To lend or not to lend, is that even the question?

Before I get started, just so you know, I’m not an economist. Therefore, like most of you, I pretty much rely on one man, the BBC business/economics editor, Robert ‘The Drawl’ Peston, for all of my information about economics in this country.

This morning Robert told me (via Radio 4 – he wasn’t in my house, I don’t think), that we have somewhat of a conundrum in the banking world. The government want banks to lend to businesses and ‘the economy’ again, but simultaneously they also want them to hold higher ‘tier 1 capital ratio’s’ in line with BASEL III recommendations of around 7%.

You got that? Good, because here is the tricky part… The two banks that have been lending and meeting the governments targets, namely Barclays and Nationwide (which isn’t strictly a bank, but never mind) are now going to get penalised by the regulators for not holding the requisite 7% of capital against the loan books, and now have a ‘shortfall’ of capital… Oh no! Double oh no! Triple oh no!

Here’s the stickler, the best way for banks to hold the capital is by not lending. But we want them to lend, and we also want them to hold capital. Robert says, (and he makes clear this is in no way a criticism of politicians) that this is contradictory.

Thank God, or if you prefer, the purely random complexity of life to emerge out of just one of an infinite number of universes, for Robert Peston! Without him we would surely be ignorant. For now we know the two choices that face the economy, to lend, or not to lend, but is that really the question?

As I said, I’m not an economist. Thank God, of if you prefer… etc. I wouldn’t want to be stuck in a profession that gets itself caught in incompatible binary choices and still can’t see the utter pointlessness of its existence. Let’s put it like this, have you ever played Sudoku? I’m going to presume ‘yes’ or that you are at least aware of it. Now this may seem obvious to you seasoned players, but I used to think with Sudoku that if you arrived at a point where you had only two possible numbers in several boxes, and were unable to eliminate any others, you were faced with a choice. One or the other, and then see what happens. I was really pleased to (only recently) find out strategies that, although complicated, avoid you ever having to make a random choice in Sudoku. I still haven’t mastered them all yet, but I’m getting there.

Now imagine playing Sudoku where you were left with two choices, and there was no process you could follow, or any amount of computer analysis that could tell you for sure which number to go with. Now imagine that even if you chose either numbers, they could still inevitably fail, and no correct answer could ever be obtained. I think you would agree that it would constitute a rather poor, frustrating and pointless game.

Well, it is my opinion (remember, not an economist) – that the economy and the financial systems of this world are exactly that. A Sudoku puzzle that cannot be solved. We’ve been at it for years, but now it has come to the crunch. Two numbers in a box, and no reason to choose one over the other, as both make the solution invalid.

For the philosopher Thomas Kuhn, this would constitute a ‘paradigm’ that has been fully inhabited and rigidly defined by its architects, defended strongly by its adherents, and been more-or-less suitable for our purposes to a point. However, as Kuhn described with science and political structures, the dogmatic adherence to this paradigm will reach a revolutionary phase, where the underlying errors in its foundations and principles can no longer be ignored as they are causing catastrophic problems that can’t be reconciled.

An easy way to demonstrate this (courtesy of Open University author Jon Pike)  is with astronomy. For centuries we relied on a geo-centric model of the solar system (placing the Earth at the centre) which was fundamentally wrong. However, the principles were still sufficient to enable steady progress in navigation techniques and solve celestial puzzles. Eventually, over hundreds of years, as our needs became more complex and our techniques more advanced, little inaccuracies began to form and adjustments were made to the calculations. But the underlying false premise remained, and as real-world problems occurred in navigation and astronomical calculations, the opponents to the system, who had until that point been branded idiots or even heretic’s, were finally able to supplant the old system, firmly placing the sun at the centre of the solar system. And lo! Suddenly all the little errors were rectified by the truth of the new system, and humanity made a great leap forwards.

So it is that we have arrived at the same point with the current financial system. There is a false premise somewhere which unless removed and the whole framework restructured, will constantly prevent us from progressing. My guess (not an economist remember) is that this flawed premise lies in whatever function of the system also causes the huge wealth inequalities in this world by granting those with vast resources the ability to exponentially increase said resources via trading on loans/debts etc… I think that buying money to make money, with money that never existed, sounds like a pretty damn ridiculous concept that benefits a few people with access to such scams, and depresses everyone else.

But I’m not an economist, so what do I know? Maybe Robert Peston will wake me up one morning (not literally – look, I don’t live with Peston ok?), and say:

“The problem with the IMF’s plan to demand more capital ratio’s from the banks while stimulating the economy and avoiding further rounds of quantitative easing from the BOE is that they are the dogmatic defender’s of a paradigm based on a flawed premise and we need a revolutionary shift in how we structure and distribute resources if this world is ever going to progress to a more enlightened and equal age of shared prosperity.”

If he ever did say that, I would probably ask him to move in with me, but alas, I fear such words will never slowly drone out of his lips and through my radio to my anxious ears. You see the problem with a ‘paradigm shift’ is that those who have made a profession out of the current system will defend it, as it is in their interests to do so. This is why the mainstream media does not give us an accurate enough picture of the world, because it rejects the possibilities of alternatives that could render its expertise redundant. Not that it doesn’t have a place, it certainly does, but we need to think about and explore alternatives to all sorts of accepted truths that are actually just abstract concepts of our own device, able to be revised and replaced when they become unworkable and damaging to equality, which I would argue ‘economics’ certainly and irrefutably has.

But I’m not an economist, so what do I know?

References:

http://www.bbc.co.uk/news/business-22983363 (Peston on Barclays/Nationwide)

http://en.wikipedia.org/wiki/Thomas_Kuhn – (A good starting point on Kuhn and his philosophy)

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