans run a dry goods store. They sell fabric and suits, but then, as they find their footing, they expand their lines of merchandise. “I came to America to sell fabrics and suits,” Emanuel objects. “It’s all business,” Henry replies. “It’s what we do, we sell. Whatever it is.” Their family’s rise is fueled by a comfort with abstraction. Better to be a seller-in-the-abstract, able to pivot to whatever is readiest to buy, than a specialist in a particular product.
In 1853, a fire tore through Montgomery, and the Lehmans found they were sellers-in-the-abstract to a community that had lost the ability to buy. The brothers took the next step up the ladder of abstraction. If there was no money to buy, then, in order to sell, a new currency had to be invented. Instead of cash on the barrel, they would have to find a way to buy and sell debt. Debt could be a bridge for them, and the farming community they lived alongside, to step from nothing to something.
Debt lets you buy today with the cotton crop that would exist tomorrow, if only you could buy seed and tools with the money you did not yet have. A little fold in the fabric of time, a tesser, and the whole thing resolved without paradox. Debt is not one of Morton’s examples of hyperobjects, but it fits his general framework of these massive phenomena “exert[ing] a backward causality on other entities.” You existed because you had once travelled back in time to introduce your mother and father. Your community was rebuilt because money travelled back in time from the prosperous future you couldn’t afford. Don’t think about it too much, you’ll give yourself a headache. We’ve all seen the Time Knife.
The Lehmans do not go mad from the revelation. They collect cotton in payment for debt; they bundle and sell it up north. Emanuel Lehman travels north to see the factories that digest the cotton they sell. He returns to his brothers, transfixed:
The room shakes with the hellish racket of the steam looms / their long mechanical rakes / twenty feet long, twelve feet high / combing and stripping the cotton constantly … The rakes just ate the cotton up / so voracious, so greedy, that Emanuel couldn’t help but think / that if they had another one hundred, two hundred … / one thousand wagons … / the machine would have swallowed them all. Baruch HaShem!
If Emanuel was too early for the term “hyperobject,” he had an older word available to him: leviathan. Could he draw it with a hook? Would it speak soft words unto him? Could it be bound as a servant? A question for another day, perhaps. You could certainly make a contract with its keeper. The brothers would expand their business across the whole South. They had seen what the farmers had not — the great mouth and how much it would pay to be fed.
Like anyone who sojourns outside our world, they had fantastical stories to tell that no one yet believed. In the play, Mayer Lehman attempts to explain his family business to the man he hopes will be his future father-in-law. His beloved’s family could comprehend a simple dry goods merchant, but the Lehman brothers had become merchants without a store. They don’t transform the raw cotton they buy — they convey it to those who will transform it.
“What kind of job is that?” Mr. Newgass asks, “Something that doesn’t exist yet, Mr. Newgass,” Mayer explains, “It’s something we invented … We’re middlemen.”
After hours in a dark theater, a familiar word can become strange again. What was it like when “middleman” was spoken for the first time? What is a casual word of dismissal for us has an obvious thrill for Mayer. In the middle, you have the distance to see the world and put it in better order.
A middleman offers more than just a connection between pools of buyers and sellers. Part of the value a middleman can offer to both sides of his transactions is mystery. If his work is skilled, priestly, esoteric, his partners can treat it as a black box, and wash their hands of it. Disclaiming knowledge and responsibility-as-a-service is something you can charge for.
For some observers, the opacity of the financial market is a gift. If the ordinary person has terrible intuitions about risk, there needs to be some smoke and mirrors to get him to act in his own best interest. As Steve Randy Waldman put it at Interfluidity:
Finance has always been complex. More precisely it has always been opaque, and complexity is a means of rationalizing opacity in societies that pretend to transparency. Opacity is absolutely essential to modern finance. It is a feature not a bug until we radically change the way we mobilize economic risk-bearing. The core purpose of status quo finance is to coax people into accepting risks that they would not, if fully informed, consent to bear.
From Waldman’s point of view, middlemen and opacity help many disparate actors solve an otherwise impossible collective action problem. Each individual risk you take as an investor is, well, risky. Someone needs to command the pools of capital that can handle loss after loss, until one big success pays for all. And a few people need to be ready to crash and burn in expectation of one or two others breaking through.
Elon Musk famously admitted that he thought SpaceX had only about a 10% chance of success. Because he took a big picture view, he embraced the risk. If someone is willing to stake 10 people who are willing to chase that risk/reward balance, one of those risk-takers is expected to break through and change the world. As Waldman summarizes:
Successful real investment does not occur via isolated projects, but in waves, forward thrusts by cohorts of optimists, most of whom crash and burn, some of whom do great things for the world and make their investors wealthy. But the winners depend upon the existence of the losers.
This kind of gamble isn’t solely the province of venture capitalists chasing unicorns. Almost every book publisher works according to the same model. Most books they sign will be a loss, but a limited number of breakout and backlist titles pay off and provide the capital to sign the next group of (mostly) losers. Here, the big wins are big enough that even the losers are subsidized; publishers aren’t just moving around a static pool of money.
Even someone who’s never drawn up profit and loss projections has still probably played one game that goes lose-lose-lose … win big. Dating follows this basic model: The expected outcome of each particular Tinder or OkCupid date is probably negative, but men and women persist because you only need to hit the jackpot once. Then you get to cash out and leave the table.
Part of the game is not explicitly discussing these patterns, though, especially not with your counterparties. The editor isn’t supposed to tell the author it’s become clear their preorders aren’t snowballing. During the date, you usually can’t say you’re adopting a high-volume, high-variance search strategy. (Worked for me, though.)
As the Lehman brothers begin their shift from commodity merchants to brokers, they offer their clients this sort of service. A farmer wants the freedom to specialize in just farming, the same way a savings account customer wants the freedom to just see an interest rate, without thinking about every calculation of debt and risk that drives the number up or down. The farmer buying on credit, the modern customer with her checking account are relying on someone to take enough smart risks to cushion the losses and have a little left over. Stability depends on risk, and peace of mind depends on not knowing the details. The Lehmans became a bridge that allowed Southern farmers and Northern factories to not know each other.
The middleman isn’t just skilled at choosing prudent capital investments and partnerships. Increasingly, the job is sliding carefully up and down a ladder of abstraction. When things take a turn for the worse, the merchants of abstraction can have trouble interpreting back down to the people who have trusted them.
Most middlemen can’t offer the reassurance that small town banker George Bailey can in It’s a Wonderful Life. When Bailey’s customers make a run on the bank (and money has genuinely been mislaid), Bailey can credibly tell the mob that he may not be able to hand them back their money out of a vault, but that they know where it is. “Your money’s in Joe’s house … right next to yours,” he tells one of his neighbors. Bailey lists family after family, and tells the angry crowd, “Why, you’re lending them the money to build, and then, they’re going to pay it back to you as best they can.”
Bailey has just the right balance of abstraction and immediacy in order to run his business. His customers can picture the specific homes they’re financing; they can imagine the holes torn in the fabric of their neighborhood if they collapsed dozens of mortgages in a day. But still, the people of Bedford Falls wouldn’t have interviewed Joe (and every other renter) and then decided how much money to allocate him and on what schedule. George Bailey is a translator, comfortably sliding up and down the ladder of abstraction to align his neighbors’ short-term self-interest with their long-term hopes for their homes and their community.
The Lehmans, however, are ultimately headed for collapse. The brief prologue to the play opens on a janitor in 2008 clearing out trash as a radio drones “Lehman Brothers threatened with bankruptcy … decision expected before market opens.” As the play unfolds, the audience leans forward, watching carefully, like the smart mark who knows how not to get tricked by a shell game performer. Where did the collapse become inevitable? Were the brothers and their successors simply the next necessary losers, so that other merchants with a high appetite for risk could be staked and come out winners? Or is their story a classic tragedy, rooted in a specific, personal flaw?
By my lights, the crucial scene comes as the family business passes to the next generation. It is 1891. Mayer and Emanuel are being interviewed by the Wall Street Journal. Emanuel’s son, Phillip, sits quietly in the corner. The journalist asks, “If your bank had a recipe for making money … What would the core ingredient be? The flour that you bake with.” The Lehmans are no longer a family business but a bank. They trade commodities, they finance railroads. It is hard for the brothers to say what the core ingredient of their work is. Trains, coffee, coal, the brothers offer, thinking out loud. They know for sure it’s no longer cotton. Phillip cuts in:
PHILLIP.
The flour that you are asking about
is neither coffee nor coal nor cotton
nor the steel of the railway tracks.
We are merchants of money.
Regular people use money only to buy things.
But we, who have a bank,
we use money to make more money.
We buy it
we sell it
we lend it
we trade it.
This is how the recipe works.
Our flour is money.
MAYER.
Mayer stares at Phillip.
EMANUEL.
Emanuel does the same.
MAYER.
Like two bakers who suddenly...
EMANUEL.
...Don't know what bread is.
Emanuel, who had once felt he had to visit a railroad to know if he should invest, knows that his time is over. For his son, the models and the figures will always be more real than the railroad ties and sacks of coffee they represent. The question is whether anyone does still know what bread is in the heady world of pricing risk.
Meme stocks and crypto increasingly look like bread made without flour. The price of Dogecoin or of Gamestop doesn’t depend on what the anticipated future flows of the underlying asset are. They are, at best, a way of pricing parasocial affiliation with these communities of traders. For some digital assets, like the various Trump family crypto coins, you can work your way around to arguing that quantifying this strength-of-affiliation is valuable — maybe you want to hedge a Trump-related business risk. But the case is pretty thin.
When Gladstone took stock of the 2008 financial crisis — the convulsion that collapsed Lehman Brothers — he translated it into fantastical terms. “We were witnessing the twilight of a certain set of gods and monsters, which then devoured their own entrails and gave birth to another set of god/monsters, which is what always happens with gods.” So which rough beast has its hour come at last now?
You can spot the nascent godlings in the prediction markets. Like a bound demon escaping its summoning circle, real-money prediction markets like Kalshi have attempted to slip out of reach for state regulators (who set limits on gambling) and federal regulators (who approve securities offerings). Kalshi has placed itself under the aegis of the Commodity Futures Trading Commission and offers “event contracts” on what otherwise might look like sports bets (who will win the Superbowl) or securities (the S&P 500 price at the end of this week).
These little godlings are hungry for attention, and they don’t promise profit but perpetual volatility. There will always be a little action available, and there’s always a parlay to justify your investment in the next play. A functioning market depends on players being deeply invested in their expected value. By contrast, a casino’s most committed gamblers get frustrated when a slot machine jackpot interrupts their flow state of press-spin-repeat.
Markets and middlemen serve us best when they are future-oriented. Debt is an informed gamble on what possible future is almost here, but needs a little push to be joined to the present. An auction or a market is a pooling of knowledge, allowing many expectations and preferences to aggregate, like tesserae, into a fuller picture than any participant possessed. Prediction and gambling markets that satisfy present hunger to feel something — up, down, sideways, whatever — lose their moorings.
A healthy market prowls looking for serious disagreements about the future, unnoticed inefficiencies that can be collapsed into profit. A stagnant market just needs frothiness, and the length of a press conference is as good an opportunity as anything else to spit on your palms and say “Bet?”
In response, you can unmuzzle the traditional watchdogs who policed market makers. You can raise the threshold for accredited investors until more retail investors are priced out. You can, as Matt Levine has modestly proposed, offer the smart-marks a “Certificate of Dumb Investment” (price: one hard slap in the face).
When you start to lose your sense of what bread is, it’s time to slide back down the ladder of abstraction and see what you’re certain of. What piece of the hyperobject do you have in view? What can you hypothesize about what you can’t see? How can you test your fragile model of the world? How much can you afford to risk as you take the first step off the edge of the map?
The most suspicious markets are those without tight feedback loops. A business needs to convince a customer it is providing real value, worth the price charged. But a nonprofit can often justify its grant proposals by appealing to its funders’ pride and sense of identity. A company in its growth phase faces similar temptations to win over a VC with their intensity and ambition, not their acumen. When you make something of real value, there is going to be a real customer on the other side of the transaction. There will be someone eager to do business, even if, from their perspective, the bread, the pencil, the contract seems to appear as if by magic.
This article originally appeared in Issue 14: Risk. Subscribe to the print magazine to get future issues delivered to your door.
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