Comment Dated Mar 20, 2010

THE GOLDEN FLEECE

BANK LOANS 1947-2009

If I lose my shirt betting on the wrong horse or a risky poker hand and am forced to turn to a bank for replacement of essential capital, it comes in the form of a loan which the lender expects to be returned with interest, whether I make good the chance to rebuild my finances or not. The left-hand part of the chart above shows how the business transacted on that basis in the US varied over the past sixty years. Generally speaking, the experience gained over centuries was applied prudently, and the borrowers met their obligations. Then in 2009 the situation underwent a spectacular reversal when the banks got themselves into trouble by "overleveraging"--using borrowed capital to buy risky assets by means of such complex instruments as collateralized debt obligations (obscurese for betting on the wrong horse or a risky poker hand)--and were forced to turn to the taxpayers for replacement of essential capital. Not only had the situation changed, but so did the terms, both descriptive and contractual. The "loan" arrangement that had previously addressed this kind of need suddenly became a "bailout," and under the widely promoted private-public "partnership," the government would provide 92 percent of the funds to buy up the ailing assets, but would stand to receive only 50 percent of any gains and absorb practically all of the losses. A business partnership in which one partner gains by robbing the other is hardly likely to produce any profit. As Churchill famously put it, "[F]or a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”

It seems to me that much of the woes currently befalling our finance-obsessed society result from the delusion that manipulating numbers and currencies can create wealth. The real wealth of a people lies in its knowledge, skills, land, machinery, and other resources that equate to the ability to turn ideas and materials into food, clothing, homes, services, and things people need. So you could think of economics as a pair of scales in which one pan holds the total needs of a people, and the other weighs against it their capacity to meet those needs. At the level of a modern society, the latter so totally outweighs the former that there isn't any real problem in the sense of anything inescapably imposed by nature. If we think we have problems, they lie in the thinking, not in the reality that's out there. It also follows that the real worth of a nation can't change abruptly overnight. If all of the money in existence were wiped out, our ability to do the things that need to be done wouldn't change by an iota. The terrors and superstitions of the Middle Ages never really went away. We just computerized them.