Wednesday, July 11, 2012

Credit, Money, and Perception (Or the Emperor is Nude)

As "scandals" continue to pop up in the global finance and banking system, I'm amazed that no one that  I know of is asking fundamental questions concerning our current economic system.  We talk regulation, we talk fines, and reigning in the system, but we aren't asking why the system was prone to fail as it did, and to continue to produce these scandals.  We also don't ask why so many bankers and financiers have little or no sense of wrong doing, and or have a sense that things that appear unfair and unethical to those of us outside are okay because it is the way things are done.

What I think we should be asking is how we got to this point, and remember what our money is and isn't now and how that is and isn't different than what money was before the 20th century.   My understanding of past and current finance system is limited, and this is a sketch based on the limited study based in my historical studies of Europe and the states in the 19th and 20th centuries.  I welcome any misperceptions or inaccuracy's.

On some level money is and always has been about perception.  Currency only has meaning we all agree to give it.  In other words a basis all finance is a fiction we agree will be real, and always has been.  Now it is usually a fiction backed by a power, ie. a State.  For instance when Jesus of Nazareth is asked about the payment of Taxes, he points to the one who backs it, The Roman emperor.  Money in the Roman empire and most monarchy's was the coin stamped with the authority of the monarch.  Money then in some sense has always been linked to authority and power.  Thus Jesus' witty saying "Render to Ceasar that which is Ceasars, and to God that which is God's".

However, before the widespread use of paper currency, most money was actually made from something valuable and rare, such as precious metals. (Across cultures and across time their have been other systems of exchange and economy, but they do not form the background of our current system and crisis). With the wide spread use of paper currency it generally was in some way still tied to precious metals.  The relationship was complex, and in some ways arbitrary, but still said perception was backed by something actual (gold or silver).  Certain policies around backing paper money with gold were opposed in the late 19th and early 20th century, William Jennings Bryan's populist "Cross of Gold" speech is an example of this opposition.  Eventually, our currency was no longer tied to the value of precious metal.  (The issue here is that even the value of Gold or silver wasn't constant, and things like the California Gold Rush could effect the value of a precious metal when such new large sources of the precious metal were found.)  The populist sense of this is that a currency backed by gold only benefited the wealthy, those who controlled the reserves of gold - sound familiar.

For a variety of reasons (relevant to this discussion but to many to address in this post) currency was loosed from anything real, and the value of a currency became tied to the perceived value it had relative to other currency, specifically the value of currencies became tied to the American dollar.  Basically, as I see it this means that our current financial system is entirely tied to perceptions of the strength of economies relative to each other and more importantly the perceived strength of the economy of the United States (or now also the European Union, and possibly also China).  There is nothing to back our currency but perception and power (that this would produce an ethical and moral fluid and an ethically compromised culture should not be surprising).

Add to this the growth of the availability and necessity of "credit".  "Credit" is nothing more than the perceived ability of one party to repay money one may be loaned.  Partly based on past record of repayment or default.  It has little to do though with one's actual financial stability if one had chosen to not borrow any money.  According to the system if one hasn't borrowed money one has no "credit".  I'm aware of this particular nuance in relation to the no nearly extinct practice that church provided houses ("parsonages" or "rectories") to their clergy.  At one time a pastor could spend his (at the time they would have been he) entire life living in church provided housing having payed nothing and upon retirement be able to purchase a house without a problem.  As "credit" became a more universal means of determining financial stability (not savings, etc.) clergy began to find it difficult to get even a modest loan upon their retirement.  This is the main reason churches began to rethink such provision and began to provide housing allowances that clergy would then use to pay a mortgage on a house that would be bought by the pastor when he came to the church and which would be sold by the pastor on the pastors moving to a new church.  Through this the pastor would be perceived to have the ability to pay back a loan buy having had many mortgages over time and a record of repaying those loans.

Our current system then is almost entirely based on the perceptions of the powerful, and our trust in those who back this system of perception of value and stability.  Debt seems less real in such a system, especially when the system perceives an unlimited amount of growth and sells that perception to the public (as is much of what was going on in the various booms of the past 20 years or so.)

If our entire economic system is only founded on our perceptions of what is of value, and who can be trusted, then why wouldn't those in charge of that system seek to manipulate those perceptions?  After all as long as what is perceived is shared by all it actually matters little how that perception, that "confidence", is produced.   If all is perception, it is not far from saying there is no truth in the system. Add to this that our system has always been about what the powerful back as having perceived value for their own purposes,it is not surprising that the powerful continue to do use the system to their advantage especially when the system is not set in such away that there is nothing hard to back up the monetary fiction of confidence.  In a sense, our financial system is the most post-modern thing to have been produced in late-capitalism, of the 21st century.  Our economic system is all simulacra, without anything real to back it up. We are hesitantly coming to the realization that this isn't sustainable.  We are seeing that we need truth, and not just perceived value and confidence.  Even so we are still afraid to say it: "The Emperor (of all our hopes for prosperity and progress), has no clothes".

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