Written by By Davian Views (Traditional Industrial Ecologist)
“Financial Rehab Part 1” endeavoured to list the weaknesses in the current system. This has produced very limited engagement from the people who read it. They said yes that’s very good but the impulse to say: “Here’s the problem let’s see what we can do about it, you could try this.” clearly didn’t happen. Hence the necessity to write down the changes needed, to make the system more robust, and see if that sparks some debate. People are always enthusiastic when it comes to playing the Devil’s Advocate. The reason for this is that it is so much easier to reference concepts to where you sit and therefore stand, than to get up and move your mind to look at things from a different perspective.
The main points raised in part one are as follows:
The difference between lifeforms and deathforms illustrates that juristic persons are easily manipulated and can be driven or operated by anyone qualified or not. The logical response is to place power only in the hands of lifeforms and relegate deathforms to the status of machinery. The primary reason for this suggestion is that there is no sanction that is credible for juristic persons, they cannot be sent to jail in the same way as a lifeform can.
The second point is that regulation or oversight needs to be done in real time, recent history shows that organisations make a mess of things, then an enquiry is held, and those involved swear to make changes so that what happened can never happen again. This again produces no sanction against malicious behaviour and reduces any incentive for the deathforms, i.e. juristic persons, to behave in an ethical fashion.
This naturally brings us on the markets and how they operate, with computers that can do umpteen calculations per second and are therefore much faster than living decision-makers, the balance has been tipped in favour of the machines (deathforms), this has resulted in high-frequency trading becoming the main participants in markets. This totally undermines any connection between Lifeforms and the value of what is traded in the market.
As such the proportion of wealth controlled by deathforms has risen to dominate markets. This means that if the trend continues lifeforms become increasingly irrelevant to the function of markets. Tangible assets should therefore only be owned by lifeforms, and the ownership by deathforms should be restricted to intangible assets. These intangible assets such as derivatives, as they are not part of the tangible universe need to be treated as a bet rather than an investment.
This is my turn to play Devils Advocate!
The main cause of the current financial crisis is the understanding of ownership. This allows claims on an asset to be multiplied by re-hypothecation many times over. The result of this is the degradation of the concept of ownership from something straight-forward and simple into a labyrinth of claims on the asset. These multiple claims shatter the legal title to the asset and transfer power to anyone with enough legal muscle, to extort money from the hapless person who thought the asset belonged to them.
Clearly the ownership of an asset needs to be a simple concept that is understandable by most people, such as if you own something then you own it.
This last sentence already raises the question what to do with intangible assets that have no material form. In most obvious intangible asset is what we call intellectual property. Intellectual property has been the subject of serious abuse. If you take a patented idea as our starting point. A patent is granted by the state to an individual or company to allow them the time to develop an idea and recoup the research and development costs rather than having someone copy it without contributing to its development them and thereby disenfranchising the original inventor.
Unfortunately this noble objective has been constantly subverted since the dawn of patents. From a business point of view a patent can be a threat to the status quo. The cost of retooling a factory to make an improved product is quite prohibitive and the existing players in this market will obviously try and protect their position by preventing the development of the new invention. The most common form of approach to this is called “Buy and Bury”. This involves doing a deal with the patent holder so that they sell their interest in the idea thus giving control to the status quo, who will then proceed to not develop it. This saves the status quo the cost of retooling, and loss of potential sales because of the new invention’s superiority.
So inadvertently the patent has shot itself in the foot by offering the route of assured non-development. From the point of view of society, this creates an environment of stagnation and regress. It is also interesting to note that patents have been granted to companies of things that already exist such as seeds. The idea that you can patent something that has already been invented, caused a bit of a stir at the time. However with enough legal and lobbying muscle the change was made. We are now reaping the benefits of genetically modified crops which have destroyed the livelihoods of millions of small farmers around the globe. To these farmers their work is the difference between life and death and tens of thousands around the world have responded by taking their own lives.
Following the same logic that allowed seeds to be patented, Mr Dyson’s vacuum cleaner could be bought, a screw made of a different metal replacing an original screw. This would allow the vacuum cleaner to be patented by someone else. Common sense would say this is wrong.
By any civilised standard, this behaviour is unacceptable and morally reprehensible. Yet within the current framework of legislation this behaviour has been encouraged due to the failure to enforce regulations that already exist.
This example illustrates moral hazard, and I have included it to make the point that how we conduct our affairs, especially in business and law, is a moral imperative necessary to maintain trust and confidence in the system. To justify actions for short term gains and political expediency undermines trust and confidence and is therefore unacceptable. Therefore reparations to restore trust must always be paid in full, plus costs incurred. In the legal profession, what is the point of having a judge constrained by politically motivated mandatory sentencing rules, so that a judge cannot use his or her judgement to show that justice is seen to be done?
I advocate the use of Barter Currency as an economic balancing mechanism in the economy. Barter currency needs to embody moral fortitude so that trust is maintained, creating confidence in the system. My minimum moral standard is to behave in a Discerning, Ethical and Streamlined manner in both ethos and operation of Barter Currency.
[… continued tomorrow with Part 2)
Photo by nicknormal