Monday, October 18, 2010

Money ... does anyone know what it is?

Dear Colleagues

Bill Sharon has a blog which is worth perusing ... but the recent post about money got my attention ... and a comment from me. The URL is:

The text of Bill's post is as follows:
The Means of Exchange

The past several weeks have seen new revelations about the complexity of the mortgage industry and the astonishing level of sloppy work done to document that complexity. We are on the verge of massive lawsuits and a good deal of wailing and gnashing of teeth on the part of the banks that issued the loans and the entities that processed, repackaged and sold them as securities. According to William D. Cohan’s piece in the New York Times the banks not only knew about the problem, they hired a company to tell them all about it and then apparently ignored their report.

This is but the latest revelation in the unwinding of our monetary system. It is a symptom of a fundamental underlying problem. Much of the debate has been and is seems will continue to be whether or not we should ignore moral hazard or root out and punish the greedy. Viewed in terms of the current argument, there doesn’t seem to be a solution. People are living in houses that they couldn’t afford and now are worth less than the debt that encumbers them. Banks extended loans with the knowledge they were unlikely to be paid and then failed to comply with the legal requirements which simply mirror the complexity of the securities that were created. A fine mess.

Last night a nameless spokesperson for the Bank of America insisted that even if the bank hadn’t obeyed the law, the underlying facts were accurate. In other words, people had taken out mortgages, weren’t paying and should lose their homes. As the AG’s of forty states join together to halt foreclosures and the debate rages about what should be done we will not doubt hear more of the same. But the laws were written so that the banks could resell, package and securitize the mortgages. Which set of rules should apply? Eventually we will reach a compromise on this issue. People can’t own homes for free and banks can’t decide which part of the law they want to obey. But even as we develop a solution that no one will like we will not have addressed the core issue.

For the last thousand years we have had a debt based monetary system in one form or another. Where money comes from remains a mystery to most people. We teach very little about how our economy works and how we get money into that economic system in our public and private schools – even at the high school level. When people do educate themselves it seems that many of them feel compelled to write about what they have learned in capital letters on the Internet. It’s difficult to have a dispassionate discussion about money when more and more people don’t have any, but we really don’t have much choice in the matter.

It is not new that we have very large issues that we choose not to address. As anyone who has lived through a failed marriage knows, ignoring problems doesn’t make them go away – they simply get bigger. That’s what is happening now. The drive to address the demands of interest on the debt exploits a human trait that we call greed – not the other way around. Those who insist that our solutions lie in the thoughts of the 18th century minds who created the US Constitution, brilliant though they may have been, are missing the point.

Money is a means of exchange. It is developed as cultures become more complex. Accumulating money gives individuals and organizations power, but only up to a point. In the past, disproportionate accumulation has met with societal resistance sometimes manifesting in revolution. An increasingly vocal minority seem to be insisting that we are at this point again. But returning to simpler times is not really a viable solution. We are hopelessly interconnected (or perhaps hopefully) with each other across national borders. We have to begin to discuss and address the issue of money, interest and debt. It could be argued that the current debt-based system has served us well and perhaps, on balance, it has. But nothing is forever and it would be useful if we began to think about whether the level of complexity in our means of exchange can reasonably be expected to serve us in the future.
posted by Bill Sharon at 9:06 AM on Oct 15, 2010
The following is the comment I posted on the SORMS blog:
Dear Bill

This is a very good post ... and much appreciated. My own views have much in common with what you have written.

The implosion of the financial sector over the past few years should not have come as a surprise. The incentives are all wrong, and the financial reporting systems are inadequate to ensure that risk is handled correctly.

Very little of the "education" system deals with important matters like the basic workings of an economic system ... yet the players in the financial and economic game walk away with million dollar annual remuneration ... while contributing absolutely nothing of value to society.

It is a disgraceful situation.

Peter Burgess
The media is being decidedly unhelpful in the way they present issues related to foreclosure and the performance of the banks. The financial and corporate community seems to be very comfortable with the doctrine of "caveat emptor" or "let the buyer beware" ... but the playing field and the legal framework is stacked against ordinary little buyers who are systematically misinformed by vendors. For a very long time "mortgages" were a product that was being sold to people who had little or no idea what they were being sold ... but who cared ... everyone on the feed chain was doing well, the land developers, the builders, the mortgage originators, the community banks, the lawyers, the real estate industry, the title industry, the appraisers, the big banks, the investment banks and ultimately Fannie and Freddie! All of these profits on top of the earning power of people who were economically strapped is a stupid pyramid ... and everyone in the pyramid shares blame for the fiasco. The fact that the media did not see a problem is also hard to swallow ... not to mention the accounting profession and the regulators.

I do not like a lot of regulation ... but freedom without responsibility has proven to be worse in the context of an "anything goes" US entrepreneurial economy ... going all the way back to the frauds of the Reagan deregulation, which should have been a wake-up call but was pushed back and then made worse and worse!

Peter Burgess

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