New World Order?

"I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale." - Thomas Jefferson, May 28, 1816 'Letter to John Taylor'

"I believe that banking institutions are more dangerous than standing armies... If the American people ever allow private banks to control the issue of our currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their father conquered." - Thomas Jefferson, 1802

The Free-Market Reason for the Nationalization of Banks and Closing The Inequality Gap

Free-market economists have always championed for removal of state intervention from the financial markets, to allow them to provide capital efficiently for the optimal functioning of the free market. The recent financial meltdown however, has seen bank after bank being nationalized. While this is now being seen as an ‘inevitable’ step in preventing the real markets from collapsing as well, a deeper look into the original purposes of banks seems to suggest that banks should always be nationalized in the first place. Before that though, let us explore the current financial meltdown and its effects on the ‘productive’ markets.

Firms in the real ‘productive’ markets will only be affected by the meltdown of banks and their inherent financial systems in three possible ways. The first and most blatant: they have deposited their finances and profits into banks and with banks collapsing, see some if not all their deposits liquidated. Secondly, they are unable to obtain further credit from banks and have to cut back operations. And thirdly, in a bid to make more profits, they may have divested their profits into bank shares and options and now see their profits go red. Ditto for the private individual. The logical implication of this is then: governments need to save banks in other to safeguard the real market. In so far as the real market is unlinked to the banks and, (i.e. individuals and firms do not borrow, deposit or invest in banks), there is no need to save the banks.

But of course in this age of globalization and rapid growth, few firms and individuals in the developed world are actually independent of banks. For the rapid rate of growth this part of the world has seen in the past century, banks and money have played a crucial role. Banks provided the credit for growth!

All resources in the world are finite to various levels. However, in the push for speedier rise to riches of the middle classes since the 18^th century, capitalists gradually found a way to make money infinite. The original exchange of money (gold) had an innate value in itself, and was finite. When it was replaced by paper though, it became much less finite backed only by government guarantee, but still managed to maintain some finiteness due to international trade and inflation pressures. However, the stock market is not subject to inflationary pressures, but subject to sentiment and perception of the future. They are based on the evaluation of value and not value itself. Essentially, credit, stock markets, budget deficits are nothing more than a loan from future generations, loaning their expected future profits so that they can be spent today. Their validity rests precariously on public confidence. Resources are finite, but the capital of future generations is always assumed as infinite. The financial market is thus, an artificial creation by capitalists to generate more credit from banks to acquire wealth and growth. Money, the only resource available to banks, has thus become infinite through the introduction of credit.

I will argue then, that the fundamental reason why the developed world has achieved such incredibly fast growth besides the establishment of property rights, is not because of the industrial or technological revolutions, but simply because of the financial markets. Instead of being a response to growth, financial instruments became the catalyst for growth. This is evidenced by this current financial crisis. The majority of firms listed in the stock markets acquire more credit from banks based on high credit ratings which is directly related to their share value. In effect, the market value determines the collateral, thus the amount of borrowing. The fundamental reason why the collapse of Wall Street will lead to a collapse of Main Street is precisely this fall in credit ratings: Banks do not want to lend. And therefore, growth is curtailed, or in firms that have already accumulated bank debts which they are unable to pay off, total collapse.

It is irrational to allow private banks (albeit state-regulated) to exist because there is no structural benefit of having banks private at all. Free market laws enable productive industries to be efficient in producing goods and services but banks cannot be classified as such. The reason is two-fold. Resources are finite and fluid, a car-making firm can shift into fertilizer production if the market dictates that as more efficient and they have access to other resources, but banks cannot do this, their only resource is money which is not a finite resource as it ascribes value to something, but has no value in itself as explained previously.

Closer scrutiny will show that the way banks function as institutions are actually not according to free market laws at all. The free market does not decide which companies get extra capital; it is the banks that decide. Rather than having perfect information (under free-market supply and demand conditions), they decide based upon a set of regulations set by the governments, and then upon the analysis of their managers and analysts. Free-marketeers argue against nationalisation on the strongest reason that the state will never have more complete information than the free market. This is true, but there is no reason to assume the state will have any less information than banks, not when they are privy to exactly the same resources - people!

Next, the deposition of money. Besides the small interest percentage individuals earn when they deposit their life savings in banks, it is undeniable that another motive of most is to safeguard their money. Simply put, banks and their sealed lockers provide more security than the old biscuit tin box or the mattress on the bed. Here again, there is no reason to pre-suppose the bank to be a better alternative than the state, especially not when the state have resource to secure military infrastructure.

If we acknowledge that banks do not comply to free market theory, then, obviously, they should not be run privately. Sovereign governments should nationalize and control all banks to safeguard the interests of their countries. But of course, there will always be the threat of corrupt governments, which brings me to my next innovation. That is for the United Nations to establish an international deposits bank where all global citizens can deposit money into and borrow money from. In the interest of closing the inequality gap, this UN Bank will then be able to provide micro-credit functions to directly benefit the poorest people in the world.

This naturally leads to the question on who will control abuse, inefficiency and rent-seeking in the UN Bank (as it obviously will command huge power). My thoughts are for a panel of respected ex-leaders and treasury heads of governments from the top five economies in the world. My reason for this is that having assumed the prestige and respect that came with their respective terms of office, their natural next direction would be to have an even greater positive influence on the rest of the world outside their own home nation. People who come to mind who already have moved in this direction include ex-Presidents Carter, Clinton, Bush Sr, ex-Prime Ministers Tony Blair etc. My assumption here is their presumed 'greater calling', and that for both intention and ability wise, they would be most up to the job. (I will admit there will always be anomalies, but every system will face the same problem of who final responsibility lies with and ultimately, it is about selecting the people seen best for the role.)

Back to the economic world, the real markets and products will still continue to be subject to the free-market and competition, but individual financial institutions will be controlled and directed into the interests of the greater public good, no longer open to speculation. Under this model, the respective state banks and the UN bank will still compete and allow capital to be created efficiently. Private investment will continue to drive innovation and projects, as long as individuals and firms invest with only their own capital and not the combined capital of others as they cannot accept deposits.

Credit granted by the banks will be based not on any stock market price, but on the book price of the company. This will also require the establishment for a single trading currency in the entire world, and speculation on currency will cease to disrupt the free-market efficiency of resources. Nations will still be able to safeguard and distinguish their sovereignty, less through the accumulation of money, and more through the true innovation of products and services. Trade and competition will be established through the true value of products, and not the value of the currency the products are traded in. Ultimately, one cannot deny the importance of credit-induced capital for growth, however, it being a creation of governance, should remain a tool of governance.

To quote from history, Emperor Qin created a unified Chinese currency to facilitate trade between the former Warring States of China, and while there were problems of famines and floods during the dynastic reign, these were all a result of human corruption and natural disasters. (And corruption does not distinguish between private and public.) Never was there a human-created financial fiasco in the form of what is happening today. Money is a state invention, and only the state will be able to solve its problems. If the free market wants to take over, then we will all have to go back to barter trade (where any form of exchange will represent true supply and demand), without any state intervention to guarantee and establish trust.

The even more radical alternative is to re-look our concepts of growth. Should growth be made possible by the availability of money, or should growth bring about more money? Did money come first, or did the goods come first? History will clearly show that obviously the goods for trade came first, and money was a subsequent invention to facilitate this trade. This is not chicken and egg! If so, then growth should bring about money, and not the other way round. However, the current situation shows that the accepted model in the world is clearly the first. The reasons are simple. Human development and education is a long-term process that will necessarily lag behind almost instantaneous credit creation. But it will necessarily bring about true and productive innovation, and slower but steadier continuous growth. However, this impatient world is unlikely to accept this, and we will probably be left with what happens now, ‘Rapid growth subject to cycles, and little knowledge of true production.’ There can be no other solution, but without enlightened state intervention, the cycles will only get more volatile.