On Thursday of last week (May 3rd) Rep. Ron Paul attacked international banking at the highest level, the central banks. Paul asserts that interest rates are "prices" on money and that central bank manipulation of interest rates creates an artificial distortion of the market for money. He forgets, in his attacks on the central banks, that our money is fiat money, that is money produced by governments that cannot be redeemed for gold or silver. He complains that the central banks control the supply of money by printing more or less, allowing credit to be produced by banks by multipliers and by various financial instruments that also affect the value of money (CDOs, ETFs, etc).
Paul argues that the central banks, mainly the Fed, has printed unlimited amounts of money in the hopes of increasing consumption and production. He is wrong here, under his fellow Ayn Rand supporter, Fed chairman Allan Greenspan, the Fed lowered interest rates to create the massive credit that allowed for the bubble driven by not central bankers, but by financial institutions like Citicorp, BofA, Lehman Bros, MorganStanley, etc. We borrowed to buy and instead of pay increases Americans got debt in the form of loans on the equity of their homes.
But Paul does have a point. The banks are thriving and the economy is tanking. Why? We have to look at the way credit and money work to understand that. Anthropologist Ann Guyer (2011) focuses her research on the supply of money and its use and in use on temporal dimensions: the velocity issue and “time horizons.” Among the Yoruba she finds that terms for debt inform us on these topics as there are moral attributes to credit and debt. While debt can be delayed in payment, given the market cycle, or payment dated with fees. The use of money in lending or paying is linked to social needs and the Yoruba distinguish kinds of saving in moral terms. Saving as “taking care of” or toju, or “storing” (pamo), both of which can be seen as having prudent and useful goals while, “locking away from others” (hawo) is seen as reprehensible.
The use of debt as a means of control, of burdening individuals with debts to control their lives is a well known means of social control. Coulton (1925) notes the many ways the feudal lords (and church managers of fiefs) used debts to erase or obfuscate traditional rights even as feudalism was passing away. The application of law in multiplying violations and fees became an infamous means of control in the Medieval period and early modern transition. Coulton (1925) quotes the Medieval lawyers’ proverb, “Justice is great profit” to emphasize this process. Thus debts allow for the control of future time and even, in the case of the late feudal period, control of progeny. Graeber (2011) has focused his attention on this issue in a recent book.
As opposed to the past history of money and value, and that described by Guyer (2011) for the Yoruba, newer techniques for value transfer and retention over time, including credit cards, online banking, Google and Facebook money (Hart, 1986; Palmer, 2012), have all made hording value problematic. One does not have direct control of the value, it is not buried in a can in the back yard, or in a mattress, or with a long established family relationship with a banking family in a private bank. The value is now potentially virtual. It is interesting in this context that the use of fiat money has actually increased in recent years in transactions (Lex, 2012), (barter is also increasing, see Spitznagel, 2012), though perhaps only in legal transactions as laundering money through legitimate sources has become more difficult with anti-terrorist laws. This may be an illusion and there is another entire black (opaque) banking system already in formation, called P2P or peer to peer lending (Alloway & Moore, 2012).
In P2P lending, as in the case with the new firm, Lending Club, headed by former Morgan Stanley chairman, John Mack, are systems organized to bypass banks and regulation, with most loans supposedly unsecured. Early P2P entities failed under a mass of bad debt, examples are the Dutch site, Boober and Big Carrots and Quackie in the UK and Friendsclear in France. In Germany any P2P organization has to partner with an existing bank. Japanese and Korean P2P entities have had more success but their loans tend to be more traditional and secured. The central idea, which is laudable, is that there will be less complexity and management of loans and thus lower costs which is pitched as a means to produce loans for small businesses, but what seems to come along is less oversight.
As mentioned the developed nations have flooded their economies with liquidity as their banking institutions and other financial organizations have been undermined by the credit collapse. In fact, the very institutions that were created to avoid such events have been endangered. There were warnings of this with the demise of the firm, Long Term Capital Management. The levels of hedging and derivative leveraging created destabilizing conditions as with Long Term Capital Management (Lowenstein, 2000), where a very small investment could influence a quite remarkable segment of the market. This has been often felt in “shorting the market” where a combination of “borrowed” stocks by hedge funds and rumor have caused substantial falls in the stock of some companies producing large profits for hedge funds. But as leverage required payment by counter parties and that created a need for liquidity to pay demands it was obvious in late 2008 that only by providing massive government cash could the entire banking industry avoid disaster. The value of the assets that were believed to support the leveraged positions had evaporated. The magic of credit had failed. One could say that the situational value of the credit devices, whether ABS, CDOs, etc. had lost position of ritual orientation as when the Trobriand taytu simply become yams again.
As described in the Introduction, we find the origin of all the liquidity that has been created by derivatives and like synthetic products in asset inflation that essentially comes down to human faith in value, that is like a belief in Mana. We are back today where we were in 2007 regarding investment instruments, can be seen in the lack of information and its distribution among investors, as Keynes states in 1921, “The terms “certain” and “probable” describe various degrees of rational belief about a proposition which different amounts of knowledge authorize us to entertain.” Without knowledge all is luck and Mana. It is a mystery to most. This applies to Exchange Traded Funds (ETFs) especially now. In their June 2011 report the Bank of England warned that ETFs were not transparent and this created similar problems to the credit crisis and posed a threat of money laundering. With all the money put into the banking systems in Europe and the USA one has to wonder why that money has not been translated into new investments producing jobs. One answer has to be in the problem Brazil has with foreign investment mentioned above. Another question is where are the investments of hedge funds? Should these entities not be funding new enterprises? It seems obvious that most banks are investing in sovereign paper and not loans, but even corporations are selling bonds and hording cash either for buy backs of stock or paying dividends. This would seem to fall into the Yoruba category of “hawo” or locking away from others and is seen by the Yoruba as a negative social behavior. But in the developed world this is seen as saving the banking industry. So in this sense modernity celebrates counterproductive behavior. According to Bureau of Labor Statistics, US small business creation is in long-term decline. In 2010 it reached a historic low (Luce, 2012). It is obvious that the financial industry has no faith in the economy.