The promise of hope and change met Barack Obama and much of the world with one of the darkest day in modern American history in 2008-9.
The entire system was about to collapse. What we call money was about to vanish to the thin air it came from. Banks had created too much, Greeenspan had increased interest rates too high and too fast, borrowers could no longer pay back the debt, trillions were about to disappear as if by magic.
We now know money is created when you borrow, say a mortgage. When you pay back the mortgage, the initial capital disappears as if it never existed. The interest you pay turns into real money, with real money creatable otherwise only by the central banks. Barclays and other commercial banks transact with each other only in central bank money. Unless we’re using cash, we all transact only in commercial bank money.
The system works, until it doesn’t. Homeowners who had borrowed at the base rate of 2% in 2004, found themselves having to pay back triple that rate at 6% in 2006. That was the fed’s rate, the commercial banks in addition added some percentages on top for themselves. Sending mortgage interest rates to unbearable levels for wages had in no way increased so quickly.
Mass default meant mass money destruction. As real as the paper in your wallet might seem, however, money is an abstract concept. Food had not vanished. Homes were still there. In many ways nothing whatever had changed. For those at home watching the events unfolding in Congress, it was as if a TV show was unfolding with no consequences for them.
Watching the data in fact shows the economy did not contract that much. Certainly no where near 1930s levels, with it a somewhat normal and a very brief recession. The 60s-70s recession was worse.
Growth in US in fact returned in 2010 and since then there has been a bull run in stock markets. Just like the Congress TV show, however, this too was not quite felt by those at home for nothing had quite changed for them.
For the most part, that is. Plenty had their homes repossessed. Their sons and daughters occupied wall street. Here we’ll quote something very revealing:
“We’ve all been quite content to demean government, drop civics and in general conspire to produce an unaware and compliant citizenry.
The unawareness remains strong but compliance is obviously fading rapidly. This problem demands some serious, serious thinking – and not just poll driven, demographically-inspired messaging.”
Those sons and daughters did not quite know how to politically organize to get results. They used this idea of no leaders, of no demands. What then was the point of occupying Wall Street? To have some sort of clown festival just for fun when serious problems were facing the nation?
There were plenty of demands that could have been made and quite rightly. The main one would have been a halt to repossessions. They could have then asked for public oversight over banks. For a certain percentage of profits to go towards a rainy day and so on.
On the right, the Tea Party got angry because all this money handed over to banks meant there would be higher taxes and a bigger government involvement in the economy.
There, they took to the streets once or twice and then put up some candidates for Congress. Those candidates then shouted a bit, mainly for show, with the end result being zero real achievement by both the left and the right grassroots movements.
The elite then got back to “poll driven, demographically-inspired messaging.” Packaging the population into labels of color, nation, religion. With immigrants or Europe or gender fluid people or whatever label being the problem. Anything, as long as it distracts from the real problem: the merger of money creation (loans) with the money payment system (ATMs), both in the hands of very few banks.
To improve upon that system is no easy task for the complexities are immense. Apples do grow on trees, so perhaps money should too. The question is how to do that fairly.
Currently it is only the prerogative of banks to create money. Some say unconstitutionally for it should be the prerogative of Congress. As a matter of law, it is illegal for anyone else to create money.
Some tried in a centralized form by issuing gold backed paper and so on. They ended up in prison. Technology, mythologized as magic in the tales of old, provided an alternative.
Bitcoin is many things to many people, but fundamentally it automates Fed and banks through some code that runs by itself the money creation rules and the payment system. Its uniqueness is that it does so in a decentralized way through a network of global nodes. Anyone with a laptop can run the people’s money.
Its use as actual money has challenges. Capacity is one, but also more cash related challenges. A number of bitcoin related armed robberies or attempted armed robberies have occurred for example. With fiat, the exercise would be pointless because the bank would just reverse it, they would have to show identity, and so on. Unless it’s in cash, but the exchange point would be quite dangerous for the robber.
With bitcoin too there would be significant dangers for any would be criminal. The public blockchain is public. Traces can be left. Detectives are getting better and better at solving blockchain related crime.
One criticism however has been that we’re sort of re-creating the current financial system. Most keep their cryptos on exchanges (banks). In ethereum with the rise of decentralized finance, one joked and quite rightly that all we need now for these smart contract based collateralized loans is to have them packaged in contracts for difference and have decentralized insurance to cover them. Nothing could possibly go wrong.
In traditional finance things are done for a reason. We generalize bankers or government, but at the end of the day it is our parents or siblings and for some it us ourself that make up the bank or government. In their working day they solve all these problems as they arise creating a system that generally works, but sometime doesn’t or doesn’t do so very well.
Some methods for example, or some solutions, may be outdated. With relevance here being the tale of the Mayans working off base 24 maths – or something like that. They created sophisticated layers on top, with all seeing the problem, but with all seeing that it would be far too much to start from scratch and work off base 10.
As cryptos do not have that baggage of the traditional system, they are free to use modern tools and modern methods to do in some cases the same thing, but better, and in some cases new things especially with the invention of ethereum’s smart contracts.
As such, fundamentally cryptos are “just” an alternative. One can have the view that they’re no better than fiat. Even under that view, however, one can see the value of an alternative that keeps Fed’s Powell in check.
Trump perhaps does a better job there, you might say, but Trump only has words unless constitutional crisis. Cryptos allow for peaceful exit, as a hedge or more.
Then there are many other central banks in the world. The prime example is Venezuela. Prior to them PBoC’s Yuan devaluation. Prior to them Zimbabwe, and so on.
One can argue, therefore, that the mere existence of cryptos has changed finance. The laboratory of live experiments in the crypto space will probably change it more. Young economists, in fact, never had more exiting studying tools.
Especially the ones who read books outside of their studying course. Hayek’s Denationalization of Money being what can be described as the intellectual foundations.
That is open to criticism. Roubini for example said if you have different money and you’re exchanging them for one another, you’re engaging in barter like exchanging tomatoes for eggs. The idea here is that one money rises as dominant, with that money originally being gold. Gold had silver and copper. We have dollars, euros, etc. But gold and fiat are two very different things.
By using Roubini’s logic, one can argue that when you exchange fiat for tomatoes, you’re engaging in barter. It doesn’t have the complexity of exchanging tomatoes for eggs and ham for tomatoes, but it does have the complexity of fiat devaluation or of too much money suddenly vanishing at once, bringing the system to near collapse.
It does also have the complexity of effectively one individual or a very small group of individuals having far too much power over the economy without any constrain or accountability, making it no different than the soviets setting the price of bread.
Competition is the solution mankind has arrived at after millennials of experience. There is no reason why such competition should not extend to money itself. There is no reason why people should be constrained to one choice only when it comes to the regulator of the free market: money.
It is not easy to see how such competition would develop in the digital age when even the apple grower can create his/her own money, rather than as previously only banks being able to which did not work due to the added complexity of whether the bank is solvent.
In the digital age, there is no question of insolvency where a crypto is concerned because the piece of code guarantees the rules. Why they would want it over fiat is a different question with many potential answers, including that they might want to play with cryptokitties or get a collateralized loan or that they think certain fiat money is being devalued too much.
We may be seeing an echo in this decade of bitcoin anniversary with Powell arguably going too fast in raising interest rates, just like Greenspan. That question of the fairness of mortgages is also a topic that millennials may now revisit as they look to buy a home. Many of them pay far more in rent than they would pay in mortgage installments, yet banks wont give them the money despite banks now effectively being guaranteed by their taxes.
That these topics are raised is also one important way of how bitcoin has changed finance. Textbooks for example still teach that banks lend money from savers. It perhaps took the rise of cryptos for the Bank of England to explain money is created from nothing save for the demand for a loan or mortgage and then is destroyed when that is repaid.
They have still not explained what role interest plays. We can guess interest becomes central bank money and we’re probably right, but it would be good to have it from an authoritative source.
Questions about the fairness of mortgages have been raised previously, of course. The civil rights movement in the 60s began due to the perceived unfairness of banks mortgage policies whereby they would lend to what then were white areas, but not black areas.
In this space, however, rather than taking to the streets, we can potentially offer alternatives. In the process, our critique may assist the current system to become fairer and better, which itself would be quite a good outcome.
Banks, for example, have been told to compete with cryptos. Money transfers within the UK, for example, are now pretty much instant. Fees are still high for international transfers. Overdraft charges remain very high. Lending policies have plenty of room for improvement. Interest rates in US are now too high, especially for credit cards.
But an overnight change is far less preferable to incremental improvements. Such incremental improvements, however, can only come through competitive pressures. That is what cryptos provide first and foremost.
It allows a generation to not just talk, but build a better system, or at least a good alternative. In the process so improving the current one to the benefit of everyone, the many and the few.