Wednesday, March 18, 2009

Lords of Finance, Today

Today, a "plug" for an excellent book written by an author who not only knows his financial history, he's a practising money man, too.

"Lords of Finance - The Bankers Who Broke The World" by Liaquat Ahamed. See the "Featured Book" Amazon button on the right or click on the link above.

Mr. Ahamed tells the story of the world's most powerful central bankers as they struggled to re-establish a Victorian financial ethos in a world forever changed by the Great War: Montagu Norman of Bank of England, Benjamin Strong of the NY Fed, Hjalmar Schacht of Reichsbank and Emile Moreau of Banque de France. Their short-sighted decision to re-impose the inflexible gold standard and its arcane foreign exchange and monetary policy mechanisms (which were previously abandoned during WWI) proved ruinous and ultimately precipitated the Great Depression.

From a Washington Post review :

The gold standard's role in the worldwide depression of the 1930s has been probed before, notably in Barry J. Eichengreen's scholarly "Golden Fetters" (1992). But Ahamed -- a hedge fund adviser, a World Bank veteran and a supple writer -- personalizes the story, exploring how insular relationships led to bad choices. Strong and Norman, for instance, became friends and gained each other's trust through lengthy correspondence. Strong used his influence to secure a loan for England, then prodded Norman to put England back on the gold standard. Norman, in turn, persuaded Strong to push down U.S. interest rates, helping to create the stock bubble that eventually burst in October 1929. When Strong died in 1928, his replacement became Norman's thrall and fell in lock-step with the emphasis on gold, extending the economic agony.

The purpose for bringing this up in today's blog is not out of intellectual curiosity for the financial history of a bygone era. Rather, it is to make clear that insistence on old dogma is highly destructive in the face of new economic realities. And in this context The Lords of Finance has a very important message for all of us, right now.

No, we are not threatened with going back to "that barbarous relic", as Keynes called the gold standard in 1924. Instead, our era's rapidly ossifying dogma is Permagrowth: the idea that we need to constantly grow our economies and fight GDP recessions with all tools at our disposal, fiscal and monetary. In my opinion, Permagrowth has "outgrown" its use and become but a relic of post-WWII groupthink, itself based on the erroneous application of Keynes' ideas.

Such dated orthodoxy is completely ineffective - probably even dangerous - in a world confronting challenges that could not be foreseen in 1944, when Permagrowth became the official religion during the Bretton Woods meeting. Climate change, habitat destruction and resource depletion were not on the radar screen then, not even as distant blips. But they certainly loom large now and demand our immediate attention.

Therefore, instead of futilely attempting to preserve the ancien regime, we should strive to develop a new global economic paradigm and the proper monetary model to fit with it.

This does not mean that we should plot a course that strives for maximum gain, even at the cost of maximum pain, as some suggest. This is not only unacceptable from a purely humanitarian viewpoint it is also impossible in today's modern democracies; voters will simply not stand for it. In any case, I am certain that the transition from Permagrowth to Sustainability can be accomplished without the inevitable social upheaval and massive degradation of living standards that is envisioned by some popular tent-revivalist doomers.

In fact, I strongly believe that the process of transition can serve as a secure foundation of continuous economic development for many decades to come (notice the absence of the word "growth"), replacing the current debt/asset/consumption vicious cycle.

What's my two cents worth of a contribution?

There is a missing link between the new Green Sustainability economic paradigm and the old monetary system, i.e. we cannot apply a new economic paradigm using an old money system. This is where my Greenback proposal comes in, a new way of creating "money" but one that is completely familiar and easy to implement for everyone involved, from consumers and businesses to financiers, central bankers and politicians. Even the day-to-day monetary policy tools are kept the same, though they have not been heavily used in some 25 years: direct targeting and control of money supply via open market operations.

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"Late Edition" Post Script

Throughout my career I have had several magazine front covers framed. One is from BusinessWeek and shows a smiling cow jumping over the moon - naturally, it's about the stockmarket and is dated a few months before the 1987 Crash. Another comes from TIME and has the simple words "THE CRASH" in black, dated November 1987. Naturally, these two hang side by side.

And now, I think I have another addition for my collection. From the ever so subtle and tactful NY Post, comes today's "let's slam the barn doors shut after the (fat) cows have left" rage. We have our convenient scapegoat and we're going to milk her for all she's got - and then some.


Question: where was the mainstream press when the real looting was taking place?

14 comments:

Joe said...

I fully agree with your self-sustainable concept. In fact, this is how humans have lived for millions of years.

However, we are not dealing with sane people here. This money-power-control structure is inhabited by greedy, corrupt and mad with power peoples.

As such, they will not release one bit of power and this will grind the whole system into collapse.

Their cycle is up. We will rebuild but it will take years and much pain to transistion through collapse.


Joe M.

Roger said...

Your greenback monetary policy certainly provides both the creative and financial reward incentives to drive new and fresh industrial development.

But I have a question: how do you implement it? I can't help but think about examples of industry changers: Silicon Valley; Japanese auto makers; BMW automobiles. But were these movements a result of government involvement?

yoyomo said...

"...and resource depletion were not on the radar screen then, not even as distant blips."

A few years ago I was clicking thru some links on peak oil and I landed on a passage written in the early 1920's lamenting that society was being structured in a way that would be unsustainable when fossil fuels, especially oil, eventually ran out at whatever date in the future. Even though the writer had no conception of the size of reserves, he knew they weren't infinite and would run out eventually even as the increasingly expensive (and ruinously expensive to replace) investment in the infrastructure of society was becoming more and more dependent on them.

I'm sure he wasn't the only one, or even the first, to see this problem but that didn't stop the profit motive from driving society into a dead end long term even as the people alive then benefited mightily from depleting the earth as fast as they could. The same process will more likely than not repeat itself going forward. I'm with Joe on this one.

Anonymous said...

A government enterprise can never be commercialized no matter how many external features of private enterprise are superimposed on it.
I call that the predicated business cyle as does history. They are the customers who are always right, the patrons who have the power to make poor suppliers rich and rich suppliers poor. The consumers are merciless. In public administration there is no connection between revenue and expenditure period. The corruption of the regulatory bodies does not shake the totaly blind confidence in the infallibility and perfection of the state; it merely fills them with moral aversion to entrepreneurs and capitalists who cleary go where it is best treated. I still work corporate and have for 30 plus years so I have 2 bureaucracy' to survive in the first place. We are in the process from the consumers to adjust staff to maintain proper cash flow and guess who are going at work and not in goverment to date so who brings what advantages. If the State does not see free trade at home you are never going to go anywhere. Michigan is asking now for voter's to change the tax structure with no viable PLAN IN THE FIRST PLACE. They do have the capital or knowledge to do so. What the government spends more on the public spends less. Im sorry you do not see the light of day to situation we are really at IMO. In the last analysis, all decisions are dependent on the will of the people as consumers. Thus, whenever there is a conflict between the consumers views and those of the business managers, market pressures assure that the views of the consumers win out eventually. Supply x and y and we will decide who we want. I may INVEST but i can assure you the market will decide when and who in the long run.

Bill said...

H:

Many thanks for another insightful post.

OT:
Your banner quotes, especially the ones written by Cicero, et.al. describing ancient Roman government & societal conditions have a remarkable correlation to our present state. Any chance you can post links or source for some of those?

Marcus said...

Roger (and Anon):

"I can't help but think about examples of industry changers: Silicon Valley; Japanese auto makers; BMW automobiles. But were these movements a result of government involvement?"

No but nuclear power, the interstate highway system, and rural electrification were. Hows' them for "industry changers"?

Debra said...

I think that your idea of basing monetary "value" on energy is interesting.
It brings one important change to the concept of monetary value itself, and that is the idea that the relationship between the symbol and the value it represents is no longer arbitrary. I'm not sure if/ how this works. I don't know.
But... as far as the permagrowth model is concerned, I AM SURE that the very existence of credit cards is based on an ideology of unlimited money, and that, given this psychological fact, trying to create a sustainable model while using instruments that encourage UNLIMITED access or unlimited quantities of credit/money is counterproductive.
For proof, I cite the case of France's current medical system, where we all run around with cute little "carte vitales" THAT LOOK LIKE CREDIT CARDS, and that we present to doctors and pharmacists, sometimes in lieu of pulling out payment in what is called "tiers payant". Of course, that does not preclude being signed up for a health program, and a complementary health program, but the simple fact of having what LOOKS and often ACTS like a credit card in one's hand has done wonders for inflating the consumption of health care service in France.
So, if we want OUT of permagrowth, we will have to axe the credit card, in my opinion...

Homo Sarcasticus said...

Question: where was the mainstream press when the real looting was taking place?

Answer: why, they were still there, farting in their chairs and lauding the winners - the always brilliant and virile speculators! Hip-hip-hurrah!
But I understand that was a rhetorical question.

As for the 'green' economy, I must say it has some hidden bombs. Unless implemented thoroughly and mindfully, lowly 'carbon quota' sales and similar crap might as well come to forefront and cast a deadly shadow on otherwise positive developments.
There are enough smart people who call this carbon and temperature stuff false science already, because it is pretty obvious that sun is the main culprit. Humans are mostly just accenting a bad trend and maybe making it irreversible.

Debra said...

Homo sarcasticus, I beg to differ with you over the question of the sun being the REAL culprit.
I think that we humans have always been incredibly gifted at taking exclusive credit for all POSITIVE developments, or what masquerades at such, while shirking off ALL responsibility for what could possibly be perceived as negative.
That is an ethological truth in my book...

Edwardo said...

How supremely ironic that on this day of all days, when the ghastly Federal Reserve publicly and grotesquely re-asserted its commitment to monetize sovereign debt, that you are advertising a tome which attempts to lay some sort of responsibility for The Great Depression at the feet of the gold standard. Yes, I know your point wasn't to besmirch gold per se, but then again...

As for the irony, well, for those of you who weren't paying attention, gold staged a spectacular reversal after being beaten down (almost certainly at the behest of central bankers), and because PMs, if you have the sense to own them, are going to be invaluable to one's well being going forward.

As for Maynard Keynes, he and his philosophy are the real barbarous relics.

Allan E said...

Hell, I'm interested to know if you envisage the Greenback as being a 'complementary currency', as Bernard Lieter uses the term (eg here: http://www.altruists.org/f845) or as a replacement for our existing currencies?

Hellasious said...

Re: Greenback

In my proposal the Greenback is the regular currency. Actually, NOTHING would change but the rate at which money supply fluctuates up or down, as put forth in my post from some time ago. The same dollar, the same banking system, the same Fed.

Of course targeting money supply against renewable energy is quite a departure from current practice, but for 99.99% of the people the effect would be imperceptible.

Regards,
H.

Homo Sarcasticus said...

But why be suckered easily? Sure, we better be green, lest we live in our own 'droppings', no doubt, but we do not need hype.

Science has had many flops throughout time, including phrenology, racial hygiene (yes, yes I'm using the almost funny blind hatred against everything Nazi as a lever) and others uncounted, now why couldn't Gore and some lab rats be wrong? After all, they can make a good living that way, so they are very interested.

I once saw a chart of how much CO2 is tied up in world's oceans (that can be released if the temperature rises and rises) as well as some dynamics, and the amount DWARFS manmade emissions. So I'm inclined to believe our Sun is still the main big oven frying our planet, and no doubt it changes over centuries.

Yau-ming's blog!! said...

Cheering the bankers on as they issued home loans to people who couldn't afford to service them.