20 November 2008

Financial Meltdown

The current financial crisis is not what it seems. However, because it seems like, well just about any number of things, most of us don't feel that we have much choice but to trust that the people that got us into this mess in the first place will somehow get us out. Even more frustrating is that this is exactly the attitude that those people need for us to have in order for the show to continue as scripted.

These gurus of economic witchcraft feed us a story that goes something like this:

A doctoral degree in economics or any related field, from Yale or Princeton or some similar institution qualifies certain people to understand the intricate and extremely complex inner-workings of the economic and financial instruments that have evolved over approximately 250 years to their nearly perfect current status. The prevailing crisis has occurred because many of our vital institutions have had the poor fortune of being controlled by unscrupulous and selfish individuals. The common citizen should feel assured that our leaders have learned from this crisis and will make the necessary adjustments to the system so that consumer confidence grows, private investments become more financially stable and most importantly the Gross Domestic Product and the Dow Jones Industrial Average begin rising again, so that life can go back to normal.


This sounds so plausible, neutral and reassuring that it almost makes sense. Although it may sound reassuring to some, it is neither plausible nor neutral. In fact, a carefully crafted ideology provides the underlying assumptions that have become so ubiquitous that they gain a status that sets them beyond critical examination for fear of sounding un-American. Bearing such a risk in mind, this crisis provides us with a perfect opportunity to do just that: critically examine such assumptions and look at alternative views so that we can direct our efforts towards supporting initiatives that will truly build prosperity.

With a nearly infinite number of topics at our disposal for exploration, we will look at just two. We will first turn our gaze towards a specific aspect our financial institutions, currency issuance, and subsequently explore the dizzying possibilities of breaking free from the dogmatic materialistic framework in which the above story is set.

I. Debt-Free Money

As I mentioned in an earlier post, there are aspects of our financial structure that are portrayed as having survived the ordeal of natural selection not unlike Darwin’s turtles on the Galapagos Islands, rendering them the gospel truth. However, as several elements of the current paradigm have been dethroned lately, we should take the opportunity afforded to dig deep into some others.

An element that we would be wise to pry into is the way we create money. Put in the simplest terms, “One key to Wall Street’s power and to the inherent instability of the financial system is the current practice of private banks creating money with a simple bookkeeping entry each time they make a loan. Because the bookkeeping entry creates only the principal, but not the interest, unless the economy grows fast enough to generate sufficient demand for loans to create the new money required to make the interest payments on the previous loans, debts go into default and the financial system and the economy collapse. The demand for repayment with interest of nearly every dollar in circulation virtually assures the economy will fail unless GDP and inequality are constantly growing.” (David Korten)

This growth imperative puts us in a bind by making us decide to either use natural resources unsustainably or default on our debt. So, the question arises, does money need to be issued as interest-earning debt? Common sense tells us that we can, and indeed must, use our natural resources sustainably, and that this principle seems much more important than servicing man-made debt. As we haven't been inventive or courageous enough to permit this common sense to see reality, we have given the power of issuing money over to private banks, which charge us for this service in the form of interest on every loan.

However, are banks really providing a service worth charging interest for? First, banks don’t really provide society with any notable service because they create money out of nothing while making it appear to be created by government. As Ellen Brown so clearly explains, “This devious scheme was revealed by Sir Josiah Stamp, director of the Bank of England and the second richest man in Britain in the 1920s. Speaking at the University of Texas in 1927, he dropped this bombshell:


The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented. Banking was conceived in inequity and born in sin . . . . Bankers own the earth. Take it away from them but leave them the power to create money, and, with a flick of a pen, they will create enough money to buy it back again. . . . Take this great power away from them and all great fortunes like mine will disappear, for then this would be a better and happier world to live in. . . . But, if you want to continue to be the slaves of bankers and pay the cost of your own slavery, then let bankers continue to create money and control credit.


“Professor Henry C. K. Liu is an economist who graduated from Harvard and chaired a graduate department at UCLA before becoming an investment adviser for developing countries. He calls the current monetary scheme a 'cruel hoax.' When we wake up to that fact, he says, our entire economic world view will need to be reordered, "just as physics was subject to reordering when man's world view changed with the realization that the earth is not stationary nor is it the center of the universe." The hoax is that there is virtually no 'real' money in the system, only debts. Except for coins, which are issued by the government and make up only about one one-thousandth of the money supply, the entire U.S. money supply now consists of debt to private banks, for money they created with accounting entries on their books. It is all done by sleight of hand; and like a magician's trick, we have to see it many times before we realize what is going on. But when we do, it changes everything.”

Second, even though interest has come to be regarded as a natural and fair element of a healthy economy, it creates the growth imperative mentioned above. As David Korten puts it, “Privately issued debt-money … bears major responsibility for environmental destruction because it requires infinite growth, extreme inequality because it assures an upward flow of wealth from Main Street to Wall Street, and economic instability because issuing loans to fuel reckless speculation generates handsome short-term bank profits” at the expense of failing small businesses and home foreclosures. For this reason, Mr. Korten suggests that one of the most important elements of an agenda for a new economy is converting to debt-free money.

The story woven by the gurus of economic witchcraft suddenly becomes vulnerable. These are things we can all understand. Surely any product of evolution would not cause environmental destruction and widen the gulf between rich and poor as our current banking institutions do. Self-indulgent individuals at the helm of these institutions are the product and not the cause of a larger crisis in which private institutions are allowed to create money out of nothing by sleight of hand. Has measuring human prosperity and the health of our earth through the GDP and the Dow Jones index set us on a path towards anything resembling prosperity or health?

Lastly, and most importantly, these and similar insights have empowered ordinary people to stand up and have a say in how our money is issued. We now have evidence that our banking institutions are much more vulnerable than we previously imagined.

Further exploring this necessary paradigm shift, as I will do in subsequent posts, is crucial if we want to shake our current boom-bust mentality and if we want to see how material prosperity can match its spiritual counterpart.

1 comment:

Nabil Morocho said...

Thanks for analyzing these important points in economics. You are right: the failure of our economic system is a consequence of its very nature.