We need to find an alternative to the existing monetary economy - not least because it just does not work!! It is a sophisticated pyramid selling scheme, which we have all bought into.
Money itself is a psychological instrument - it does not exist on it's own (see my blog post for 13th March), it is created when you take out credit (therefore money = debt!). Money used to be based on gold - the system then was called the 'gold standard' because a bank note was a 'promissory note' - if you took it to a bank, you could demand it's equivalent in actual gold. This was modified by the Bretton Woods agreement during WW2 (when the dollar became the standard, but it was pegged to gold) then the dollar-gold link was abandoned by Nixon in 1971.
So what? Because money no longer has a physical base, bank deregulation has allowed huge amounts of it (debt) to be created out of thin air! Like an upside down pyramid it is based on and fed by real things like people paying mortgages and working to produce value. But on top of the small, real base of this inverted pyramid has been built an enormous, mushrooming mountain of debt. This debt takes the form of 'derivatives' and is like a huge swirling whirlpool of financial instruments. For example take one kind of instrument: CDS (Credit Default Swaps), of which there are about $67 trillion dollars worth floating around!
They work like this: A bank lends money (which it probably does not have) to people for mortgages. It then takes a bunch of those mortgages and puts them together to create a financial product (or instrument, let's call it product#1) which is used to borrow money (according to fractional reserve accounting rules) from a commercial bank (or, in the USA, Fannie May for instance).
The Commercial bank now has this financial instrument (product#1) and it:
a) creates a CDS (lets call it product#2), which is a guarantee (insurance) from a third party in case the first bank defaults on product#1, and
b) bundles product#1 together with other products and creates a new instrument (lets call it product#3) to borrow money against.
This CDS (product#2) itself can then be borrowed against because it too is a kind of financial instrument! And of course product#3 will also be the source of a CDS (product#4)! - and so it goes on with more and more debt being created on the basis of the honest mortgage at the base. This $67 trillion CDS mountain is simply one of the foothills of the total derivative mountain - some say the total is nearer $1 quadrillion - a thousand thousand thousand million dollars.
You should realise that this is not about sub-prime mortgages, they are not to blame, they are merely one of the triggers. The total mortgage market in the US is worth about $11 trillion. If, say 20% of that was bad, that is still only $2.2 trillion dollars. The worlds central banks have pushed much more than that into the banking system this year without solving the problem.
How did this happen and what to do? If you look back you see that there has been an inexorable move towards the centralisation of financial power and control. For example, in both the UK and the US we used to have straight forward, community based ways of creating mortgages in order to buy a house. In the UK we called them Building Societies and in the US they were called Savings & Loan banks. These were community based institutions whose members (not share-holders) clubbed together and saved money which was made available within the community as mortgage loans - they were literally Societies for Buildings!
In the 1990's in the UK and the 1980's in the US all these fine old institutions were deregulated and their directors persuaded the members that they should become banks. This represented a massive shift in wealth from millions of Society members to the financial community which is dominated by a relatively small number of powerful groups.
In the present crisis we see that consolidation of power accelerating as the number of key financial institutions is reduced and more and more wealth is centrally controlled.
Some people believe that the answer is greater state involvement ('a buy-in') which will lead to a form of public ownership - to the benefit of the public along the lines of the recent UK Government action. I disagree - for several reasons.
1) There is not enough wealth in the world to pay off the enormous debt created. For months the central banks of the world have been creating more and more money out of thin air and it has had no effect. Each time they borrow money from the money market they simply create more and more of these financial instruments, thus making the debt mountain even bigger! The money is created by central government and handed to private financiers while the tax payers are left with the debt. They are inflating (and devaluing) money
2) The Brown Government initiative has simply shoved us further into the 'brown stuff'! The UK is pumping more money (£500 billion) into this unregulated market, but only a tenth (£50 billion) is directed to banks as shareholding, the rest is going to support those financial instruments. Furthermore those shares will be preference shares which have no voting rights and give no control, they simply attract a dividend (if there is one). When it comes to dealing with private sector corporations the UK government is entirely ineffective.
3) It is the same financiers that created this mess who are in charge of the responses. For example, in the USA the Treasury Secretary is a man called Hank Paulson. He is the ex Chairman and CEO of Goldman Sachs, one of the most aggressive of the voracious Wall Street banks. As Treasury Secretary he now has carte blanche within the US financial sector. If the US adopts the approach of a 'buy-in', he would be in charge of all the USA banks taken into 'public ownership'. By the way he already has the power to take over every bank in the US, without reference to Congress. Like putting that nice wolf in charge of the sheep.
4) The system itself is fundamentally flawed - systemic failure. Therefore, rather than trying to patch it up, we need to ask what it is that we are trying to achieve with our monetary economy and how might we best achieve that goal. That is a big question, for another time!
Given that the financial sector has created these problems (and continues to so do) if we want to help individuals we should recognise that the sector does not work and we can not trust bankers to operate in our interest. There is absolutely no evidence that money given to banks ends up by helping the banks customers (except a tiny, tiny group of billionares).
We have to find a way of getting money to people which by-passes the banks. One solution is that instead of giving £500 thousand million pounds to the banks, a fraction (perhaps £1 thousand million) of that should be used to invigorate the UK Post Office network. (It is currently being reduced in size because it is deemed that the £150m subsidy to rural communities is too much!) The traditional British post office was at the heart of the local community. It was a conduit that enabled the government to channel money to the elderly or poor, and provided many other community building services.
A new form of the National Giro (it was de-regulated and privatised) could be used to help people who are adversely affected by the present crisis. For example, if their savings with Bank X are at risk, then those savings could be transferred to a new post office account; mortgage payment support could be arranged in a similar way. That way funds could be directly channeled to those in need. In the mean time the banks could be left to suffer the consequences of their corrupt practices - and fail publicly.
We need to see the emergence of the Community Company through initiatives like the Grameen Bank and Social Enterprises which demonstrate aspects of the Gift Economy. The gift economy is the real power which underpins the current monetary economy and will eventually be recognised as such.
Posted by Nicholas Moore 12:52:03 AM