Economic Issues: The Beast in the Machine

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Ensuring the health of household finances is likely to be high on the agenda for most of us. In the post-financial-crash world, we have all developed a heightened consciousness that money is the essential oil keeping the machine running.

Much the same is true of central governments. In the seven years since the financial crisis hit, Western nations have demonstrated a resolute focus on crisis management and on kick-starting their economies through a regime of quantitative easing, market stimulation and austerity. The result has been that many of these economies are now starting to yield slow growth and increased market stability. 

However, these measures will not solve the inherent problems that caused the crisis in the first place. One of the challenges to maintaining political and public attention for that goal is that the financial system is complex—massively complex. For governments holding office for finite terms, the primary objective is often economic stability, not disruptive overhaul.

Those initiatives that have been implemented to deal with the systemic problems have struggled to touch the surface of addressing real reform. Such initiatives have included the encouragement of challenger banks—the new breed of post-financial crash banks set up to challenge the largest established retail (high street) banks who lost credibility in the crash—and an unrealized desire to create a totally effective regulatory regime since the crisis.

Scandals such as the rigging of the London Interbank Offered Rate (LIBOR) by a number of investment banks, would suggest that we still have a long way to go to achieving real reform. Connected to hundreds of trillions of dollars worth of financial contracts, ranging from personal loans and credit cards to complex derivatives, LIBOR is one of the most important interest rates in global finance. The daily setting of LIBOR by the banks themselves determined the rate at which they were prepared to lend to each other. The breadth of the scandal became evident in 2012, and involved bankers from various financial institutions corruptly providing information on the interest rates they would use to calculate LIBOR. The scandal demonstrates just how chronically corrupt key elements of the system are.

Ironically, estimates indicate that in 2011 close to half (49%) of the world's adult population did not even possess a bank account. Yet even if we don’t all actively participate in the mechanics of the global financial system to the same extent, we are all impacted by it—especially when it breaks down. Philanthropic and microcredit initiatives do demonstrate a more outward focus, but efforts to bring about total reform have clearly failed, suggesting that the heart of the system is much less like a machine that can be fixed, and far more like a dynamic, wild force of nature beyond our control.

As the world begins to move on, there also appears to be a growing acceptance that the system will never be caged by regulation, only temporarily stabilized or momentarily tamed to allow us to secure our own short-term gains. Perhaps this is a beast that cannot be tamed because doing so would first require taming ourselves. At its heart is the systematized right of every individual to compete for self-gain, such that the wealthiest 1% own 48% of the wealth, while millions suffer poverty.

No matter where we are positioned in the wealth chain, scarcely anyone can escape from the fact that products and markets are designed to gratify consumer desire only momentarily, to ensure the essential return to market for renewed gratification. Therefore, in a very real sense, we ourselves are as much consumed as consumers.

Estimates for 2014 suggest that the number of adults with bank accounts had already grown to 62%. It may well be that government will be able to increase our integration within the financial system. However, based on its inherent flaws and inexorable link to our own flawed nature, should that really be the goal? Would it not be a far better solution if we could be released from its grip?.

While it might not be immediately apparent how this could be achieved, there are relevant principles from ancient sources that might seem simple on the surface, yet offer the potential for radical economic change if we would only apply them. The challenge there is that human nature is not predisposed to tame the beast in the machine. Because the beast in the machine is us. 

DAN TOMPSETT


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Tags: economics, financial issues, global economy