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High finance is wrecking the economy and the planet, but it won't reform itself (prospectmagazine.co.uk)
117 points by fanf2 10 days ago | hide | past | web | favorite | 50 comments





I'm most bothered by Indonesia and what is happening there. The pursuit of profit is so strong that the cheap land-clearing method of burning has destroyed the air quality of many parts of SE Asia and caused suffering to millions of people. In the last couple of months alone, nearly half a billion tonnes of CO2 have been released into the atmosphere from these fires [0].

And it's all about money.

[0] https://www.channelnewsasia.com/news/singapore/indonesia-for...

more:

https://edition.cnn.com/2019/09/11/asia/malaysia-singapore-p...


Indonesia has so many problems. Corruption is the biggest problem. All Indonesia’s problem stem from corruption.

It's funny that "usury" has gone from mortal sin (Thomas Aquinas :https://oll.libertyfund.org/pages/aquinas-on-usury; but also Jesus in the temple) to everyday activity, and that the communities that outlaw it (the whole of Islam, old style communism) don't get a mention in discussion. Very much in contrast to discussions of food ethics and human rights !

It might be indicative of the success and prosperity of societies built on different principles.

Doing without interest seems not to work very well, unless you basically put a fig leaf on it and call it something else.

Rules for food preparation don't seem to have a great effect on the success of societies, by contrast.


" the communities that outlaw it (the whole of Islam, old style communism)"

I lived almost 20 years in communist Romania, I can assure you interest aka "usury" was not banned at all.


That's so interesting!

What institutions administed loans? How were they squared with anti capitalism?


Well, yes. Financial deregulation in the US was a big mistake. Which we knew in 2008. Yet it wasn't reversed then.

People have been worried about this since the 70s, when it really took off, with financial maneuvering being more important than actual economic value.

When lawmakers reacted to the emergency they thus listened only to the people who created the disaster - they were the only people they could see who understood what was going on.

It's a little better now with people like Elizabeth Warren. The left still needs to understand finance better though or we'll all get totally screwed again come the next crisis.


Elizabeth Warren certainly has some good ideas, but the fiasco the CFPB has become is largely on her. She created a bureaucracy that was to be immune to political pressure by design, under the shortsighted assumption that she (or at least someone amenable to her) would run it. People warned her and she should have known better.

The way to avoid the next crisis is to stop bailing out the players. The role of the Fed should be ensure that the payment system remains robust and that solvent banks have access to liquidity.

Lehman Brothers should be a model for the future. Barclays and Nomura bought productive the assets of Lehman and put them to work. The investors in Lehman's poor management were punished.

On the other hand, AIG/Goldman bailout earned Warren Buffet alone about $5 billion dollars. He literally was buying Goldman preferred stock while advising the Treasury to bailout AIG (whose biggest counterparty was GS).


The problem with "stop bailing out the players" is that the players hold the people for ransom. The players didn't lose their money -- they lost people's personal savings that they used to pay for food and rent.

If people get hungry, they revolt. The banks said to government, "If you don't bail us out, there will be a revolt. You don't want war in the streets do you?"


But they don't. They want you to think they are holding the people for ransom, but they're not.

Solvent banks need liquidity, the payment system has to stay robust and functional, and existing deposit insurance (which is fully funded) needs to be honored. But don't bail them out.


Regulated or deregulated — central bank fiat money created via debt instruments is inevitably self-destructive.

We are in a situation where essentially all global personal tax revenue goes directly or indirectly to pay commercial and central banks for the money supply to exist.

Destroy that — or be destroyed by it.

Everything else is just rearranging deck chairs on the Titanic.


All money is essentially debt. It might be a failure of imagination from my part, but I can't see what you would replace it with except a system just like eit but not quite it.

He's referring to something in specific that many people do not consider. Most of our money is not printed, but created by fractional reserve systems through debt. Banks in general are only required to hold 10% of their deposits on hand. The rest can be lent/invested. If there's a run on the bank they rely on a central bank to give them money to cover it. Most people know this stuff, but consider this:

- Bob deposits $100 of 'real' money at a bank.

- Joe takes out a loan of $90 and uses it to buy something from Jane.

- Jane deposits $90 at the bank.

- Mike takes out a loan of $81 ...

And this process recurses on downward with a smaller and smaller share each time. But the mathematical result of this is that $100 of "real" deposits ends up creating $1000 of debt. And that's before interest which, for long term loans, can be multiplicative. So $100 of "real" money may end up creating thousands of dollars of debt. We've created a system where banks end up, quite rapidly, being owed literally more money than exists. Great time to be a banker for sure.

This is why the Fed and other financial entities are so obsessed with inflation. Inflation makes everything more expensive in the present, but it also reduces the cost of loans from the past. Imagine I take out a loan for $1000 and somehow the next day we see 100% inflation. Well now my loan can be paid back with only $500 of 'value' as measured from the time I took out the loan. If inflation is higher than the interest rate on my loan, I actually earn money by not repaying it. By contrast, deflation makes older loans more expensive. And of course there is also the investment outlook. Inflation is a penalty on wealth. If there's 2% inflation per year, my billion dollar piggy bank becomes worth ~$20 million less each year. So I'm incentivized to invest actively. By contrast with deflation I can sit on my money and become relatively richer by the day.

But this also puts us on a roller coaster. Old debt is only paid off with new debt which will only be paid off with new debt which ... And the money definitely does trickle downward, but at the same time it gushes upward. And the ride keeps going faster, and growing bigger. Not hard to imagine a different system as ours is grossly counter intuitive. Of course different doesn't mean better so, as a recurring theme in human history, we're only like to change once things go boom.


The flip side of money being created by creating loans is that it is extinguished when those loans are paid back.

Taxes also effectively perform the same function - destroying money (consider what would happen if all current tax money were burned and all government spending were printed - economically no different).

This side of the equation doesn't get a commensurate level of attention.


All except the interest component, of course...

That requires the creation of additional money, borrowed into existence by someone else and then earned by the interest payer, in a never ending exponential cycle.


ideally, the loan is directed towards productive activity- the sowing of seeds purchased today for a harvest tomorrow, the construction of a factory today for gadgets tomorrow, the stocking of a store today for sales tomorrow, a home loan today for a person getting a job at a new city tomorrow - that will generate utility in the future. then the wealth generated from the interest is also wealth generated from new economic activity that never existed until the loan enabled it.

credit is only problematic when the expected activity fails to come to fruition, which is why the credit shrinkage acutely accompanied the economic shrinkage in the last crisis.


All those observations are true, and there isn’t anything wrong with borrowing money and paying interest.

It’s the creation of money and paying interest that’s problematic.

This interest demands new money to be brought into being to pay it — to someone doing nothing but seeking rents due a monopoly position bestowed by the government; the banks.

This stream of interest payments is going out of the economy to whomever owns the commercial bank, but must be paid by people within the economy, who must borrow more money into existence to pay it — from the very people to whom it is “owed” (for no reason at all; they bear no risk, and provided no capital of their own).


> they bear no risk

how does the existence of loan defaults jive with the idea that loans have no risk?


Banks leverage themselves 50-to-1, and then take huge volumes loans to unqualified clients, in the (historically accurate) assumption that the tax payer will be obliged to bail them out.

If the money creation aspect of banking was separated from the capital accumulation and loan-making/risk-taking aspect, things should unfold much differently. Particularly since there would be "fractional reserve" concept underpinning the money supply.


Thanks a lot. Can you recommend a book if I’d like to read more on this explained similarly.

This is one of the first things you'll learn studying Macroeconomics. Any introductory book on that topic will teach you about the concept.

In general, you can look for information pertaining to "How banks create money," which refers to your $100 deposit turning into $1000 after it completes the ownership ladder.

If you're still in college and have the opportunity to take some electives, I highly recommend Micro and Macroecon.


A great book on the creation of the fed and fractional reserve is The Creature From Jekyll Island

I almost bought this, but the author looks very shady:

>G. Edward Griffin (born November 7, 1931) is an American author, filmmaker, and conspiracy theorist. Griffin's writings promote a number of views and conspiracy theories regarding various of his political, defense and health care interests. In his book World Without Cancer, he argues that cancer is a nutritional deficiency that can be cured by consuming amygdalin, a view regarded as quackery by the medical community.[2][3][4] He is the author of The Creature from Jekyll Island (1994), which promotes false theories about the motives behind the creation of the Federal Reserve System.[2][5] He is an HIV/AIDS denialist, supports the 9/11 Truth movement, and supports a specific John F. Kennedy assassination conspiracy theory.[2] He also believes that the biblical Noah's Ark is located at the Durupınar site in Turkey.

https://en.wikipedia.org/wiki/G._Edward_Griffin


Fractional reserve banking does not exist, and did not for a long time. The real situation is even worse.

https://www.forexlive.com/centralbank/!/fractional-reserve-b...


Well, you just linked a forum post on a forex trading website, I'm not sure how much weight I would put on that.

However, I did read the link and did some own research. I do see the argument that we need to revisit the causality of bank loans through the demand side argument. This however does not need to mean that "Fractional reserve banking does not exist". I'm not sure what makes you think that.


Apologies, this is indeed a shitty link. The commonly held belief that banks require a deposit before they can hand out loans is a myth, the financial system has not worked that way for at least 40 years, if ever at all. A bank's ability to create new money is enormous, and proper explanation can be found in this paper by the Bank of England: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

So in a sense we agree right?

That's a great question!

When you create money through "taking a loan" against property, the bank creates deposits equal to the "loan", secured by your assets. These assets are attached by the bank (a lein), valued by an appraiser and insured against loss (at your expense).

The bank creates these deposits ex nihilo; the only one in this equation that has any wealth is you, and the bank is at little to no risk.

Imagine, instead, a scenario where all of this takes place; you have wealth, you insure it against all perils (loss due to destruction or theft, including title insurance against fraud, etc.), at your expense. You get it appraised, and then money springs into being. Exactly like today. Except with no bank, and no "interest" being charged.

The same limiting function is used, as by the banks; the amount of money allowed to be brought into existence for a certain amount of wealth is some percentage (say, for example, 75%, or whatever).

Except, this factor is dynamic; it is adjusted automatically as inflation or deflation occurs, dynamically issuing and withdrawing "credit" (the amount of money credited to your account due to the pledged wealth).

The value of the units of currency can thus be established at an absolutely fixed valuation (say, relative to a basket of widely traded commodities; steel, kWh electricity, pork bellies, OJ, barrels of WTI crude, etc.).

If someone needs to "borrow", in excess of the money they have created based on their wealth, they can do so on the private market; not based on some fanciful central-bank controlled interest rate, but at market rates from others with excess wealth/credit, at their own individual risk-adjusted market rate.

Anyway, that's a quick summary of one potential alternative.

Same highly dynamic money supply, most of the same "moving parts", but no central-bank interest stream is required to create the stock and flow of credit underlying the economy.


fantastic polemic -- utterly false dichotomy. We are in an age of massive systems, and systems-thinking is called for..

The limiting function for money creation is the amount of wealth available to absorb it (both stock and flow).

Presently, that is secondary; the limiting function is the ability of civilization to maintain the interest payments to those private institutions mandated to create the money supply.

One of these concepts is necessary; the other is not.

Creation of dynamic money supplies based on the one limiting function is possible, and there are emerging mechanisms becoming available to support such money at scale — and make it available to the other ~4 billion people entirely unserved by the present system.

Care to comment on why this conversation is a “polemic”, and such a future is unimaginable?


And what does "systems thinking" oh-so-conveniently mean this time?

One thing that might be worth considering is where the best leverage point in the system is. See http://donellameadows.org/archives/leverage-points-places-to...

If an investor (say, a pension fund) holds treasuries, then this has the effect of redistributing money from taxpayers (via interest payments) to pensioners (via treasury yields). Where does the destruction come in?

My issue with articles and stances like this is that I agree that rent seeking behavior is obviously an issue. Rent seeking is by definition unproductive economic behavior. But the existence of rent seeking does not serve as proper indictment of capitalism in general.

Capitalism has been an effective and great tool and system in many ways, it just needs focus on the improper practices.


I thinks this is the issue with our capitalism in "practice". It's not resilient enough to bad actors.

Of course there's no perfect system, but we should strive to improve what we have whether or not we can still label it "capitalism" (or socialism or w/e) as we iterate.


> Rent seeking is by definition unproductive economic behavior.

While I am inclined to agree with you, I do see benefits to the renting model. Basically any thing in the cloud is paying towards "rent seeking" model and it has enough benefits for many people that its worthwhile.


If someone is providing a service that generally increases the total wealth (even if they are the primary recipient of that wealth), then it is not rent-seeking.

It’s when someone is _actively trying to extract wealth without adding value_ that we call this rent-seeking behavior. It is often not obvious from the outside which is which, and it does lie on a spectrum.

Software is actually a pretty interesting case to inspect rent-seeking, but it’s not easy to pull apart in rent-seeking context (music is another such product).

So let’s imagine a reservoir of water, and there is a bridge that everyone must go over to get the water. Now imagine there is a bridge troll that demands 50 gold coins in order for people to pass. This is rent-seeking behavior. Now imagine the same scenario, but the troll built the bridge. This is not rent-seeking per se, it is wealth creation, because now everyone can get to the water source that they could not get to before. However, the troll can still engage in rent-seeking behavior (like preventing anyone else from building a bridge). That doesn’t mean that rent-seeking doesn’t come into play when chasing profits, but the term is definitionally about siphoning of wealth, not its generation, so drawing the line between profit seeking and rent-seeking isn’t really something you can do in practice unless it’s obvious that no wealth creation whatsoever comes from the rent-seeking behavior.


Renting =/= rents(in the economic sense). Renting cloud VPS is not rent-seeking(in the economic sense).

Two completely different concepts which unfortunately bear the same name.


Ok, if you are going to claim a distinction, I think its fair to ask where the distinction lies. Whats so good about renting cloud infrastructure from renting an apartment?

(Apartments don't com with the same level of vendor lock in.)


So rent seeking is only slightly related to actual rent (like for an apartment or office). It is the idea of extracting value from something without providing anything. A landlord who does no work maintaining an apartment but charges rent would qualify, but a good landlord who works to improve and maintain the property to rent would not.

https://en.wikipedia.org/wiki/Rent-seeking


Running a cloud infrastructure takes work, and the profits should be made from the service provided and not off the monopolization of some property.

So does building and maintaining an apartment.

The article discusses rentier, which is pretty much the rent seeking discussed here. Renting an apartment isn't profiting off the monopolization of property either.

Cloud VPS is a management service and not a hardware leasing service.

why is it charged by the size of machine then? Does a bigger machine require more management?

True. But supply is limited so there has to be a mechanism to ration what exists to what is desired. The ability to pay is a reasonable proxy for need.

Rent is sort of surplus gained due to advantage of scarcity rather than advantage of production. Unfortunately, I cannot write a HN comment that differentiates more clearly but that's the rough idea.

Like setting up a guild and saying no one can do work except through the guild and then using that advantage of pricing is rent-seeking.

Just being better at doing work so you make more money is profiting.


Humans have been wrecking the planet (deforestation, killing the megafauna etc.) and doing economically dubious things (wars etc.) for far longer than high finance has been around. Still it provides another tool that can do damage or be used for good that could benefit from better regulation.



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