I have a modest proposal.
While things are a monstrous mess on the credit front at the moment, the real problem is a very simple structural one.
Everyone, starting nearly two generations ago now, absorbed the idea that money is an idea, rather than a thing. Money—however regulated in its transfers by central banks—is actually created by work, and that value of the work is set, ultimately, by commercial financial institutions through a sort of vague social consensus. (Every had a pay review that compared your salary with a target taken from an industry average of salaries for people with similar job titles? Ever wondered why that makes sense, rather than attempting to determine your actual contribution to the company? Which would be pretty easy to evolve simple mathematical rules for? That's what I mean by "vague social consensus".)
At which point enough people figure out that the best way to be really rich is to turn government from a machine for securing the general welfare into a machine for ensuring the continuation of wealth, and away we go.
There are two really serious, and various minor problems associated with this.
Really serious problem the first is that this results in risk-shifting, generally from the wealthy to the defenceless. At best this produces results which are horribly and systematically unjust, and maintaining the injustices in place requires corrupting or suppressing any representative or democratic institutions, so that the people being subjected to the injustice can't vote to remove it. Eventually they figure out that they can't fix the problem within the scope of the existing society, and bloody revolution, actual or attempted, results.
Really serious problem the second is that the banking system works, in large part, by valuing work that's going to take place in the future. When you take out a loan, the value on the loan goes on the bank's books as an asset. When they do this, they (in effect) create money. It is, if the system is working properly, done very carefully and the risk is managed by charging interest and the future value is appropriately discounted, but, fundamentally, fractional reserve banking is a process that assigns present value to work that will be done in the future.
This is, in and oft itself, a very good thing. It lets people with good ideas build them much faster than they could if the kind of credit available through fractional reserve banking wasn't present.
However, as a mechanism, it's subject to the general human tendency to excess hope. People want to believe in a secure and good future; perversely, there's nothing like expecting such a future to keep you from getting it. Once a mechanism is found to legitimize this hope, it's very easy for the banking system to get turned into a machine for shifting value from the future to the present. This presents very serious problems the instant the future is not the expected future and the whole structure falls over.
In a context where the prevailing view of the economy is that it is a machine to ensure the security and continuity of existing wealth -- if you're rich now, you will stay rich tomorrow, next year, next decade, and next century -- this goes from being a problem to a disaster, because the expectations of class are at work in the decisions about what things will be valuable in the future, and the relatively harmless error of hope is replaced with the harmful errors of greed. Notably, pricing things based on what they "should" be worth, rather than in a quantitative way. This eventually introduces enough instability (=not matching reality) into the system to wreck it.
Minor problems include how easy it is to exploit that hope to build a money pump to get a disproportionate amount of the value from the future concentrated in very few hands, the equation of wealth and goodness, typically as a conscious strategy of justification by the folks doing the risk shifting, and the tendency to extremely wasteful conversion of what could be future benefit into future harm; by treating the entire future as beneficial the majority of the future becomes harmful until the accounting is again in accord with reality.
The question is mostly what to do about the whole thing, which brings me to the modest proposal.
Three things need to happen to return to something like a stable financial system.
People need to believe it is, as a system, sound.
The pre-eminence of capital over labour needs to be broken; that includes limiting the range of compensation, and regulation with the intent to produce general economic prosperity in the future. (Which means, in part, that the proper purpose of a corporation is not maximal profit but reliable profit.)
Great concentrations of wealth must be dissolved and distributed. Oligarchy through capital is as bad for democratic principles as any other kind, and is the inevitable end condition of unconstrained and unregulated capitalism.
So, change the money. The carefully hidden offshore hoards become valueless; the concentrations of wealth must submit to conversion or similarly dissolve into nothingness.
At the same time, taking the opportunity to switch to a system where there's coined gold in circulation, no paper money, and most transactions are electronic, would create a general upswing in belief in the system. Gold isn't inherently valuable but it remains hard to fake, and it retains significant emotional status which would be useful just at the moment.
At the same time, re-denomination—one thousand old dollars are fifty new—allows two important things to happen. One is a reset of the long pattern of inflation more or less inherent to a fiat currency (this will have to happen again sometime...), and the second is a partial reversal of the chronic and systematic underpricing of labour by setting up the salary conversion rules differently from the capital conversion rules.
I don't believe it would even be that difficult to do, considered purely as a logistical problem.
13 November 2008
I have a modest proposal.