This is one of a series of blogs aimed at raising awareness of the everyday external reality we take for granted (the matrix) and then considering how well it really works for our collective well-being, both short and long-term. This week the lens is focused on Banking and Finance.
Everyone hates the banks! Well at least it’s hard to find anyone who likes them. Why is it so? I think it's a well-founded observation that banks have so much influence at all levels in our society, yet they take so little responsibility for our prosperity – or our lack of it.
So how do banks work? They borrow money from their customers or on the world market; they add the cost of their overheads, bankers bonuses, competitive returns to shareholders, and thus set lending rates for borrowers. Competition is limited to whose turn it is this time to raise rates first. When their borrowing rates go up they immediately raise lending rates. When their borrowing rates go down they mostly delay dropping rates for as long as possible. It's a risk free business! On the lending side the bank holds a mortgage over a property and the borrower holds a debt to the bank. In other words the bank owns the debt and you own the risk.
Yet when banks borrow huge amounts of money and can’t meet their own debts as in GFC times, then we the public bail them out – we even own the risk on their behalf!
Alan Greenspan, former chairman of the US Federal Reserve, states in his book ‘The Age of Turbulence’, that “transferring risk away from highly leveraged loan originators can be critical for economic stability, especially in a global environment”. Think about that statement and the mindset that it implies! Imagine if it applied similarly to you... You can borrow as much as you want and gear yourself as highly as you wish – and the risk of any failure on your part to repay the loan will be transferred elsewhere so you will not suffer – because it’s important for your economic stability. How much would you borrow?
How on earth did we lose the plot such that we could allow a system such as this to be central to our way of life? In order to understand this, we need to touch into basic human psychology…
It is perfectly normal, and in fact healthy, if you're standing in the road, to worry about the bus bearing down on you. It is a perception about a physical reality that hopefully leads quickly to a decision to get out of the way! However it is not normal, and is in fact unhealthy, to lie awake in bed at night worrying about the possibility of being hit by a bus. The difference is that the first instance is a concept about something real and therefore you can do something about it; the second instance is a concept about a concept – about something which is not real, and therefore you can’t do anything about it. If we persist in entertaining fears about being hit by a bus, we can build a neurosis for ourselves that can interfere with our ability to cross the road in a normal manner. If we persist long enough, we can turn our neurosis into a psychosis, where it takes on a life of its own and we lose the ability to function in society, and need hospital treatment to get back to normal.
The same principle applies to all our dealings with physical reality, but in the financial world we have built a collective psychosis and we live in it as if it were real. But here the inmates have taken over the hospital!
Take a look at a banknote – it is signed by the Governor of the Reserve Bank and marked as ‘legal tender’. That is, money is a contract – an agreement between two parties in a value exchange. No problem exists there because we have a concept about some physical reality – hand over money and receive goods or services. It saves us the hassle of having to barter in goods.
However the beginnings of our collective neurosis occurred when we agreed to charge interest for lending money – because at that point we invented a ‘concept about a concept’. At face value it sounds innocent enough, but what it allows is the party with the ‘concept about concept’ to be decoupled from physical reality. The steps between there and the arbitrage of default credit swaps simply add a few more levels of ‘concepts about concepts’ and the collective psychosis takes on a life of its own. The problem is that concepts about concepts only exist as long as enough people agree that they exist! If we are ever forced to a reality check – for example balancing real assets against debts – the system can collapse overnight, as it did for Lehman Brothers, or Greece!
So the system reaches an inevitable conclusion and we desperately scrabble around to patch up the same system and continue with business as usual…
But how can we cure a collective psychosis? The answer is to bring our operating principles back into contact with reality. This applies to us personally as well as to the creators of the matrix!
Islamic banking for example, is run on the principle that a concept should never lose touch with reality - so interest may not be charged on loans. The principle is in accordance with sharia law and while I certainly would not embrace that law in its entirety, in the case of financial matters it has not lost touch with physical reality. But western style bankers (a la Alan Greenspan) have created their own private conceptual reality and drawn most of the world into it!
Instead of charging interest, an Islamic bank enters into a partnership with the borrower to buy the property which is then owned jointly. As the borrower repays the bank, ownership transfers proportionally. The bank profits by selling the house to the borrower at an agreed price higher than what the bank paid. While this may sound like the same outcome, in effect it is a world apart. The bank does not own the debt – the bank owns the property. The borrower does not pay interest – the borrower buys the property from the bank at an agreed rate. The risk is shared, and both parties have something at stake in the success of the borrower. Neither party loses touch with physical reality!
So it is certainly possible to adjust our systems towards a healthy state. But will we? It is the system that allows a lender to decouple from physical reality and its associated risks that is the core of the current global financial fiasco. But the implications of change run deep. If you receive interest on an investment that decouples you from physical reality, then you are part of the problem! But if you invest in physical property, for example, an apartment that you rent to someone else, then you're connected to reality appropriately. If you are an investor, you can choose to adjust your financial affairs by ensuring that you make contracts only with physical reality – don’t go for products that look like ‘concepts about concepts’. That means that we must be involved and engaged in the workings of any investment we make.
The government has made it easier to change banks in order to encourage competition. If you are a borrower, make noises in banking environments that you are looking for a change. Make a point of checking out Islamic Banking – you don’t have to change religions – and then point out its advantages to bankers in the collective psychosis club!
Self-interest doesn’t have to include bank interest…
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