Sunday, March 22, 2009

No one can handle the money stuff

I will soon write the for-dummies series, I need to noodle on the format and narrative a bit but I will finish with the notes on current thoughts and conclusions. The first funny conclusion I get at is that handling money is impossible for humans.

Certainly not the bankers

I am reading a good book by Desoto recommended by a reader and he delves into the history of fractional banking since the Romans which was considered theft by the Romans as the legal status of deposits is to be available in kind at ANY moment.

Glass Steagal, the 1934 act, was crafted to try and limit the amount of credit money that could exist in the system by limiting the amount of debt banks could hold on their balance sheets with respect to their reserves. Securitization quickly made ashes of this and excesses were back in a jiffy.

Not the politicians

The politicians cannot deal with the money. It is too hard to restrict growth and too politically rewarding to open the money valves. Why? when you start opening the monetary valves, a mini-ponzi kicks in. Prices go up because credit goes up and then more credit is demanded because prices go up and so prices go up. Get it? It looks like growth, it feels like growth, it talks and walks like growth, but it is mostly monetary growth. The beginning of the credit boom is the equivalent of a honeymoon. It pays to lever. That was Reagan in the early 80's by 85 credit was exponentially growing and it wasn't until 20 years later that the bubble blew up. By 90 Reagan was a hero. Clinton didn't even try to close the valves, it is too hard. How do you dare meddle with the banks? In fact Clinton was the one that undid Glass Steagal. Political suicide. The last one that did it was Carter (according to Greenspan in his book), he got slaughtered politically for closing the money valves and getting inflation under control and got blamed on a short term for the very problem he solved long term. But the times were hard, and demanded these measures, imagine when the times are easy, you can't ask this from politicians, not possible. The mouse will push the morphin pedal until it dies.

Machines and the 3 generation problems
So we need machine like handling for money, we cannot go around having every politico with a 4 year horizon, or a banskter with a 3 month horizon deciding what the money levels are going to be. In reading the history of bank failures, one disheartening fact is that there is a failure of regulation that lasts in time. Glass Steagal was a good thing, hard lessons learned during the depression. It became an illusion that the FED could control the monetary levels once securitization was put in place. Our forefather knew what to do, had learned a lesson, but 3 generation later, "things were different this time". Same story for the 2000 last years and we do NOT seem to have an genetic memory of money management that last more than 3 generations. I profoundly hope that the internet will help in preserving the knowledge we are rediscovering, call me crazy: things such as this blog, so that future generation understand the urgency of abiding by that knowledge (monetary management). I am hopeful.


srw said...

Turing's halting problem is to machines like current economic crisis is to humans. Both are undecidable.

Dimitris Andreadis said...

So Marc, wouldn't the return to a gold standard provide the mechanical means to solve this type of problem?

That is the collective memory of hundreds of years of experience, i.e. don't let humans control monetary levels, they are bound to screw up.

Marcf said...

No the gold standard does not prevent fractional banking, aka the original sin. Hard money proponents are mistaken to long for a gold standard. What they really want is
1/ a fixed and EFFECTIVE money multiplier ala glass-steagal. The money lever needs to be more than 12 (old regulation was limiting) and less than 40 (current leverage blew us up). The money multiplier should apply to securitized credit flowing into the economy and not just the narrow accounting view of the banks balance sheets. I will go on record with the number of 23 :)
2/ the gold standard is a longing to keep governments out of the money creation business. And I'm that sense yes. By having a commodity as a monetary token you prevent actions like the one bernanke is undertaking. Another way to get at it is to create a government free supranational currency sort of like the euro but for the world. This way the reserve currency is not the dollar and subject to debasement. I am reading some coverage about such proposals.

A one world fiat currency could marry the advantages of gold and fiat by creating a currency whose monetary levels are out of the control of a few while allowing for fluctuations in monetary levels.

I need to think some more there may be something here.

Marcf said...


Funny and clever and almost accurate in my opinion. The problem is decidable. When confronted with the choice, mouse and humans will push the morphine despite knowing that it will kill them. Our brains are wired as such and it sucks. The resulting math ( I am working on research models as we speak) is chaotic with n coupled variable with diferential equations that exhibit feedback loops left and right. The outcome is in-knowable and in fact uncomputable. I suspect the proper language to capture the result of such chaos is statistical eg your system will go kaput within this timeframe with this probability. No idea how to formulate this yet.

Army No. Va. said...

If we go to a world reserve currency, the std of living of most Americans will decline quite a bit further. Basically, we won't be able to run the deficits we are running and a lot of spending will have to stop (esp at the government level). Oil and imports will get quite a bit more expensive. It will be harder for many Americans to heat their homes and drive long distances in their cars.

The Chinese will be buying and driving cars. The Americans will be buying and riding bikes. Maybe that's a good thing (unless you live 20 miles from work and everything else).

Marcf said...

So this says the american way of life is subsidized by chinese politics.

Army No Va said...

Yes and Japanese too. To a lesser extent add Germany.

eda said...