Archives for: January 2011
Fractional Reserve Lending
Henry Ford once observed: "It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." Fractional reserve lending, which is at the heart of our banking system, is indeed one of the most subtle scams in the whole entire Universe.
On the surface, lending is a fairly straightforward business. Suppose you have an extra $10000, while a good friend of yours has a brilliant business plan. You have idling money in your mattress, your friend has a profitable idea, so you naturally help him out and bankroll his enterprise. The value of your previous hard work will be put to good use, and for this friendly service you get rewarded with interest.
The trouble is that sometimes there is no good friend around to utilize people's dormant capital and that led to formation of the banking system. Banks look after your extra cash and, while you have no immediate need for it, loan it to people who have, and are willing to pay a little fee for the privilege. Banks essentially function as a matchmaker, which is a valuable service for which they take a cut in the form of an interest spread.
However, most laymen think that when a bank lends money, it comes from some depositor's account; that the value of the loan is fully backed by someone's hard work. That is not true. Banks may lend up to 10 times of what they are collecting. So if you deposit say $100, not only can your bank lend out that amount, but it can continue lending up to roughly $1000. It makes 10 loans with your capital. Thus when you take a loan, the bank does not just transfer someone else's money to you, in most cases it simply creates it by an accounting trick. Of course, the banks won't share the interest coming from those extra loans with you. You get your little interest on the first loan, while the remaining nine generate interest solely for the banksters' pockets, despite the obvious fact that you are the one who provided the capital to begin with.
This lovely habit harks back to the Middle Ages when goldsmiths issuing gold certificates for stored bullion realized that on the average only about 10% of physical gold was claimed back at any given time. Cunningly, they started issuing more deposits than they had gold for and today's banks just happily continue this tradition. In plain terms, this is nothing else than sanctioned counterfeiting, which is why our current monetary system would better be named Fractional Reserve Pretending.
That brings us to the crucial question: As the amount of goods and services in the whole economy expands, and the money supply needs to expand with it (to prevent deflation), who should have the right to implement it? Should bankers be allowed to rake in obscene profits just by creating money out of thin air and then lending it to us at interest? This is something that should be subject of a serious political debate. I am not an economist, but in my ideal world such sovereign prerogative should benefit the whole nation, not just its financiers.
I would say the banks should implement the full reserve lending and cede ALL money creation to a fully public central bank. This would allow interest collected from the expanded money supply during economic boom to go back to the Treasury and, by extension, to the people. You could build bridges and hospitals with this interest, you could fund research in new technologies and energy resources, you could use it for federal emergency assistance. That would provide much better social service than luxurious private yachts of Goldman Sachs alumni.
Transferring the money creation solely to a central bank would also simplify the current feed back mechanism. If any given commercial bank had more entrepreneurs with brilliant ideas than people with capital, and the bank would think the ideas were worth it, they could then ask the central bank to create the extra money and lend it to them at interest. Again, the bank's core source of income should be the interest rate spread (the difference between the rate at which they borrow from the central bank and lend to the entrepreneur). In good times the central bank would raise the interest rate to discourage runaway lending, in bad times they would lower it. Banks would be less willing to go on a reckless lending binge, if most of the profits from a further credit expansion went into the public Treasury.
There is no apparent reason why bankers should be the richest people on Earth. After all, they are just matchmakers. They do not produce anything of value. They do not create revolutionary inventions, or miracle drugs, they don't write engrossing bestsellers. When you drive down a small town's main street, the shiniest building on the block will invariably be a local bank. Why should that be? That building should belong to an architectural studio, to an engineering firm or a software development company. Again, it should belong to people who produce and create.
Bankers certainly deserve good salaries for their service, but the easy windfalls coming from usurping the right to create money should not be theirs. They effectively come from raping our currency. If banking was redefined to serve our communities, as it was originally intended, it would have beneficial effects on careers decisions, too - more smart people would be considering productive careers in engineering, technology, sciences, manufacturing, farming or arts, rather than dreaming about get-rich-quick schemes conjured up by the Wall Street.
The true importance of this issue can be gleaned from the words of Mayer Amschel Rothschild, the founder of the well known international banking dynasty: "Let me issue and control a nation's money and I care not who writes the laws". In the 21st century, it is outright outlandish to let bankers still get away with this game. We should return the control of our currency to the people of the land to whom it rightfully belongs. Separating the commercial and investment banking and placing severe restrictions on what the banks can do with our money would be a good start.
Slippery When White
You only start appreciating something when you lose it, they say. Whoever "they" are, they didn't tell me that one day I'd be fitting this old adage to friction.
Last Wednesday afternoon, it started snowing pretty hard. An endless stream of tiny parachutes was invading the Earth. Within an hour, the whole landscape turned into a billboard for the dairy industry. Coming from a relatively cold Czechoslovakia, I did not panic and left work only when I saw about 8 inches of shredded ice lying idly on the ground without any intention of thawing.
I whisked out an old dust pan that I keep in the trunk for emergencies and started liberating my car and its vicinity from the white oppression. The act of snow shoveling, or rather snow troweling, was no picnic and it filled my heart with a sudden and sincere appreciation for rain which - I figured - would have been much easier to ladle away.
After I removed most of the snow, I hopped in and put the car in reverse. As I let the clutch slowly engage, it became clear to me that this is an "Extra Wet Ultra Slick, No Friction Whatsoever or Your Money Back" kind of snow. A formidable foe. A sense of foreboding started to condense on my back in the form of little sweat droplets. As I plowed my way to the parking lot exit, I attempted to take a right turn only to find out that my steering wheel had become a zombie - technically operational and moving but not really performing its intended functions. It was about as useful as a portable French horn dispenser. I felt like driving one of those kiddie cars with fake controls. No matter what I did, the car continued wherever it wanted, which was largely downhill to the bottom of the lot in blatant disregard of my wishes that I tried to communicate through increasingly desperate turns of the steering wheel. I put pedal to the metal with enough willpower to hypnotize a medium size bear, but no measurable motion was effected. I was hopelessly stuck.
While I pondered the options, the manager of our building noticed my predicament and came out with a snow blower. After a brief pow-wow (well, more wow than pow), he offered to clear up a narrow escape path for me and also help me push the car to the exit. Long story short, after two more maintenance staff joined the pushing effort, I made it onto the street. A sense of relief was nearly palpable. But it lasted only till I realized that the road did not have much more to offer in the way of traction. Even without deep snow to push through, my wheels were spinning like Stalin in his grave after 20 years of watching Russian capitalism. Fortunately, I live only about 2 miles away, so I asked the kind trio of volunteers for a final push back into the parking lot and decided to walk home.
That turned out to be the correct solution. The traffic was super heavy and occasional smell of smoldering rubber indicated that I was not the only one having problems with a grip. The back road I usually take to work resembled a parking lot, or more accurately a turtle impersonating contest as it soon transpired that I was the fastest object on it. Much faster than all those expensive miracles of modern technology - the Audis, the Buicks, the Fords, the BMWs. Their wretched Masters held impotently onto bridles of hundreds of horses neighing under the hood, as all the vaunted power of fossil fuels idled in vain. Lightheartedly I strutted by, smiling like an owner of a tropical beehive and seemingly running on a little more than a wisp of liquefied moonshine. After an ordeal in the parking lot, the trek home filled me with a well deserved sense of superiority as if I had single handedly won a major battle of the ongoing war between Men and Machines.
At an intersection close to my apartment complex, I balanced my good will account and helped two Indian girls push their car up a slight hill. They had obviously had very little experience with wintry conditions and must have been under a strong impression that bringing the God of Friction a burnt offering in the form of smoking tires would be enough to propel their Toyota across the intersection. The next day when I walked back to work to reclaim my car, I noticed another young lady - also of Indian origin - trying to clean up her car with a common kitchen spatula. I guess they don't get much exposure to snow around Mumbai.
The journey home which usually take 5-7 minutes, took me two hours to complete. But on the plus side, walking from work was a healthy exercise for which - no doubt - I would get a Thank You note from my heart. Not to mention a little P.S. from my eyes for the delicate poetry of snowed in residential areas.
The price of crude oil has climbed over $90 again.
And I think I know why.
Nope, it's not because of the demand from emerging economies.
Nor is it because Bernanke is vehemently debasing our currency.
It is the dinosaurs!
(or whoever is responsible for that stuff that the crude is made out of)
Whenever I drive up to a gas station nowadays, I smell a class action law suit against these Jurassic monsters for purposefully vomiting in hard to reach places. Come on, one hundred miles off the coast of Brazil? You must be kidding me.
As if they couldn't have deposited their waste in an easily accessible area, preferably within conveyor belt distance from a major refinery of the future. But no, that would be too much to ask of their little brains.
I can almost hear those scaly bastards living it up in some remote Alaskan valley: "Hey dudes, let's party like it's 64,999,999 BC! We are too big to fail, right?"
The heartland of most classical sciences has been vigorously strip mined for centuries. And we have quite a lot to show for it. Human ingenuity distilled their laws, formulas and theorems into technological and social progress. Fortunately for us this natural resource shows little signs of depletion. Motherloads of useful knowledge are still awaiting our jackhammers in the quarries of interdisciplinary frontiers. There, alongside the unexplored border regions, lies the Wild West of scientific opportunity, untamed rivers ready to yield their precious nuggets to avid prospectors unencumbered by canon of established doctrines.
Discovering new science, however, is like discovering a tropical island.
It is not a linear process. Nor is it orderly. There is no blueprint for collecting and synthesizing information. The quest for wisdom proceeds in fits and starts as it is furthered by many disparate groups and subcultures, by myriad of intrepid individuals who clamber over each other like ants hustling chaotically around an anthill. Equipped only with a compass of intuition, they all grope haphazardly through the maze of trial and error.
Members of each subculture share their own unique point of view shaped mostly by their educational and personal history. This common background forms a prism through which they see the objects of study; it constitutes a jurisdiction of sorts which they instinctively try not to overstep. As they struggle with the barrage of new facts, each group gradually develops their own jargon and procedures reflecting their native lore which in turn entails redundancy and intellectual isolation. The only unifying force that binds them weakly together is their curiosity about the subject and the thirst for knowledge. Other than that they are on their own, chiseling away at their particular facet. Sciences have become so specialized these days that creative cross pollination is a rare occurrence and those who enter advanced fields of study probably feel like Robinson Crusoe.
A tropical island is a similarly multifaceted entity. It looks one way from a cruising ship, and quite another from a flying airplane. It has a certain feel to tourists in a seaside vacation resort, and a very different one to natives from a little village deep inland. Their opinions about various realities of the island may bear no resemblance to each other. People from the ship are able to observe its relief and general kind of vegetation and may also be aware of its position in the surrounding region, something not entirely apparent to the natives, unless they venture far into the sea. People from the passing airplane see clearly the island's contours and the texture of its geology. The natives may not know the exact shape of the island as seen from the above or its relative position in the archipelago, but they know its inner workings: they know where to fish and where to plant crops, they know where the poisonous snakes are and where they can collect healing herbs. Finally, the people from the vacation resort have a mixture of both worlds. They know the island partly from the outside and partly from the inside, albeit both from a rather shallow perspective.
New interdisciplinary scientists are in a similar position as island explorers - at first it must seem to them that their partial experiences are irreconcilable with those of their colleagues across the aisle. A group of pilots flying frequently over the island will have a different sense of it than the natives, so to speak. Every cooperative human endeavor is born fragmented. But as similarities manifest themselves and the notion of common subject is acknowledged and even embraced, the need for a mutually agreeable platform emerges. True identities of objects will be taken into consideration. Wars over the meaning of words will be waged. Great methodological debates will be held. Walls of tentative dogmas will be erected, fiercely defended, then torn down and soon re-erected elsewhere and then torn down again.
Take a rain forest for instance. What looks like a distant outcropping of a leafy biomass from the ship, and a rather boring patch of green tarpaulin from the airplane, is in fact a much more intricate organism. Only a native, or an especially adventurous tourist, could find out that the forest is populated with a baffling variety of species and that its canopy hides a smorgasbord of fruits and nuts, something not easily seen from 37,000 feet. But eventually all competing groups realize that their viewpoints can be united and that it is in their interest to accept a shared narrative and terminology.
Over time, through scores of exchanges in the free market place of ideas, a new science is born - a collaborative effort of a whole corps of scholars, researchers, volunteers, academics, engineers, practitioners, tinkerers, scouts, technicians, scientists, thinkers, and yes, an occasional nut or two. Although you wouldn't be able to see those from 37,000 feet.
On Saturday, January 8, 2011, a young loner named Jared Lee Loughner opened fire on participants of a United States congresswoman's meeting with constituents held in a supermarket parking lot in Tucson. Twenty people were shot, six of them fatally and U.S. Representative Gabrielle Giffords is in a critical condition. In a sinister twist, a little girl born on September 11 died in that shooting too.
A cold act like this leaves us gasping for words. Our daily life does not prepare us for such extraordinary lapse of humanity. But as time plods on, we are forced to absorb the reality and adjust. Eventually, words appear and when they do, it is telling what kind of emotions and hidden agendas they reflect. While a number of commentators had risen above the ramparts of their ideological castles and showed proper decorum, others wasted little time and got right back to tilling their stretch of arable bigotry. The ensuing festival of finger pointing produced a tasteless tug-of-war between a right wing nut theory and its left wing counterpart. Previous girlfriends were summoned to testify, past records were scrutinized, some MySpace accounts archived, and Twitter suddenly turned into a reliable source of information. The most disappointing fact though was an assumption - common to both camps - that their form of hatred is somehow nobler than the one they were frothing about.
The trauma of the shock is rarely a good time for analysis. It is more a time to remind ourselves that we live in a complex world in which no single doctrine can claim to hold all the answers. However trite it may sound, each of us owns but a tiny little piece of truth and we would do a great service to our country and to ourselves if we started listening to each other rather than waving our cherished partisan flags and digging for political capital - whether we get our flavor of truth from Keith Olbermann or Glenn Beck. But in the barrage of arguments and counterarguments, attacks and counterattacks, humility was barely heard.
As I watched the Sunday morning shows, I noticed a lot of calls for toning down the divisive rhetoric. While that is certainly a valid concern, it only addresses the symptoms, not the cause of the violence. And as every good doctor knows you can't have a completely recovery without identifying the heart of the problem and treating it. Sure, the media addicted to blatant sensationalism will always be happy to report on a little controversy. That's just media being media. But someone should stand up and ask where is all that vitriol coming from. Why is a significant chunk of the population slipping into radical mindframe and general mistrust?
If you read the comments section in blogs and newspapers, one theme that stands out is the growing perception that there are in fact two Americas. One located roughly in the corridor between New York and Washington DC, and the other spread uniformly over the rest of the country. One enjoys the sunshine pouring down on a privileged class comprised of powerful elites and wealthy moneychangers, and the other, populated by the hoi polloi of Ohio, Michigan or Alabama, is being rained on day in and day out. With this kind of social milieu and a spreading feeling of injustice, it is only a matter of time until some deviant mind in the crowd wakes up from its apathy and takes its frustration to the nearest gun shop.
After our elected representatives return from their respectful hiatus, they should take a deep look inside their collective soul and ask themselves whether they are steering the country in the right direction. Why do so many citizens feel that the laws are written by lobbyists with generous corporations in mind? Why do young people feel disenfranchised from the world where personal connections seem more important than skills or knowledge? With the approval ratings for Congress hovering near historic minimums, such introspection would be a great way of honoring the memory of those that lost their lives in this lunacy.
Going after the causes, rather than symptoms.