Those who know me, or those who come read my writing’s regularly, may know that I have many interests and the audacity to pursue nearly all of them.  At the advise of Nietzsche, I am proudly an amateur at nearly everything I do and hardly professional in anything.  I have no degrees; I have no official training’s or certificates; I have spent my entire adult life on and off in college, accumulating a total of almost an Associate’s Degree worth of credits, but otherwise, I have learnt almost exclusively from the people around me and a nearly pathological need to read about any and everything that strikes my interest.  What interests me?  vegetable gardening, fruit and berry pruning, music, writing, philosophy (whatever the hell that means), human behavior, herbalism, history, random trivia, mathematical patterns, coffee, geography, children, building things, consciousness, social trends, beer, the way things work, and of course, social theories, political life, and most of all, human interactions both macro and micro.  Keeping in mind my above declaration of a somewhat pathological bend towards trying to understanding things, I am not content with many answers but instead find in one idea a need to learn more about another ten.  My quest to try and understand just what the fuck it is we humans are doing here, why, and how come the whole thing is, well, a pretty sloppy and often miserable mess has led me to try and learn a bit here and there about political and social structures, theories, and, somewhere in there, economics.  And economics, near as I can tell, is really nothing more than the root point of politics and society: we come together as a social species in order to provide for and ensure our collective survival (as all social species do), and there you have it: an economic system of one sort or another.

Economics, of course, is famously known as “the dismal science”, and I get it: fancy abstracted terms that have no instinctual connection to what the hell they are referring to, numbers and formulas that go on and on until no one in the conversation knows what the fuck the original question or point was.  On top of it all, any economist worth their weight in salt will tell you point blank that there is little, if any, “science” involved in economics.  After all, what we really are talking about, at the very root of economics, is simply the ideas and theories of how people can, did, do, or should interact with one another and with the resources around us in order to fulfill a variety of needs and wants.  Based on observed patterns and a bit of speculation, people called “economists” create all sorts of fancy formulas and theories and predictions about one thing causing another causing another causing another, ad infinitum.  The truth of the matter, however, is that unlike any real science, very few economic theories (including most any of the economic systems that have hither to existed on planet earth and especially of the current dominant system, capitalism) fall into the realm of Law; far more often, economists give us what amount to little more than patterns.  

Now, to be fair, many economic ideas are quite good at predicting events.  Some patterns really do play out exactly the way one would assume they would, and they do so with near 100% certainty.  Still, a Scientific Law or Truth is just that- so close to being 100% that we could fill the entire universe with 9’s after the “99.9” percent is written.  Economic “rules”, however, even the best ones, well, I wouldn’t be comfortable with more than two “9’s” after the decimal point when describing their certainty.  And those are the very few rules; the vast majority of them fall far short of “99%” accuracy, at least the theories that have been allowed to play-out on a large scale in the real world.  There are, of course, many economic ideas (some good, some ridiculous) that have never had a chance to play-out in human society and until/unless those experiments happen, well, who knows (it is, actually, this place right here- the economic theory that remains untested- where “economics” looks, feels, and acts a whole lot like a political theory, and I would argue that at least most of the time, that’s exactly what it is).

The Current Crisis

With all this in mind, I’ve been trying to figure out what excactly the deal with the current “global financial crisis” is.  Not merely because these things fascinate me, but also because I want to know if it’s time to ensure my food stockpiles are in order and get my shotgun back from Kevin- there’s no way the whole friggin’ system is going to collapse at precisely the moment I wasn’t prepared, and hell, I’m sharp (enough), I think I have a good chance at reading the clouds for a storm.  At the very least, I know I can give my mom better advise for how to take care of her retirement savings than the dopy investment banker’s mantra of “don’t panic- the market always corrects itself” (yes, a system based on exponential growth from finite resources will certainly repeat forever the pattern that it has for the past 200 years; I mean, there isn’t anything that happened in human history before capitalism, so there certainly can be nothing in history after it, right?).

The often-sited “beginning” of the current financial crisis is the implosion of the U.S. sub-prime mortgage market.  For those of you who have managed to get this far without yet figuring out what that means, a) congratulations! and b) get out from under your rock- your self-imposed naiveté isn’t making the world or your life any better, quite the opposite actually.  Slightly more seriously though: the “sub-prime mortgage” thing is largely about banks and other financial institutions lending money to people who couldn’t guarantee they could pay it back, and had little to no safety nets to rely on if they hit harder financial times.  When the interest rates on these loans and mortgages went up (as they almost all were intended to do) people could no longer pay the banks.  This caused several things to happen: first, when you don’t pay back your lender, they take possession of whatever the thing they lent you money for (in most cases, homes and property).  Banks, however, aren’t all too interested in owning property (at least, not in owning too much of it).  So they start frantically trying to sell, at less the the house is “worth” if necessary in order to get cash back into their hands.  Simultaneously, people who could see that they were on the verge of losing their home to the bank began frantically trying to sell their homes, to get any cash they could to pay off their loans and avoid bankruptcy.  With all these houses on the market, home values dropped quickly.

Now, this is a bit of a simplified version of the situation, but it’s accurate enough.  The real “sub-prime crisis” kicks in when we understand that banks, financial institutions, and in fact, many other huge corporations play a kind of continual game with the actual money, cash, they have at any given time.  When you or I deposit our paycheck into the bank, it’s not really just sitting in some safe somewhere, waiting for us to return tomorrow and withdraw money from our account.  These folks do all keep a certain amount of cash on hand at all times, but really what they do with your and my deposit is they pool it together with all the other money they receive and they play it on the market- they lend it to someone, or in the case of these bigger financial institutions, they lend it to each other in huge sums, and they buy stocks, bonds, treasury notes, etc.  They try to make money off the money.  It’s a constant, and rather complicated and intricate game of lending money at one rate to one person or institution, and collecting money (and, of course, interest) from another person or institution at the same time.  When the banks began finding themselves in possession of more and more properties- meaning they weren’t collecting the cash money they were depending on to be able to pay off the money that they had borrowed from elsewhere, well, there’s your crisis.  To the regular folks on the street- you and I- this meant little, unless a) you were one of the millions of people (approx. 9,000-10,000 families a day is the generally agreed number of home foreclosures in the U.S. right now) unable to pay your mortgage and you lost your home or b) you were looking to borrow money for one reason or another.  The banks had no choice but to pull back on who and how much they could lend out, to people and to other institutions.  And there’s a the real “crisis”, for the capitalist, because a huge component of the current system is people who don’t have money borrowing money from people who do and then spending it in the consumer market.  When money isn’t being lent, it’s not being spent, which then spreads the problem beyond  just the banks: less products being sold, which means job cuts, wage and hour reductions, and the like for the worker bees of the system.  This, of course, directly translates into more people without the money to pay their mortgages and loans, and now we see the snake eating its own tail.

The latest fallout from all this crap, as everyone surely knows about because it’s practically the only news story going on in the corporate press, are the collapses, near-collapses, and Federal take-overs (i.e., “buyout”, i.e. “nationalization”) of some major financial institutions.  The first was Bear Sterns, then Freddie and Fanny, then AIG, Lehman Brothers, and Washington Mutual.  

If institutions as large and complex as these were to be “allowed” by the powers that be to simply fail, to file for bankruptcy en masse and tell their debtors “sorry, we can’t pay you, we’re calling it quits” it would have far, far reaching effects.  Or so we’re told.  The accepted scenario is that literally, chaos and disorder would be highly expected, as personal finances would become non-existent for millions, if not billions of people the world over.  Aside from financial ruin and home foreclosures, the eventual conclusions of a system-wide failure would mean food systems and supply chains would breakdown; power, water and sewage systems would likely be disrupted, and the “survival of the fittest” mentality of people in want for not only the comforts of modern life but also the basic survival necessities would act irrational and erratically.

Or maybe not.

But before I move into that part of this diatribe, lets close out with what is happening and will likely be the result, in the short term, of this “crisis”.

The Capitalist Response

The stock markets the world over have been, um, turbulent over all this.  This is for several reasons, but the leading one’s revolve around the fact that no one (in the markets) is trusting anyone else to be able to pay on their debts, and so no one is lending, and so there’s a “liquidity” shortage (“liquidity” simply meaning “cash”).  In addition, if you’re in the stock market game, part of your job is to know who’s going down next, and there are several ways to do this.  One of the biggest is selling short, which I’m not going to bother to explain beyond saying that it’s when you “buy” a stock at a much lower price than what it’s trading for, essentially betting that the stock (the company) is going to go down or even crash; if the stock does tumble downwards, you’ve won the bet and you make the difference between what the price was when you “bought” your short and whatever lower price you predicted it to fall to.  Many people decry selling short transactions, because there’s a shit load of room for manipulation and unscrupulous behavior.  Following last week’s chaos the U.S. and Briton banned short-selling in the financial sector and the New York Attorney General has just opened an investigation to see if all the short’s that have been going on of late can be pinned as illegal and somehow partially responsible for the fall of some of these big players.  But whatever with all that.

The band-aid solution to not enough money in the system is, of course, to lower the interest rates that the Fed (who makes the money) charges to these institutions when they borrow money, and to make more money available to be borrowed.  This has happened, a shit load, and to no avail.  So last Thursday the Fed got together with the major players the world over and pumped something like $180 billion dollars “into the market” not just to be sure that there was plenty of money to be borrowed by those institutions who couldn’t afford to go on without some more cash on hand, but more importantly as a show of strength and resolve on their parts that they are working, together, to ensure that a global systematic collapse doesn’t happen.  This sort of helped, as panicking investors and banks like to be- need to be- reminded every once in a while that the State makes the rules (not “the market”), and whenever the game is near over, they’re willing and able (and, by their own accounts, obliged) to change the rules so that the game keeps going.  A notable exception to all this stock market hub-bub and panic are the “emerging markets” in Asia- China and India, most noticeably, have been relatively stable and calm.  China, for its part, has a far more direct system of State control over their stock exchange, essentially deciding to do what the U.S. has been doing the past couple of weeks all the time, for reasons little understood by many in the West.  India, well, most of their “liquidity” is internally produced, so while they (and every stock market) are inter-connected and tied to the ups and downs of every one else (especially, of course, the major markets of New York, Europe, and Tokyo) India has proven stable through all this to a degree that most commenter’s I’ve read are a bit surprised by.

Most notable- and here’s where a likely, most immediate outcome of all this can be read- Europe.  In adopting the centralization plan that is known as the European Union (and the European Central Bank), the socialist-capitalist hybrid system of Western Europe (largely exemplified by the politics of the social democratic Parties throughout the continent) took an approach to the financial markets of high regulation, less exuberant profits (relatively speaking from this side of the Atlantic) and with it, less volatility and risk.  To talk about this current “crisis” with the French and the Germans, the typical American would be advised to leave his or her famous patriotic pride in the car: mostly, they’re laughing their asses off at us.  Sure, they know how co-dependent the whole system is, and their global power is tied to ours- they’re not interested in a Chinese world order either- but they’re not experiencing anything like the panic and volatility that New York, and London (who opted to only quasi-join the E.U. and keep their own, much more U.S.-like market rules and regulations) are going through.  To borrow a popular French phrase: this could be the beginnings of the end for the “treacherous Anglo-Saxon financial system”.

The very non-“free market” move of all these Federal buy-outs is about to be trumped by the the creation of something that will be the same or similar as the way they got out of the savings & loans mess of the 1980’s, something called the Resolution Trust Company.  An RTC will likely be created by the State which will then buy from all these banks and businesses whatever debt they can’t afford to pay.  The RTC will not be obliged to actually balance it’s budget, since it’ll be essentially a Federally-backed bank account where all these institutions can hide their bad debt until the things “stabilize”.  Even whispers of the idea brought such excitement to Wall Street last Thursday that it had one of it’s biggest gains in years (and gains like that, in the midst of all this panic and paranoia, usually have something to them).  For their part, the Democrats have showed a surprising resolve in negotiating and demanding certain additional provisions of the much belly-hooed “$700 billion bail-out” plan (oh, and by the way, that number- $700 billion- was pulled entirely out of this air; not an analyst, economist, or observer in the world can solidly explain or justify that amount, it’s almost completely random.  I hope that re-assures you about the safety, control, viability, and “science” of capitalist economics).

And so, mostly, this should be the real-world end for the big time “free market”, “laisseze faire” crowd.  The gig is up, for the most part.  The Fed (and the Congress) is going to move in, put in all sorts of nuanced and not-at-all worth your time or mine to figure out rules and regulations, and the headlines will go back to Brittany Spears and Paris Hilton (they are still around, right?).  If it’s an Obama presidential victory, the new regulations will be “better” than whatever crap McCain’s advisor’s are willing to go with, but have no doubt, real-deal power-brokers will decide what the rules will be to get the capitalists out of this mess; and by “real-deal” I’m not talking about president anybody, I’m talking Bernanke, Paulson, and the like (I’m sure someone will call Greenspan, since retired or not he’s still the reigning king of market manipulation).  If you’re really unsure about how this system works, consider that it was JP Morgan who personally “saved” many failing institutions with his vast wealth during the Great Depression of the 1930’s- and today his legacy (JP Morgan-Chase) is throwing some real-deal money around and doing the exact same (having bought major portions of at least two collapsed banks so far during this “crisis”).  Saving capitalism is not something to be left to elected officials, and it won’t be.

A Short Look At The Causes Of The Causes

A question that I had a hard time finding even a few clues to an answer to was “OK, but what brought about the exuberant lending from the banks in the first place?”  Why did conventional lending ideas like ‘make sure the guy can pay you back’ totally disappear for most of the past 8 years?  Of course, there really isn’t a simple or straight-forward answer, unless you’re willing to just except “capitalism” (which, this far into this rant, if any of you are still reading, you just may be willing to go for simple and straight-forward).  Looking a bit more into it though, what we have is the logical conclusion of the super-liberalist free market approach.  Don’t get confused: “liberalism” is capitalism, and in the world everywhere but the U.S., and to economists who actually know political theory rather than memorized capitalist company lines, what we in America call “conservative” or “neo-conservative” is actually a stance of extreme liberalism.  Don’t think socialized health care and 30 hour work-weeks, that dips into socialism (as in Western Europe and their socialist-capitalist hybrid system).

Yup, all the brilliant economists who brought us “Reaganomics” and “trickle-down” theory failed at the only real skill that an economist needs- they didn’t predict the logical results from the set of parameters that they were advocating and implementing.  Well, that’s not fair, the smartest of them did predict this stuff, but they saw the net gains for them and their crony friends as out-weighing the overall losses and the huge potential risks.  And to be sure- they did so because of an incredibly vein, irresponsible notion of their ability to change any and everything whenever necessary, essentially saying “we can drive this car over the cliff, cause right as we’re going over the edge we can build a bridge that’ll carry us over”.  Which, in all likelihood, the bridge (temporary or not) will get built, just in the nick of time.  Of course, it’s people like you and me that’ll have to build the bridge, because it’s our sons and daughters that are locked in their trunk.

But I digress.  The causes of the causes here are deregulation and cronyism; at least, that’s the narrative now largely being adopted by the press, pundits, and politicians.  And there’s a fair amount of truth to that.  They tell us it began with Reagan and has more or less continued through till today.  It got slowed- not stopped, mind you- by Clinton who, though not opposed to but actually in favor of much of all this nonetheless did have a slightly different and less fatalistic approach.  Reagan and Bush I did most of the hard work, setting the table, and then Clinton came in with the food: NAFTA, the FTAA, etc.  Finally, just before leaving office in 1999, Clinton watched passively as the far right repealed key Depression-era legislation that prohibited many forms of market speculation (the kind of speculation that largely led to the Great Depression and which has now thrown oil prices through the roof).  And to some degree this is all true; it was over thirty years in the making, but this was the goal: little to no rules and regulations on the financial markets.  And it worked- a bunch of people made an assload of money, which is partially why they went slightly mad lending and moving it all over.  For the first part of this century, the rich have just had so much wealth that they seem to have little idea of what to do with it, so they just started pissing it all over the place.  Now, with the exception of the mid to late 1990’s, this has all had a simply terrible effect on the lives and the financial standing of the average person, the “working classes” (present-day class analysis requires far more nuance than the classical working, middle, and upper class distinctions so I simplify it this way).  Under Bush II the recession for the working classes has been aggravated even more.  But the top of the pile, until now, has continued to do quite well, which is why there’s all this contrived debate about “is it a recession?” and so forth.  The irony, in some ways, is that the actual result of “trickle down economics” is that the economic devastation of such a program has ultimately trickled-up to those at the top.

The Longer View Of The Causes Of The Causes

(excerpted from here):

The origins of the banking business go back to when gold was the real currency and as such was kept by goldsmiths in their storage facilities. Because gold was very heavy and hard to move around, money in circulation consisted of shares in this metal money. One day goldsmiths realized that they could charge interest on loaning out these shares, and by way of compensation began paying a lower rate of interest to the people who had deposited the gold; in that way the banking business started out in Europe.

This system had the drawback that the possibility of loaning out money was obviously limited by the quantity of gold in circulation. Hence the goldsmiths, now turned into bankers, invented the fractional reserve system under which only a part of what has been lent out needs to be kept on hand.  Or to put it another way: based on real money, money is created out of nothing in a proportion that, bearing in mind that people will not all take their money out at the same time, does not create problems for the bankers when they have to reimburse deposits. This proportion used to be around 10%, in other words 10 units in circulation for each real gold unit in the reserve.
This increase in the money supply favoured trade expansion, and nation states (once they discovered it) decided to regulate rather than ban it.  To control the risk entailed by the possibility of it becoming known that there was not enough money available to give back their deposits to everyone, the system of central banks was set up which would hold additional gold reserves so that they could give loans to the other banks in times of crisis.

Over time the system of central banks and fractional reserve has become the dominant one worldwide:  the gold which was the backing for the money supply diminished until in 1971 the gold standard was abandoned (by Nixon); in other words gold is no longer to be used as the real basis for money.

Even though this fundamental aspect of the monetary system changed, the central banks and the fractional reserve system remained in place but with reserves that consisted solely of banking account entries created at some time by the central banks; these are reserves which stand for money but which are not guaranteed by any money which has a material basis. This completely changes the nature of money because it means that everything that we currently have in circulation comes from nothing and thus is purely contractual; it has value simply because everyone agrees that it does.

Money which is created today is basically created by means of loans, in other words in the shape of debt, whether that debt be public, commercial, foreign or held by individuals.  But that is not all; when the debts are paid off, this money disappears which means that the financial system has a tool it can use either to increase or to reduce the money supply.

Money is created by the central banks and the private banks.  Only between 3 and 5% of the money supply has been created by the central banks; the rest has been created by private banks by means of loans and (increasingly) through complex systems of financial speculation.

If money is no longer gold (which was the justification for creating the system of commercial banks and central banks as the institutions responsible for safeguarding gold and turning it into the money supply), how is it that it is still the case that only the banks can create money?  And why do they only do it as debt which has to be repaid to them with interest?

To put it another way: why do national governments have to pay interest to their central banks in order to finance public spending, when this is money that the national governments could directly create themselves when they implement this spending?
Perhaps the only logical answer that comes to mind is that the banks in fact control governments and not the other way round.

Mayer Rothschild, a member of the most powerful European dynasty of bankers, is remembered amongst other things for saying the following:
“Give me control of a nation’s money and I care not who makes the laws.”.

When a bank gives out a loan, it is creating money with the principal of the loan but not with the interest which the bank will charge to the debtor during the lifetime of the loan. Given that the entire money supply is created as debt with interest, we might conclude that the money to be used to pay the interest on the debt simply does not exist.
So how is it that the financial system has survived for so long? Basically for two reasons.

1. Because it is financed by growing indebtedness, that is to say the money supply has to constantly grow in order to pay the interest on debts and avoid the collapse of the system. This means that the system is constantly urging everyone to take out more and more debt, starting with mortgage holders before moving on to consumers who are offered quick and easy personal loans and credit cards, and finally ending up with companies and States.  We are thus talking about exponential growth in both the economy and the despoiling of the Earth’s natural resources.

2. Because there are some who do not pay off the principal of the loan and only make the interest payments. This is the case with the public debt of the most powerful countries and the debts of influential companies and institutions which enjoy privileged conditions; and probably it is also true of all policy and credit card instruments in which the principal is not paid off and the contract is normally automatically renewed each year ad infinitum.

At any event, this shows us the extent to which the financial system actually needs growing indebtedness, and how the increase in mortgages and in consumer loans is linked to the maintenance of the current financial system.

Hence in general terms everyone is in debt, and the only difference is between those who have to pay back their debts and those who do not.  A system contrived in this way is bound for only one eventuality: complete failure.  You cannot have exponential growth in a finite world, and you cannot have any real, mass, or popular “wealth”, “stability” and “security” when the very foundation of your system is debt.

What It All Means For You And Me

What the fuck does this all mean if you’re not a Wall Street investor, a banker, or some other such nonsense?  Most likely, very little.  Well, that’s a bit of a contrived answer.  What it should mean for you and me is that we should have some serious problems with a system that works this way; it’s wholly unnecessary, and takes unfathomably huge risks with our lives, our safety, our security, and our well-being.  All so that a very small number of people, literally a percent or so of us, literally a few million people on a planet of billions, can be very rich, powerful, and well-off.

Yes, it does mean other things.  It’s going to be very hard to borrow money or take out a mortgage, for who knows how long (who knows how hard, as well) for most people.  But, most likely, it means little more than that in our daily lives.  As I said above, the “hard times” that regular people have endured over the past decade, or several decades, is now just hitting those at the top, which is really what most of this is all about.  It will have noticeable effects- inflation and a further loss of real spending power are serious concerns.  But the possibility of real chaos, of massive starvation and want throughout the developed world, is at the very least not likely.  As the working classes has always done, we’ll make do one way or another and get through it all.  I don’t mean to down-play the risks and possibility of bigger, more serious problems, but it’s just not likely.  Not at this time.  And economics, remember, is largely a matter of noticing patterns and predicting likely outcomes.

And So Back To What “Economics” Is Really All About

If you’re still here, perhaps you remember somewhere way up there when I briefly speculated on the global chaos that could result from a system-wide collapse.  Perhaps, if your memory is that good, you remember that I even hinted at the possibility that that wouldn’t happen.  OK, to be sure, the real-life devastation that would be felt the world over by the collapse of the global capitalist order would be simply tremendous.  Beyond what you or I could likely really comprehend in the abstract and just horrific.  Millions of people would starve, suffer through and die from illness and disease in a relatively short period of time; oh wait, we have that already in under the capitalist system.  But I mean all this on top of the millions all over the world who already suffer these fates.  However, the devastation would be short-lived in all likelihood.  Obviously, this here is pure speculation with little to no real-world examples of exactly what would happen.  Most immediately, I think, we’d see the first of at least two really beautiful and extraordinary occurrences.

See, we were born into and will likely live our entire lives within the distortion of the capitalist lens.  This view tells us that it’s a kill or be killed world, survival of the fittest.  Darwin taught us that competition for the resources of survival is bloody and constant among the top of the food chain.  Unfortunately for Darwin and the system that enthusiastically embraced only this aspect of his premise, there’s little to no proof of this reality and in fact growing evidence of just the opposite.  From a really great article I found over at commonground.ca:

“Thanks to the philosophy of social Darwinism, white, well-bred intellectuals at the turn of the century had discovered that evolution’s peak had turned out to be, by happy coincidence, themselves. Darwin himself qualified his own thoughts on the struggle to survive to acknowledge the role of cooperation. Unfortunately, we have largely inherited our ideas on competition from the irresponsible extrapolation of one-sided ideas about survival in the wild, with poverty seen as the inevitable, if unfortunate, corollary of a universal law in which the weak are winnowed out by the powerful.  By this logic, the latter are justified in grabbing what resources they can, while duking it out among themselves.  This spectral notion has haunted everything from business management theory to classical economic thinking.  It has both endorsed and trivialized the coercive character of capital-driven power relations.”

In fact, over recent years a steady stream of scientific analysis and research has begun pouring telling us a surprising (to some) thing about humans: we are wired to cooperate, to share, and, well, to be social.  It is our very nature, it is the very definition of being human, to cooperate, not compete.  And although a few thousand years of institutionalized pathology in the guise of endless competition and greed isn’t easy to overcome, I rest easy at night knowing that my safety and survival isn’t tied to a bizarre, inhumane, and abstracted economic system that could literally come tumbling down at any moment; as long as there are people, we can, we have and we will, be just fine.

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