SUBPRIME MORTGAGES ARE BEING BLAMED as the culprit in the current financial crisis, but are they just the canary in the coalmine? It's looking more and more like the real problem is that we are bankrupt as a nation (and as a world), and have been for some time. If this is the underlying cause of the meltdown, the problem is solvable in the long run: spend less. But there may be a root cause more systemic than just spending beyond our means, a cause so fundamental it threatens to bring down the whole Ponzi scheme which is not only the American financial system, but the global system, too.
To understand what this cause may be we have to consider the implications of the financial mechanism at the heart of the capitalist system: the charging of interest for the use of capital. Only in a constantly growing economy can such a system work. Consider a manufacturer of widgets who borrows $1000 to expand his business. Let's assume he is charged 10% interest for the use of his creditor's capital. Let's assume further that widgets sell for a dollar each. If the manufacturer is successful and turns his $1000 investment into 1100 widgets and sells them for a dollar each, he can repay his loan. If his investment generates more than 1100 widgets, he makes a profit, which he can invest in further widget production. Thereby, his business grows and grows, and, other widget manufactures enjoying the same success, at the macro level the production of widgets cascades until the economy is awash in widgets. (Fractional reserve banking - the time-honored practice of a bank lending out more than it holds in deposits - has the effect of turning the cascade into a Niagara).
But what if the manufacturer labors in a non-growing economy? What if, because of resource constraints, i.e., the limits to growth, he is able to turn his $1000 investment into the production of only 1000 widgets (which, at the macro level, would be the average case for all widget manufacturers in a non-growing economy)? How, then, does he repay his debt? He has only two options. If he's lucky, inflation has raised the selling price of widgets to $1.10, so he can sell has 1000 widgets for $1100 and pay off his loan. This may work fine for him, but at the societal level, inflation as a solution to a growth-less economy is not really a solution. It's just a shell game shifting the pea of insolvency from one group to another, a sleight of hand likely to be fatal to the system of capitalistic finance in the end anyway. The only other option is for the manufacturer to dip into whatever other assets he may possess to repay his creditor. At both the personal and societal level this solution is also destructive. Repeated over time and multiplied to the macro level, it leads to the eventual impoverishment of everyone except the ultimate creditor (Scrooge McDuck?).
If the first solution to our manufacturer's predicament does not occur and the second solution is not available to him, he fails to repay his loan; he goes bankrupt and his creditor (be it bank, stockholders, or his Aunt Sally) is out whatever he is unable to repay. This, in turn, hampers his creditor's ability to repay his debts, initiating a tidal surge of credit defaults that, abetted by the multiplier effect of fractional reserve banking, turns into the tsunami we are experiencing today. Could the willingness of investors today to accept a negative rate of return on investments considered safe, e.g., the purchase of US Treasury bonds at less than face value, be a sign of things to come: an economy in which the charging of interest for the use of capital just doesn't work?
Capitalism has never before had to face such a challenge. Its history has coincided with and been causatively related to more or less continual economic growth. But can the American economy, or, more pertinently, the global economy, keep on growing forever? Can the sort of growth we've experienced over the last few hundred years be repeated over the course of the next hundred? Seems unlikely in a finite world, a world in which resources have a limit. (If the Peak Oil theorists are right, the philosophy of zero growth - anathema right now - may come to be looked back upon as a sweet dream, impossible to realize!)
Could it be that we have reached the limits to growth? Could this - not some transient housing bubble, not some risky bets made by greedy and unscrupulous high-rollers, not even the profligate ways of us Americans - lie at the heart of the current crisis? If so, no bailout scheme - no matter how wisely or justly crafted - is going to rectify the situation. It's going to take a complete restructuring of our financial system: the abandonment of a growth-dependent system based on the charging of interest for the use of capital and the adoption of a system promoting stability, not growth. But to accomplishing this quasi-religious transformation may require that the Church rediscover that hallowed precept it preached through the first 1500 years of its existence: that usury is a sin.
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M C R
This work is copyrighted by the author, Ken Meyercord. All rights reserved.
