From GENE LOGSDON
I was so gratified to see Wendell Berry’s remarks in a recent interview (“Wendell Berry: Landsman” with Jim Leach in Humanities magazine, May/June 2012) where he makes a point about economics that is overlooked in these days when divisiveness rules the political roost. The general view is that the economic battle is between capitalism and socialism, but as Wendell observes, “both are industrial systems and they have made the same mistakes in some ways.” Both have ignored “the propriety of scale and the standard of ecological health.”
Yes, yes, yes. But I would like to go farther (probably too far) than Wendell did. Both capitalism and socialism are similar industrial systems basically because both accept and practice the industrial idea that the fundamental tool to “growing an economy” is the ability to borrow money at compound interest rates. I certainly would be foolish to deny the effectiveness, maybe the necessity, of being able to borrow money. We borrowed to buy our first house and car. But seeing how borrowed money nearly ruined people I knew when I was growing up, I was determined never to borrow again if I could avoid it and I never did. Repaying a loan over a long period of time often means buying the house or car twice and if one carries credit card debt all the time, to paying for stuff more than three times.
Somehow this kind of insanity has become sanctified in our society as if it were holy scripture. The phrase “free enterprise” is uttered by its high priests with all the fervor of a biblical evangelist uttering “the Lord Jesus Christ.” I remember the first time I confronted this kind of reverence and realized with a shock, that “free enterprise,” guided by what its followers called an “invisible hand,” was almost a synonym for God.
For centuries societies learned from experience that borrowing money on interest invariably results not in “free enterprise” but in the economic enslavement of indebtedness and usury. Humans privately, and as representatives of corporations and governments, eventually borrow more money than they can pay back. They just can’t help it. And they lack the will to install the rigid controls necessary to keep money interest from, literally, captivating them.
Farmers who ignore the wisdom of the ages are most at risk in the world of manufactured money. (The most well-known example perhaps is from Shakespeare: “Neither a borrower or a lender be/ for loan oft loses both itself and friend/ and borrowing dulls the edge of husbandry.”) Farm crops grow at their own sweet pace and know nothing about manipulated money growth— as I must have written a thousand times by now. The trading shenanigans going on presently in the banks are spilling over into the Chicago Board of Trade. Are you watching the grain markets? Corn and soybean prices have been bouncing up and down like a drunken kangaroo on steroids. Expert marketers admit that they are mystified. But I hear very few of them suggest that the basic reason for this instability might be coming from the notion that we can make money grow faster than real things grow.
Banks do the same when they buy up mortgages or other bundles of paper and attempt to sell them in secondary markets for a kind of gain that can vanish overnight because it is based not on real material resources but on human desire. It is a form of usury to me, a method of trying to make something that exists only in the mind— money value— grow without any respect at all for “the propriety of scale or the standard of ecological health.” This kind of speculation always comes to grief. Ask J.P.Morgan Chase. Money doesn’t grow in trees and trees don’t grow on money.
~~
The Contrary Farmer 
20 Comments
No one will know the feel of real freedom that is a borrower or a lender for that matter.Not being in debt is the greatest feeling in the World to get some cash or other asset and be able to do with it as one wishes,now that is real freedom.
roof, a derivative is something that “derives” its value from something else. in finance, we are talking about a contract, where the parties agree to pay each other a certain amount at certain times based upon some formula. the formula can be quite complex, but it does not need to be. a simple example of a derivative is a commodity futures contract. the value of a soybean future, which is just a piece of paper (actually it’s not even that anymore) specifying what the payout will be, is “derived” from the price of actual soybeans. so all you farmers you have ever bought or sold futures, you are derivatives traders!
the value of a soybean future contract is pretty simple to calculate. now let’s say you want an option on soybean futures. that is much harder. now let’s say you want an option on the difference between soybean prices and the level of volatility of the S&P 500. now things are getting really complex.
car insurance can be thought of as a derivative. you pay your premium every six months, and if your car is damaged the insurance company will pay you based upon a formula involving the cost of repairs, the value of the car, your deductible, etc.
credit default swaps, which almost blew up the global financial system, are basically insurance policies. in this case, they were insurance policies on bundles of mortgages. one party, the buyer, paid a premium for protection of the value of those mortgages. when people started defaulting on the mortgages in those bundles, the value of those mortgages fell, and the counterparty, the seller of the protection, had to pay up. (AIG sold a lot of those insurance policies, and charged way too low of a premium. If they didn’t pay out, then the investment banks holding those policies would have collapsed. That’s why you and I own AIG.)
there is nothing nefarious per se about derivatives. but they need to be regulated! (unfortunately, derivatives are often used to violate the spirit of regulations, or to do things you shouldn’t be doing in the first place, e.g. a pension fund manager is not allowed to buy corporate bonds, so he uses derivatives instead.) now maybe regulation is just not possible, so they should be outlawed. i’m not ready to throw the baby out with the bathwater just yet.
i strongly recommend two books. both are well written and comprehensible to the layman. they are written by the same author, Michael Lewis, and are bookends to the story of modern day wall street. the first is “Liar’s Poker,” and the second is “The Big Short.” check them out.
From where does government receive its money? Or in our case, who is responsible for the more than $15 trillion dollars of debt? Citizens. Our children. Our grandchildren. Taxpayers.
Are not some taxes willing contributions to a “good” cause, while other taxes are unwilling yet forced contributions to a “good” cause? Does everyone agree on what is a “good” cause? Who in our country decides what is a good enough cause to forcefully tax the willing and unwilling alike?
Is stealing defined as forcefully removing money or possessions from the unwilling owner? Is stealing wrong? Is stealing wrong if it is done for a good cause?
Eric:
In our case, you are a wiling contributor to subsidies, and I am an unwilling contributor to subsidies. I consider government subsidies to be redistribution of wealth and stealing. You consider government subsidies to be taxing for a good cause. Please, by all means, contribute to what you wish. What I am asking is that you give me the same courtesy, and let me contribute only to what I am willing. And it would be right, of course, if I have no access to the “good” cause to which I do not contribute.
It is noteworthy that you said, “assistance is needed when the capital requirements are beyond those of mere mortals”. I believe that is exactly what Mr. Berry and Mr. Logsdon are speaking of. “The propriety of scale and the standard of ecological health” are much related to humans living within the limits of their mortality.
All readers:
You will be in favor of subsidies, bailouts, loans, charging interest, and financial derivatives, or, you will be opposed to them. Research them at your discretion. But my 2 points are these: 1) None of those things are fundamental parts of free market capitalism, and so free market capitalism should not be attacked because of their presence in our economy. At least one school of economics believes that they interfere with the success of free market capitalism. I recommend researching Austrian economics vs Keynesian economics. 2) Whether you love or hate those parts of our economy, I believe this should all be subject to ethics. Yes, we can have subsidies and financial derivatives, etc, but, should we? Who benefits and who suffers? What are the risks and what are the rewards? Are there universal moral laws and are they broken?
There will ALWAYS be a need for government subsidies. These subsidies come in various flavors – including land grants, tax incentives, special contracts (to develop an industry) and straight up cash subsidies.
Does that make government subsidies wrong? I don’t think so. Government assistance is needed when the capital requirements are beyond those of mere mortals or the technology isn’t quite ready for prime time but will be after some full scale deployment lessons are learned and applied.
On the other hand, we can always hope that bailouts will not be needed. Unfortunately, since capitalism tends to concentrate markets into the hands of a few – we will either need to prevent businesses from getting too big (regulations) or we will need to continue bailing them out (cash) whenever there is a sudden shock or a foreign competitor (with their governments support) begins dumping in our country. I don’t know which is better – an argument can be made for both.
As a man who has studied the scripture, I expect Gene to know of this already, but for the benefit of several viewers, I’d like to point out that the bible contains only one verse where homosexuality is clearly described as a sin, and over one hundred verses where the lending of money, handling money, changing money, usury and charging interests are condemned in very strong words. Yet the religious right seem to be reading their bibles very selectively in that great nation, the USA.
And for perspective, the bible tells us to be merciful for sinners and enemies of the bankers, something more Christians should keep in mind.
I appreciate your and Berry’s criticisms of our economy, and agree with them. I really do. But I don’t see any conflict between agreeing with you and Berry here, while at the same time being in favor of free market capitalism.
1) Our economy is nowhere near a true, free enterprise economy. Theories of free enterprise and capitalism are sound, and much preferred to what we have today. Admittedly, they will never be perfectly implemented. Yet, a good step in the right direction would be to end government subsidies and bailouts. There is quite a laundry list of what should be changed to allow pure competition and private ownership of the means of production.
2) Capitalism does not require a debt system to grow the economy. Capitalism could even be debt free if people decided to live that way. An economy that is strictly tied to population growth and agricultural production could still be capitalist. Capitalism just requires private ownership of the means of production and people seeking profit for their labor and goods. Unfortunately, our economic system subscribes to the idea that debt and various investing constructs “smooths” the ups and downs of capitalism (again, our economy is not capitalist). That stems from John Maynard Keynes and Keynesian economics. Keynesian practices have been falsely credited with getting us out of the Great Depression, and that is one reason it persists. Meanwhile, there are other capitalist economic theories like Austrian and Supply-side. They would actually argue that Keynesian practices prolonged the Great Depression. The point is, you can be in favor of capitalism and free markets while also being against debt and financial derivatives.
Meanwhile, the Fed is responsible for much economic injustice, implementing Keynesian practices, and giving everyone a stealth tax through purposeful inflation. Audit the Fed and end it! Ron Paul 2012!
louisc, you may be the person I’ve been looking for: can you explain to me how derivitives work? That’s the quintessence of a sophisticated financial product. In Michael Moore’s documentary “Capitalism, a Love Story”, Mr. Moore asked Ivy League business professors and Wall Street bankers to explain derivitives to him, and they all proceded to melt down. No one understands them, apparently. Warren Buffet wouldn’t touch them, because he couldn’t make sense from them. It’s just a black box from which money flowed; Enron used to have one of those.
Your second paragraph is completely Ayn Rand gobblygook: being able to bundle mortgages did not enable banks to offer lower mortgage rates, it enabled the banks to put people into ARMs and liars’ loans, at higher rates. The banks knew the mortgages were bad and didn’t care, because they could get a rating agency to rate their bundle of toxic mortgages AAA, and sell the bundle to someone who trusted the rating agency, be it Fannie Mae or a European bank. Since the banks didn’t have to live with their bad decisions, they made their cash doing the deal, and then passed their toxic mortgages on to a sucker who trusted the system. The rating agencies got their fees from these banks who made the bad mortgages, so guess where their loyalty was. Within a five mile radius of my home, there are at least ten vacant properties: not for sale, just empty. The people just walked away because their mortgages were underwater, by a great deal of money. The bubble had burst. Hell, I lost eighty thousand dollars in equity in my home, but if you could smell the native honeysuckle in my valley this week, you’d know I’m never leaving here, except on a gurney. I was fortunate to have had a great job, too.
I’m sort of an expert on being leveraged: that’s how I’ve been most of my life. Things are scary now: when I was young, I could get a loan from a local bank to buy feeder pigs or a piece of machinery , with a handshake, because they knew me, and I knew them. There was honor and integrity on both sides of that handshake. Today the SEC ruled that Lehman Bros. didn’t violate any laws when they kited mortgages between their U.S. and European banks to conceal how leveraged they were. I’ll stick with local banks and credit unions, thank you. Call me unsophisticated. There is a revolving door that we need to stop: Ivy League schools have their economics professors advising corporate boards about executive compensation, then the professors become executives, and then the executives join the government so they can get rid of those job killing regulations. Three years after the meltdown, there are still banks that the 99% will have to bail out if the banks do stupid things…..wash, rinse, repeat.
Gene – above is a quote I took from a speech made by Peter Joseph – K
This one is different. Humans are at what botanists call “Liebig’s Minimum:” if we solve one resource problem — say, energy — we’ll immediately bump up against another — say, copper, or phosphate, or rare earths, or lithium.
Right now, I’d say energy is going to collapse the global human civilization, within the next decade or so. By some accounts, we in North America consume 50% more energy than is harvested by all the photosynthesizing plants in North America. Clearly, this can’t continue, unless Little Green Men from Alpha Centauri come down and give us the secret of cold fusion.
The original poster claims to be a Christian. And yet, no matter what religion we claim, we all worship at the Church of Growth. Until we break ourself of this, we’re in for a big hurt.
I’ve been visiting the “Church of Enough, Already” lately. It’s inconveniently located on the outskirts of society, and it doesn’t have a glass preacher in every living room like the Church of Growth has. So it’s hard to even find the message, let alone keep it in your prayers and thoughts. It has “fake preachers,” exhorting those tempted to leave the Church of Growth to just change their lightbulbs and buy a new hybrid car. That’s pretty tricky, keeping your followers in line by making them think they simply need to grow differently, rather than foreswear growth entirely.
The three great western religions all claimed interest was a sin in the past. But now, they’ve pretty much all surrendered to the Church of Growth.
Please join me in being a heretic to the Church of Growth. But be warned, the Church doesn’t take heresy lightly. I found I had to leave the US — the country with the most zealous Church of Growth following — to achieve such religious freedom. The US loudly touts its “freedom,” but that’s really just the freedom to choose from a variety of different ways in which to support the Church of Growth.
The freedom to “de-consume” is largely discredited or even despised in the US. Good luck with that, folks, as resource limit start kicking in, and people start involuntarily de-consuming. And yet, they continue praying at the Church of Growth that has abandoned them! Even as they can’t afford gasoline, nor housing, nor even food, they’ll continue to select Church of Growth preachers for their leaders, who will continue to rule in favour of “Just Us” rather than in favour of the sheeple in their congregation.
I do not share your agreeable acceptance of “sophisticated” financial products. Especially in light of the intractable nature of greed, corrupt management and inept government. Sophisticated is often used to disguise greed, corruption and ineptness.
Berry’s approach of propriety of scale and ecological standard is a nicely encapsulated alternative that he and Gene and others have been promoting for years. But it does depend on virtues of honesty, generosity, self-discipline and even self-denial guiding those who exercise power. Those are not the adjectives that come to my mind when asked to describe the over-arching principles of our industrial/financial system. So we do what we can.
Peter Joseph, your observations are very helpful to me. I had not thought to phrase the situation this way. This is for me original thinking and I much appreciate your sharing it with me. Gene
Gene, borrowed money is not essential to grow an economy or a business, it is however more efficient to use borrowed money when appropriate. Broadly speaking, there are two types of capital – debt and equity. Debt is borrowed money, which has to repaid with interest. If the borrower defaults, the lender has some recourse, such as seizing collateral or other assets. Equity is money invested in return for a stake of ownership. If the business does well, the owners do well. If the business goes bust, the owners don’t get anything until the debts are paid. For this reason, debt is more secure than equity, and therefore the expected rate of return is lower. The trick is to find the right ratio of debt to equity, also known as leverage. Too much debt is risky, and if the business can’t make the payments and goes into bankruptcy. Too much equity dilutes the earnings, and the share of profits for each owner falls, making it harder to get more capital in the future. Leverage, in the appropriate amounts, is truly a wonderful thing. Only a luddite would argue otherwise 😉
Regarding banks buying up mortgages, etc., you bring up the second great achievement (the first being leverage) of the modern financial system, portfolio theory. Putting a “bundle of papers” together and selling pieces of the bundle is safer for the investor than buying just one piece of paper, because the risk of default is diversified. Since it is safer, the interest rates are lower. The banks are able to lower mortgage rates when they can bundle loans together and sell them as a diversified portfolio to their investors.
So far so good, now let’s talk about JPMorgan’s latest trouble. They had officers of their bank making huge bets, which they have been doing for a long time. When they are right, they make billions for the bank, and get paid millions in bonuses. When they are wrong, they lose billions for the bank, and get to resign (and keep the previously paid bonuses). If the losses are big enough, the government has to step in to save the financial system. Put yourself in the bankers shoes. Would you take a $5 million a year job even if you knew you’d be fired in a year or two? They have every incentive to take big gambles!
The $2-3 billion losses that JPMorgan has had lately were the result of a derivative (a bet) on the difference between the interest rates on corporate bonds and the interest rates on government bonds. If they had made the opposite bet, they would look like geniuses and get paid millions of dollars, and we would have never heard about it.
To sum up, borrowed money and sophisticated financial products are not the problem. Greed, corrupt management, and inept government are.
Reblogged this on 1043mabovethesea and commented:
Two interesting reads this morning.
“Money, contrary to the attitudes of most of the world’s populations today is not a natural resource. Nor does it represent resources. In fact, by our standards of logic, money is only functionally relevant in society, when natural resources and the mechanisms of creation are scarce. And thus, a system has emerged, where people are given value for their skills, in exchange for their servitude, which can thus be used as a medium of exchange for those supposed scarce resources. Sadly, the culture is now fully indoctrinated into this frame of reference, and, like the rising sun, most could not even consider any other possibility for our social functionality. In fact, some have even redefined the relevance of money itself, by being conditioned to think that money represents choice. That money somehow has something to do with democracy. And the greatest illusion, that the monetary structure is a tool of liberty. ”
Peter Joseph
Nice comparison with an “organic” growth.
I agree money should grow at a similar rate as an estate or a normal business is slowly building and valuing.
Anything beyond shows something artificial happening, at the expense of someone else, not at the benefit of all, and what comes up must (or may) come down, just as quickly.
Borrowing is usually a bad idea, except when the rate is so low that it would be stupid not to borrow, but only if you already have the money to repay your loan. Then you can invest your own money into something that can provide a higher return rate or into projects that can’t access traditional loans.
Borrowing at variable interest rates instead of fixed is an aberration and a sure recipe for disaster and stress for the whole family. You can’t plan ahead how much you’ll have to repay (and therefore earn) in a year, not even mentioning five. I never understood it.
cambridge, every civilization I have studied has ultimately collapsed so this one probably will too. At the moment I think that farm land prices, which have been rising horrendously by traditional standards, will collapse in the near future just like happened in the 1980s. I think that China will have a financial meltdown not unlike Japan had in the 1990s. These may be just the usual cyclical “adjustments” that economies based on money interest must go through. I am nervous trying to be a long-term prophet.Who knows? Gene
Hi Gene
Thanks for the truly thoughtful observation of the current borrowing rage we have experienced these past 20 years. I for one have been caught in this noose. As a christian you would think I know better. But the lure to “progress” is a geat tempation. I believe that in the next 5 years we will witness an economic collapse worse than this most recent one. Do you have any foresite on this comment? I noticed you are already having leading hints to this matter. Are you willing to expand further? In my faith we have a beautiful lady named Ellen White that wrote about the collapse of our economy in a book she wrote in the mid 1860’s titled “The Great Controversy”. In one of the chapters she describes this time quite well and how we will not be able to dig ourselves out of the mess. The book is online and I am willing to find the link to share it with you and your readers. But please expand further on your thoughts of what you foresee happening with the current crisis.
I agree.
—- like kangaroos on steroids.
—- like lambs at beer parties.
The animal/chemical inducement simile muse has visited Wyandot County and I’m liking it.
I would offer one of my own. The industrial play money system is like a crocodile on crank. It drowns and destroys almost everything that approaches it unwarily and even many that come near with caution. And in the end all it leaves is a rotting carcass or a smelly pile of crocodile crap.
Thanks for this post Gene. I would propose Distributism as an alternative to socialism and capitalism. Here’s an active site with continually updated information and articles on distributism: http://distributistreview.com/mag/
Reblogged this on Traditions & Skills of Every Day Life and commented:
Oh, the blasphamy! Credit is not king!
Once again, Gene Logsdon and I are in sync. Amazing how far a little common sense can go, especially in the area of economics. Well, krikies, in any area, really.
The Bible says…”Owe no man anything”…so it actually does not approve of debt either. Difficult these days. Discipline is not something that we embrace as a culture any longer. Too bad, it will come back to bite us.