Imaginary Worth, Empire of Debt: How Modern Finance Created Its Own Downfall (October 15, 2008) by Charles Hugh Smith
original source: http://www.oftwominds.com/blogoct08/positives3-10-08.html
How did we get here? The current global financial unraveling and meltdown has brought us face-to-face with a stark and uncomfortable truth: with all its reassuring numbers, our financial system is a human system, based on human frailties and desires, resting almost completely upon imaginary notions of worth.
From the bartering of material goods and services, to the convenient exchange of dollars no longer backed by anything but faith, to "creative" financial vehicles that leverage essentially symbolic wealth to an infinite degree, we have progressively departed from the foundation of what was once considered financial worth—the competent stakeholdership, ownership, and stewardship of real property involving labor, earnings, investment, risk, reward, and responsibility.
Much like a biological cancer single-mindedly programmed to take over the body, rogue financial instruments and players have mindlessly aimed for growth at all costs. Faced with the limits of growth to real wealth, the financial system has manufactured what has been called a "shadow banking system" that creates "value" out of whole cloth by simply assigning and exchanging it. This has culminated in a 70 trillion dollar market for credit default "swaps" (CDSs), an unregulated insurance, which is the subject of the following essays.
Infinite growth is impossible in a finite system. One can be very creative about assigning worth and developing unlimited growth in assigned worth, but real worth remains constrained to its moorings—can it create quality of life, can it feed, shelter, and clothe, can it produce clean air and water, can it create lasting fulfillment? Even the magic of percentages and myths about "houses always going up in value" assume unlimited growth in environmental and financial systems with limits. Infinite growth premises are demonstrably false in finite systems. What they really seem communicate is, “Let the next generation deal with the consequences as long as I get my maximum returns now.”
There is no such real thing as "externalized" liability in a global system. As with the exploitation of natural resources, there is always a cost to any action, which seeks to extract value. Someone has to pay the price. The more interconnected a system, the more readily and strongly that price will turn up to affect all the players including the initial beneficiaries.
Finance systems need to be straightforward and transparent. Corporations have started shell companies to hide off-the-balance deficits. Rating agencies assessed junk as AAA, facilitating the sale of that junk to pension funds, who were only interested in secure investments. All this was hidden behind so-called "complexity" (a mantra repeated brainlessly in the media).
Debts are not assets. Buying debt can appear to be a good investment on paper, but this rests on ability to pay. When debts are so constructed to create unreasonable re-payment (fast accelerating interest and principal payments rapidly outstripping the equity of collateral) they will fail.
Monopolies and concentrations of wealth ruin economies by binding up the flow of goods and services and freezing exchange. Healthy systems both natural and financial depend upon high diversity and exchange among distinct entities each offering something of real value. This is why a rain forest is considered a very rich system—many niches, many species all participate in the web of life. This is why Henry Ford said he needed to make his wages high enough and his cars cheap enough for his own workers to buy them. This is why a large middle class is the bedrock of a functioning democracy. Debt instruments had the effect of swallowing the normal citizen and worker’s paycheck paralyzing his or her ability to spend after the borrowing value of his or her assets (i.e. houses) were tapped out. This has been exacerbated in America by declining real wages, non-compensated increased productivity, and outsourced jobs. This has been further demonstrated by banks’ unwillingness to lend to each other. When the flow of money stops, financial systems seize up.
Without regulation and actual risk involving real consequences the financial system and its leaders will run wild. This one would again seem to be obvious, yet this law was ignored as well. Myths about the superiority of a market based on greed and acquisition to regulate itself don’t make any sense even on the face. Yet the world system, and in particular the American system driven by neo-conservative ideology, hailed deregulation as the triumph of "freedom."
Chief executive officers of large corporations could take huge risks for their companies and reap hundreds of millions of dollars of salaries, or completely run their companies into the ground as those risks came home to roost and get "only" tens of millions of dollars of golden parachutes. Reckless behavior is guaranteed if it is rewarded more than prudent, intelligent behavior in an economic system. From an acquisition standpoint, this is individually "rational" behavior, even though it is unhealthy and irrational from a system standpoint.
The question might be asked, "Why were all these very simple and obvious maxims ignored? What were people thinking?" I think much of it centers around the fact that people’s education and identity still has its roots in a long-past industrial age. People still tend to make their meaning and choices based upon largely myopic, compartmentalized, and stratified knowledge.
Even well educated people rarely look deeply into the big picture and to whether their particular perceptions, assumptions, and knowledge reasonably fit with other parts of a system.
Generally, if we can make some money, feed our families, and have some fun, we don’t really care what the system is doing. Now we are invited to engage bigger-picture thinking as a necessity in our day-to-day life.
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