Money, ultimately, is trust. Money is the trust one has into the set made of trillions of contracts around the world. That trust was damaged badly when the US government let a major bank fail (Lehman). It has been unraveling ever since.

To fix the crisis, trust has to be reinstated. It has to be, otherwise, the world economy, starved of money, will crash.

We have the example of what happened to Rome. For centuries, the Roman empire thrived with a giant inter regional trade that saw as many as 10,000 great ships plying the Mare Nostrum, carrying all goods, not just wheat to the million inhabitants of the city of Rome, but even wine to Gaul.

For a number of reasons, many of them psychopathic, the Roman imperial administration took on too much military spending, and this led to various financial difficulties, including ever more diversion of economic activity towards the military, and high inflation. Trust in the socio-economico-political system collapsed. Trade inside the Roman State collapsed in turn. The great Roman cities waned and died, health care broke down, the starving population crashed, civilization nearly succumbed, libraries were burned, surviving intellectuals fled to Persia, religious terror thrived, social order broke down terminally. Germans came in to reestablish order. Commerce became local, with serfs and lords.

Lest we want to follow a similar course, it’s time to go to the basics. The first evidence we have to keep in mind is that the financial system is not a creator, just a servant (just like Rome should have kept in mind that the army was a servant, not the boss). At the limit, the financial system could be replaced by a computer. Better one good computer rather than half a million plutocrats feasting on our bones. The financial system does not create new technology, nor even new ideas. That is not its role. Yes, finance went nuts, it dreamed that it had such a role, but the financial sector was high, then, way too high, drugged on hubris with no relation to reality whatsoever!

The financial sector’s basic function, that servant’s basic service, it is supposed to render, is not even credit, it’s to see to it that trust, that is money, capital, circulates, in full trust. At this present stage (October 2008), that function is breaking down. Worldwide.

So what to do? Nationalize to the maximum, all of the financial system, right away. Now nationalizing does not mean, as the Bush administration has so far chosen to interpret it, that one makes gifts to the management and owners of the banks that caused the problem. As it is, this is what is going on, because the Treasury Secretary, Paulson, a plutocrat, gives treasure to his fellow plutocrats, but asks for nothing in return (a violation of the capitalist doctrine; but plutocracy is not about capitalism in general, it’s about a few having most of the capital, and the power).

Since when is the transfer of capital something that brings nothing to the one that it is taken from? Is not that called theft?

In Paulson’s little scheme, banks’ managements, made of his fellow plutocrats he has to socialize with, are free to get their bonuses (a straight transfer from taxpayer pockets to plutocrats, since the banks had no more capital, just prior), and shareholders are free to get their dividends (also straight from taxpayers’ pockets). According to the Guardian, bonuses could be as much as 70 billions, in the USA alone, for the culprit, and already extremely wealthy managers of the nationalized U.S. banks. The word theft is not too strong. By the way, the same outrage is expected in other places (see P/S).

Two things are very wrong here: 1) the Paulson-nationalization-as-gift is an egregious transfer of wealth from the poor ( the taxpayers) to the rich (the very rich people that caused the problem to start with); 2) the preservation of existing managements. Those managers not only caused the problem, but they know that so well among themselves that they do not trust each other at all, so banks will not transfer money from bank to bank, knowing all too well that they are headed by impudent and imprudent crooks, all over.

So what to do? Nationalization can achieve two things: 1) recapitalization: so a bank now has money, and is financially capable of satisfying its obligations, namely, it can now function. But that does not mean it will. For that it needs: 2) to throw the old managers out and stuff the banks with civil servants in the top management, and put two (say) civil servants on each bank board, with the MANDATE OF ENFORCING TRUST between the banks. This is where we are at, there is no other choice.

In a fully nationalized system, no bank can fail. So nationalize the financial system everywhere, right away. WORLDWIDE, the mandate should be imposed that NO BANK WILL FAIL, NO DEPOSIT SHALL FAIL (whatever its amount is). We are trying to bring back trust, remember? SO MANDATE TRUST.

No bank or deposit failure has to be mandated worldwide, and right away, to avoid further imbalances. Small countries that do not have the cash (i.e., trust, as we said above) should be given the cash (as Iceland was). One has to do all the banks at once, because only recapitalizing a subset of them all is, first of all, a violation of the republican equality principle, and secondly, would put at a disadvantage, or even cause runs, on banks that did not have problems (before their competitors got recapitalized, i.e., nationalized).

Credit will have to be addressed in similar ways: mandate credit at least to those who used to get it (France created a branch of government extending credit to small and medium companies, since banks are not doing their job anymore). And ibidem for the insurance industry. All these are servants of the real economy.

The failure to implement the preceding measures will lead to major economic disruption(s). What Rome did to herself in a decade or two, we would do in a year or two. At most.

At that point a major country, or more, will go fascist. Diverting huge resources towards armament programs will ensue. Nuclear world war will be next. Because dozens of countries have the know how and capability to build nuclear weapons.

It’s a civilizational choice. The next holocaust will not kill 75 millions, as W.W.II did, but several billions. From direct bombardments, and from the collapse of most basic services (water, food, energy, health care).

A fair warning.

Patrice Ayme

P/S 1: The fascist Roman Principate could not do things well, because it did not have the wealth, competition and selection of ideas that the continuation of Roman democracy would have brought. Although it still functioned as a republic in some ways [the emperor was initially just the first man (“princeps”) in the Senate], the big time decision making was taken by a small team of natural incompetents reminiscent of the team that brought the Bush administration to war in Iraq, or the little team that has been “rescuing” the financial system by gifting to its friends. By this I precisely mean that when a general such as Septimus Severus, whatever his qualities as an imperator, a top general, took long term strategic decisions pertaining to finance and economics, he was totally out of his depth. Similarly the little team of sycophants around Bush was able to steer the gigantic USA towards a war it could not win under any plausible scheme, it was also out of its depth, due to a lack of the spirit of democracy characterized by the failure to consult and communicate with experts. In the recent case of the USA with Iraq, Bush’s little team of sycophants did not consult with people who knew enough history and human geography, and others who knew serious economics, or, a fortiori basic philosophy (which is not taught by just praying among superstitious people; basic philosophy would have shown that the basic problem was Islam, and that Islam is not won over with a gun.)  

P/S 2: In any case, under the Severan dynasty, a dynasty founded by an African general who mistrusted the plutocratic Senate (his last message to his imperial sons), military spending was boosted considerably, beyond what the empire could afford, creating chronic inflation. (The army’s size augmented by 25%, and base pay was doubled.)

Next, after the emperor Alexander Severus bought off German enemies instead of punishing them with his mighty army, he was assassinated by his troops, and the empire fell into total chaos. It was the time of the “Barracks emperors” (no jokes, please), and, just like banksters nowadays, troops needed huge enrollment bonuses (these are used presently in the US army too). The inflation only got worse and worse, to the point people lost so much trust in  the currency that it stopped being current, and started to get replaced by bartering. At this point, two average distant trading places being unable to barter physical goods directly with each other, they had to cease trading with each other. If Byzantium needed wheat from the Danube, before the collapse of the trust in currency, it would pay for it with money. After the trust in money had collapsed, Byzantium could not send anything in exchange for the wheat, because it did not have enough to barter with, that interested the peasants of the Danube (money used to interest the peasants, before, when one could exchange it against valuable stuff).

That’s why money was invented: as a universal bartering system. Hence the average pair of distant places in the empire had to stop trading, and the trading system lost most pieces of itself. As the emperors bought off the troops (with gold), 20 to 25 emperors reigned in a few years. Unsurprisingly political disorganization probably facilitated a massive, extremely lethal epidemy that weakened the empire considerably further: when it rains, it pours. 

P/S 3: Nationalization is an emergency measure, Reversion to the private sector, under tighter and more intelligent regulations will happen, once the crisis is over (the Scandinavian nationalization wave of 16 years ago is an example, but there are others, similarly successful in their return to normal).

P/S 4: Last week, a top manager at UBS (Union des Banques Suisses) was adamant that he and his colleagues, those who caused the problem, get their gigantic bonuses: ” that’s the way bankers are traditionally paid”. Never mind the poor Swiss taxpayer, and the poor Swiss underclass, asked to transfer immediately 100 billion dollars to UBS. Managers need money now, to pay for their yachts, mansions, helicopters, and fancy private schools, so their children can network…

P/S 5: Deep reforms of the financial and trading systems will have to be elaborated. Differently from the emergency nationalization, those would be permanent. Let’s just mention a few in passing: a) globalization of trade should be submitted to human environmental review and compensation (just as there are environmental impact studies, there should be human and civilizational impact studies, each time massive amounts of capital are transferred, say to install a new factory in China. The idea is NOT to limit trade, but to make governments face their responsibility to the People, and not just to the plutocracy. b) A very low speed limit for trading in securities should be enforced. Only this way would the markets be efficient, AND DEMOCRATIC. That’s all the more important, since so many people have retirement money invested in securities (and those are not secure when hedge funds are free to buy and sell them within seconds). Another trick to the same effect: put a small tax on all and any security transaction. c) reorganize the derivatives, so that they become a DAMPING mechanism, not an amplifying one, as they are now (if there was just a mortgage crisis, it would be contained, it’s the amplification of unregulated derivatives that has caused the crisis to the present extend).

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  1. Jennifer Phan Says:

    I think that you are correct: money is synonymous to trust. However, that may be too simple. There is value in the circulation of money. If money is not circulated due to mistrust, then it has no value whatsoever. There is a trend to nationalize banks and companies right now, but even that may not be enough. The US is slow to respond because citizens have been taught that socialism is a four-letter word and the equivalent of communism. Unpopularity in the midst of an election-cycle . . .

    Not all banks were reckless subprime lenders; some maintained a prudent approach to lending. When a market is opened to speculation (deregulated) and credit is cheap, it becomes the bookies’ dream with gamblers leveraging everything to win big. The market needs serious regulating, I think. It cannot become a casino particularly when the money that is being wagered is the life-savings of individuals who are risk-averse. That is not freedom. So along with clearing the Pharisees from the temple as the story of Jesus goes, derivatives should be regulated. If that means that transactions cannot be settled financially anymore in the commodities market, then that’s what it should be. People who are serious will remain in the game and the gamblers who really do not want million barrels of oil delivered to their front door will head for Las Vegas.

    For a moment consider what attracts greedy bees to meadow A over meadow B: the increased likelihood of scoring big with lots of nectar. If there are many places to gamble but one has much better odds, where will gamblers go? Meadow A is the derivatives market. Reckless subprime mortgage lenders bought credit swaps far exceeding the amount of subprime mortgages that were sold. Certainly, they are over insured in their position. Shouldn’t the banks just be moving along collecting their insurance payouts from these credit swaps as if they never were reckless at all? That would seem like the obvious climate, a simple smoothing out like our smoothing when we’re in a car accident that makes our car undrivable. We just make a claim, get it fixed, and keep going.

    The real collapse is this incestuous, buddy-buddy system of getting a “pass” on the market for the insurers, big sellers of derivatives, AIG. That was fraud! (allowing AIG to sell “insurance” without posting margin by keeping the company’s credit rating high) They trusted the untrustworthy amongst themselves. They knew the poor, lowly sods getting subprime loans weren’t going to payback, but they thought amongst themselves they could insure themselves and be inoculated from those losses. What they learned is that they couldn’t trust each other either because they’re all motivated by greed to “profit” from each other.

    Now they know they can’t trust each other! That’s why insurance has to be kept in a separate, highly regulated category. Everyone understands that notion, don’t they? Suppose I could buy many, many insurance policies that would give me a payoff if I broke a leg. The payoffs are what we know as claims. Just for a minute think about the claim for a broken leg, say $5000. If I bought, 10 policies on myself and then broke my leg and collected, I would make $45000 on the deal without considering deductible and premiums. Everyone knows that such unregulated insurance sales would lead to fraud, i.e. a lot of nonaccidental broken legs. That’s the derivatives market mentality! Coincidentally, AIG got caught selling multiple claims for the same broken leg so to speak.

    Insurance ought to be completely nationalized and taken off of the derivatives market! That would instill trust. That’s another step.



  2. Jason Spalding Says:

    Karl Marx said, “from each according to his abilities, to each according to his needs.” What Happens When You Nationalize Private Pensions, Banks, and anything else they want to control? For my part it means that I don’t need to put money aside for retirement because the government is going to save me. If I stop paying my mortgage, the government is going to use the courts to lower the principle on my home. Does this sound right?
    Isn’t Robin Hood fictional?


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