by Andrew Mannle - Sept 26th, 2008
A lot of people are scratching their heads right now as we watch bank after bank melt down. Huge financial institutions with billions of dollars on their books, thousands of employees and decades of experience are crumbling before our eyes. The founder of AIG said essentially: "I would never have believed it could fail, never in a million years." I'm sure many Lehman Brothers employees were thinking the same as they hastily packed up their cubicles..
So how could this happen?
How could billions of dollars worth of investments simply vanish? Greedy bankers, deregulation, too much money and too little oversight - these are parts of the problem, to be sure. But to understand the problem itself we need to remember two essential characteristics of the modern economy. The first is that it is a faith-based system. The second is that it is a commons.
Banking on Faith
We are familiar with material commons - grazing lands, fisheries and forests. And we know that a system which incentivizes each farmer or fisherman to take more than their share leads to the collapse of the system for everybody. But we often forget that the economy is a commons. And what allows it to work is not something private, but something we all share. That thing we all have 'in common' with each other is our faith in the system.
Exchanging a hard day's work for a few pieces of green paper is an act of faith. Accepting that paper in exchange for a bag of oranges is also an act of faith. So is putting your money in a bank, extending a line of credit, or making a home loan. Our currency used to be backed by gold, but those days are long over, and the world economy has grown far beyond the value of all the actual goods, land, labor and services on earth. The $62 trillion dollar 'shadow economy' is backed simply by our faith in the government. And with an FDIC to guarantee the loans, there is enough faith in the system to make it work.
But just as too little faith can grind an economy to a halt, too much faith can cause explosive growth.
For the last twenty years we have developed ever more powerful engines of economic growth. And we have fed them increasing amounts of fuel, flooding the market with as many products as armies of workers from around the globe can assemble in 24-hour factories at a feverish pace. But even that was not enough, and bankers developed 'financial products': futures, options, cdo's, derivatives, hedge funds - complex instruments that hide risk and inflate the economic bubble even further.
But while our economy and our population have grown, our planet has not. We are digging up and melting down everything we can get our hands on to feed this enormous economy we have created. And while this has created jobs, and brought millions out of poverty, it has also funneled increasing amounts of wealth into increasingly few hands.
Win-Win or Lose-Lose
As Peter Senge points out in his recent book “The Necessary Revolution,” systems which create winners and losers are not sustainable. In the long term there is only one planet, and bankers are discovering what ecologists have always known - that the global economy can no more be 'de-coupled' than the global atmosphere. Because the economy is a commons, in the end we either all win, or we all lose. A system which funnels wealth to the top creates fewer and fewer winners, until finally there are none at all.
In the sub-prime mortgage crisis wealth was 'created' by loaning money not on the actual value of the real estate, but on the faith in their estimated future value. By bundling those loans together and giving them a Triple A rating, bankers essentially turned loans into cash. But a loan is simply a promise to pay, not an actual payment.
And while some economists feared there might be too many big-box stores, and too many housing developments for them all to continue to increase in value, they were unable to resist playing along with the system.
There are two types of games. Those you play to win, and those you play to keep the game going. Too often we treat the economy as if it's a game that one can 'win' and then go home. But as many people are now discovering, when the economy 'stops,' many people will not have a home left to go to.
A Fishy System
In Senge's book he describes a simulation exercise called Fishbanks which his organization, the Society for Organizational Learning (SoL) has used to give people the experience of working in a commons. The Fish Banks simulation works like Monopoly, where each player's goal is to maximize the profits of their fishing business.
"After more than two decades of running the simulation with thousands of people around the world, the results are sobering. Almost every game results in early overfishing, continued overfishing, catastrophic overfishing, and eventual collapse," writes Senge. "Even teams that start out fishing wisely and sustainably usually yield to competitive urges."
The reason it's a Tragedy of the Commons is the players knew it, but they couldn't stop it. Each of them is acting rationally in their own best interests, and yet by doing so, they all fail together. No individual investor, developer, mortgage lender, or insurance agent is big enough to change the entire economic system, so everybody is incentivized to get what they can while the getting is good.
This is what political scientists call a Prisoner's Dilemma - rat out the other guy and walk away. Make your fortune and jump out the window with your golden parachute before it all comes crumbling down.
But before we pour all the blame on Wall Street bankers, ask yourself what would you do if somebody threw 10 or 20 million dollars at you to extend a few questionable loans. Given enough money to provide for your whole family for life you'd be crazy to say no, right? It would be very hard to turn down, and very easy to justify: "We're helping the economy grow, we're increasing home-ownership, it's the American Dream." Isn't it?
Too Big to Fail?
As the current financial collapse continues to grow, it should become more and more apparent that propping up an unsustainable system by pumping 'toxic waste' into your portfolio is foolish at best, a short term strategy any way you look at it, and will eventually leave those you care about out in the cold.
The modern capitalist system is the most effective motivator the world has ever seen. It is the most efficient system ever designed for transforming natural resources into goods and shipping them around the world, where they are quickly reduced to waste. It is a cycle of constant demand, and it is incredibly successful.
Unfortunately, the more successful a flawed system, the more spectacularly it fails.
But whereas the wins of the system were private, the losses are now being made public.
And this is where the real tragedy lies. When banks are deemed 'too big to fail,' the government has to step in to restore faith in the system. But bailing out these huge institutions will essentially double the deficit overnight. And while asking taxpayers (and our children) to shoulder this 'common' burden may shore up faith at home, it only weakens our credibility abroad. In a global commons there is no 'offshore' account we can draw on to replace that kind of capital.
This story was published in Sustainable Life Media, SolveClimate.org, and the Epoch Times, NY print edition.