Front page photos of the riots in Greece -- heartbreaking.
Everything traces back to human action. Positive constructive action leads to a good outcome. Likewise, the opposite is true.
If the financial crisis tells us anything, it's this. We moved away from person-to-person reciprocity and community orientation. We deconstructed boundaries for expedient profit. We see this in the making of the "Too Big to Fails" (the outcome of Glass-Steagall repeal which separated commercial banking from speculative investment banking) all the way down to the discarding of lending standards. No surprise, then, the devastating result.
I recently came across an article that made me think -- not much has changed.
It starts like this,
It is not often that business people head to Washington to explain how unimportant they are.
But, over the last several months, executives from more than two dozen financial companies and their trade groups have paraded into the Treasury Department, the Federal Reserve and other government agencies to try to persuade top regulators that they are not large or risky enough to threaten the financial system if they should ever collapse.
In a world of complex financial interconnectedness and systemic risk -- as if that's not enough for us to comprehend -- how can one be sure of anything anymore. I don't know about you, but the financial system, to me, resembles an out-of-control hydra, and, remains structurally flawed. Structural reform is necessary to curb reckless speculation, starting with the "Too Big Too Fails," which have only gotten bigger.
Apparently, the Washington parade of the "Too Unimportant to Matter" (which co-exist with the "Too Big to Fails") included the biggest insurance companies, the biggest hedge funds. Hedge funds remain lightly regulated and, are lending (unregulated) to businesses.
With Wall Street, "the cheese always moves." In theory, a regulatory system that is updated, targeted and able to be enforced would be the ideal. I wonder whether a regulatory framework can even be designed to keep up with the adroitness of Wall Street, and the present structural complexity of institutions and securities.
All the more reason for structural reform as risks remain real. Under the current regulatory framework, the taxpayer would once again "foot the bill" should something go wrong.
The hedge fund lending article, referenced above, goes on to note,
If firms load up on debt and the market goes into a tailspin again, the shadow banking system could implode and threaten the entire economy.
No too long ago, AIG, at the heart of the derivatives maelstrom, cost the American people billions. I seem to recall an AIG honcho espousing confidence in the company's derivative risk controls, before the catastrophic blow-up. Same with Bear Stearns' "best days are ahead," before the firm toppled with nearly 40 to 1 leverage and an "all eggs in one basket" modus operandi. The latter is reminiscent of the 1990 bankruptcy of high-yield bond house, Drexel Burnham.
Back to hedge funds. Hedge funds use leverage (meaning they borrow) to amplify returns. They played a role, in their rush to deleverage, during the October 2008 stock market nosedive. Hedge funds have gone belly-up before -- the 1998 collapse of the hedge fund Long Term Capital Management comes to mind, the result of high leverage in the face of a ruble devaluation. The outcome, a Federal Reserve-orchestrated bailout by a bank consortium.
In sum, who would have ever thought, pre-crisis, that one "esteemed" financial institution after the other would fall, and, with such consistency.
Meanwhile, in the real world of non-billionaires, we're dealing with absolutely untenable U.S. joblessness -- a 25% unemployment rate for the young (last I read). That's robbing someone's dreams, not to mention a deep hurt to the innate desire, we, as human beings feel, to be valued, to succeed, to care for ourselves and our families.
Stubborn joblessness is symptomatic, of the pernicious hollowing out of the US economy over decades through conglomeration, globalization and technological automation -- the morphing into a services and consumption based economy, one increasingly driven by financial bubbles.
So, what's the deal here.
Throughout the ages things don't seem to change, they just play out through a different forum. Romans conquered, then taxed to get bigger and wealthier. In the process they took people into bondage, who toiled for the economic and military success of the empire. That's what happens when person-to-person reciprocity is removed.
Debt is a form of bondage and servitude. Someone's got to pay for it, in some way or another.
The world is awash in debt to the tune of a staggering 160 trillion (governments, corporations, individuals), of which some 40 trillion is world government debt, of which 14.3 trillion is US government debt. Contrast this with a worldwide GDP just shy of 60 trillion. Even with supercharged economies, these numbers are daunting. It's a crescendo of too many promises made, too much corporate borrowing to fund expansion, and living beyond means.
Think about the seismic events taking place around the world. I'm not talking just natural disasters, heartbreaking, yet, over which, we have little control. Monstrous debt, on the other hand, is a man-made disaster.
Let's look at the world map. The U.S., is in a fiscal conundrum, with ever mounting debt and a slowing economy. Europe -- largely the peripheral PIGS (Portugal, Italy, Greece and Spain) -- is in a morass of debt with little growth to service the debt. Japan -- suffering from a devastating earthquake -- has not emerged from its decades of credit-induced stagnation. And, China is slowing down (for the moment). Add in the demographic shifts in the U.S. -- the unfunded liabilities exceeding 50 trillion -- and, we've got issues.
Let's revisit history.
The Crisis of the Third Century
"Civilization begins with order, grows with liberty and dies with chaos," so said Will Durant, author of The Story of Civilization.
Take the financial crisis that befell the Roman Empire in the third century, known as "The Crisis of the Third Century." While some historians argue that it was a series of economic crises, rather than just a specific crisis, it was a turbulent time, ushering in the multi-century transformation of the Roman Empire. One that witnessed the gradual disintegration of economic, political and social institutions -- under the weight of military conquests, invasions, fiscal turmoil, political infighting and civil unrest. It laid the groundwork for the Middle Age feudal system.
A leadership vacuum characterized the mid-third century, leaving Roman Army generals jousting for Imperial power, rather than governing. Ever increasing military conquests drained resources, created a need for money. Story has it that the silver coin currency was devalued through a metal dilution to meet the funding needs. The chain of events -- runaway inflation, currency collapse, civil unrest.
Civil unrest disrupted the Roman economy, dependent upon an internal trade network that included routes leading to the Mediterranean ports. Travel proved dangerous. Ergo, came migration from the city into the countryside whereby Roman citizens traded freedom in return for food and protection from large landholders. Hard times forced small farmers to sell out to large estates. Third century Romans were already morphing into serfs. By the time the Roman Empire collapsed, the infrastructure for serfdom was in place, the feudal system of the Dark Ages.
Debt, if big enough, is a shackle. Being shackled brings fear and anguish, certainly not freedom.
One can't move.
So, as I watch the headlines, the human crisis unfold worldwide -- the job, foreclosure, and debt disaster here at home juxtaposed against the recent headline "Bank Chiefs Enjoy 36% Jump in Pay" -- I scratch my head, in wonder, is there something deeply, deeply...?