Financial Crises: The 2008 Financial Crisis

The mercantile system enshrines money as wealth. This is opposite of the traditional political economy which based wealth of actual goods and services in society. The value of these goods were properly pegged to grains.

The Problem with Money

Money is a non-living object, as opposed to grains which are living. And so basing an economy on a non-living thing discourages life and sustainability.

In contrast, grain-based ecnomies like that of the the Inca and Khmer encourage agriculture and environmental protection since the agriculture is the basis of the economy.

We can say that:

• banks are the kings of money-based economies
• landlords are the kings of the grain-based economies

The dominance of banks is the natural consequence of the European mercantilism which evolved into micro and macroeconomics. This is why interest rates are so important nowadays when they were irrelevant in ancient times.

In fact, the Catholic Church discouraged usury in the Middle Ages just as Islam bans interest and profits up to today.

The Problem with Banks

Banks gain revenue by circulating money and getting a cut of whatever is circulated. They peforem an essential service to a money-economy even though they do not produce anything. This is why Adam Smith classifies them as unproductive labor.

The growth of the financial industry therefore grows the unproductive part of the economy.

Since banks gain revenue by taking a cut of the circulating money, they constantly invent ways to get more circulation.

• During the Roman times, the banks in the agora were controlled by the Emperror who devalued the coin to get more revenue
• During the Yuan dynasty, the banks were controlled by the Emperor who printed money excessively
• In France during the time of John Law, the French govern,ent created a bank that issued excessive paper notes
• In England, the Ayr Bank also printed excessive bank notes, while the South Sea Bubble printed stocks

These increased paper wealth, leading to a crash because there was no real productivity to match what was on paper.

Derivatives: The Origins of the 2008 Financial Crisis

Historically, bankers have been always looking for ways to increase circulation. The most common way was to take advantage of the difference between paper-productivity and real-productivity by painting something rosier than normal.

• This is more of a fraud mechanism as seen in stock bubbles and ponzi schemes.

Another way is to transfer the risk or burden or cost to someone else.

• This is more of a gambling mechanism.

Gambling enters the financial system through derivatives, as options. It allows a buyer to have additional options to buy or sell something by paying more.

This is a sign of the Negative Force since the this Force is chance-based.

Ideally, options should be illegal because it reduces the risks for rich people ny simply paying more. Economically, it creates a special class of citizens that are above the rest.

In the 2000s, such options took the form of credit default swaps. It allowed large corporations to take on huge amounts of debt and spread the risk to so many people and investors.

The key change was to regard the derivatives as an insurance which could be sold to many people, instead of as a loan.

Previously, this was illegal. But the repeal of Glass-Steagall suddenly allowed it from 1999.

This allowed banks to sell huge amounts of debt which then gave huge amounts of profits, and so they pushed it aggressively.

It soon spread to public debt where governments were offered so much debt. This is why former Greek Prime Minister Simitis blamed “European economic management” which was helpless against it.

The last line of defense should have been credit rating agencies. Unfortunately, their revenue came from the lenders and so they allowed bad debt.

This is why both private and public debt ballooned and collapsed nearly at the same years:

• from 2007, as seen in the fall of Lehman
• to 2010, as seen with the fall of Greece

The evils of debt were very well known in the 18th century, especially to Adam Smith who blamed the finance industry for it:

The Aftermath

The collapse of the financial system led to the collapse of funds which supported govverment services.

• In Europe, this caused the Eurozone crisis wherein governments could no longer provide some services
  • This eventually led to Brexit and to European dependence on Russia
• In the Middle East, this caused the collapse of sovereign wealth funds which consequently led to the Arab Spring
  • This led to the dominance of ISIS and Al-Qaeda
• In the US, this led to the collapse of many banks and therefore savings, as well as government shutdowns
  • This eventually led to the rise of Trump