Wednesday, 16 May 2012

Friends, Romans, lend me your Euros

No one should forget that the fragility of the Euro is a symptom of the real financial crisis facing us, namely the global crisis of mismanaged lending.

This crisis is, in turn, not a one-off, but part of a repetitive economic disequilibrium that breaks out whenever the plutocratic model of monetary distribution predominates without being effectively held back by regulation.

How does this plutocratic model work? Its ruling assumption is that money is to be lent to the rich on soft terms to help them get richer, but lent to the poor on stringent terms to keep them poor. Indeed the vast majority of corporate banking institutions following this model leave those with the most desperate needs with nowhere to go but resort to unscrupulous loan sharks. In general, any sign of failure to pay back will trigger off harsh interventions – poor individuals would have to lose everything, and poor countries would have to savagely cut their basic provisions for health, education and social security.

The approach towards lending to the rich is just the reverse. Lending often takes the form of investment, so that failure to produce returns would be written off as a loss-making transaction. The richer you are the more you are begged to borrow huge sums to fuel speculations which undermine economic stability. And any inability to pay back would be treated with deference in direct proportion to the quantity in question. Rich executives are rarely thrown into abject destitution by unsympathetic banks, and rich nations such as the US could for decades pile up debts, which in the case of poor nations would have long ago led to stern castigation.

The net result is that the rich are readily lent money to make even more money, while the poor are told to make up for their falling standards of living (despite their increased productivity) by borrowing more regardless. And when the rich have squandered their borrowed sums on failed gambles, and the poor’s real earnings are cut back so much they cannot keep up their debt payment, the alarm bells are raised and the stick comes crashing down on those with the least.

This model of lending led to the 1930s’ Great Depression. When the lessons from that crisis were forgotten, and the necessary regulations were later swept away by the rising tide of Thatcher-Reagan politics, it opened the floodgate to irresponsible lending which has brought us another wave of economic woes.

There is of course an alternative. The cooperative model of lending replaces exploitative divisions by the pooling of resources for the common good. We can all learn from cooperative finance institutions, mutual societies and credit unions. Money borrowed for high risk speculative gains should be subject to tighter terms that would protect against undesirable consequences for vulnerable members. Global financial deals should be taxed to provide ballast for economic stability. Financial support for the poor should be treated as investment, maintained to boost their ability to build up their own wealth, and written-off where necessary when circumstances beyond their control rob them of their ability to pay. The rich should be held to the same intensity of credit control that has been directed at the poor, while all borrowers should be treated with equal respect.

When applied consistently to individuals and countries, economic wellbeing as well as social justice, will be more readily restored than the disastrous prescription of “laissez-faire-for-the-rich, but austerity-for-the-poor.”

No comments: