Tuesday, 7 October 2008

The Banking Crisis, Peak Oil and Climate Change

Yesterday at the "Urban Harvest Festival" of Transition Nottingham, one of many local groups springing up over the UK to prepare communities for peak oil and climate change, I had a conversation in which I learned that some people are saying that all this financial crisis stuff is a distraction from the climate and peak oil.

This is understandable given the threat that climate change represents and the challenges to society that peak oil will bring. It is also understandable on a very human level after activists
have spent a lot of time taking in and developing an expertise on the climate change and peak oil agendas - only to find that the message that they want to be give out and work to, the message
that they think they understand very well, doesn't interest other people so much any more - because these other people are far more interested in a set of issues on which the climate and peak oil experts do not feel particularly competent.

That's life. People who understood the economic ramifications of peak oil deeply always expected that peak oil would bring with it a financial and banking crisis. However, the banking and financial crisis has arrived anyway and it is only very partially the consequence of supply tightness in the energy market. It is far more the result of a complex of other issues -
mainly the creation of far too much debt (leverage) which people and institutions used to buy assets, thus creating a speculative bubble in asset prices that has now burst.

The result is mass misery among ordinary people - because they are losing their houses, as well as horror and terror among bankers and high flying city types - many of them young men and women whose self esteem was based on having loads of money but who are in many cases now out of a job, with huge debts.....perhaps at home with the spouses they barely know and a family to bring up. There will be a lot of mental health problems in the City.


Whatever. This narrative still isn't the one that many climate and peak oil activists would like to be talking about and working with. But the situation is horrendous for many millions of people and they need a solution to their problems. What's more, in an unpleasant kind of way this situation of danger is also a situation of opportunity - it is an opportunity not to be missed.

Here's why...

People sometimes say that money is the root of all evil - but that's not what the biblical quote actually says. It is the *love of* money that is the root of all evil. It is when money becomes the goal of exchange that the problems arise - when money becomes the master and not the servant.

But we do need money for the service that it performs to expedite everyday transactions and exchanges in a community. Without money extensive exchange relationships are very difficult indeed and all but a very simple tribal economy would collapse.

Different kinds of money system

The problems arise because there are different kinds of money and different kinds of money relationships and systems. The money system that we have at the moment, the one that is in crisis, is a debt based money system. People often think that the government creates money and then people pay it into banks who lend it on. However, this isn't true. What actually happens when a bank gives you a loan is that they create the money that they are lending you. Most of the money in circulation was created in this way - it is backed by debt. 97% of the money in circulation is made up of bank deposits and only 3% of notes and coin. In the 1950s bank deposits made up only about 50% of the money supply. Now virtually all money is deposit money that was lent into

Now clearly there has to be a limit on how much that can be done - if people want to take cash out of a bank, to withdraw their deposits, then a bank must have liquid assets (assets which are either cash or easily converted into a known and definite quantity of cash) available. The banks need to be careful about their lending practices too so that when deposit money is created it is
backed by loans that they expect to see paid back.

The recklessness of the banks

Over the last few years however the banks, networked internationally by global telecommunication and computers, have become increasingly reckless about lending until the crash came. This was to a large degree because they assumed that the state would always bail them out. It was also because computer telecommunications technologies allowed banking to globalise and find all sorts of ways around regulations. They also slipped up on the assumption that innovations had reduced risks. Globalising banking did spread risks - but it didn't reduce risks - it meant that when the crunch came it happened globally, but above all, initially, in the USA, whose banks used the money
loaned to them from the rest of the world in a reckless and predatory way. Globalising banking also meant that relationship banking - the possibility that lenders and borrowers might actually know each other and meet face to face now and then - was no longer possible. Assessing risks became more difficult - the province of ratings agencies who could be bought to give favourable messages.

For a year we have been listening to journalists saying that the banks do not trust each other to lend to each and now the public have got the message. If the banks don't trust each other - why should their depositors trust the banks either? After lending out recklessly the banks are pulling back their lending as quickly as they can - thus plunging those individuals, families and companies who they earlier encouraged to get into debt into turmoil. But they are still left with those debts that have gone sour - the money that they should never have lent at all.

That means that the payment system on which we all depend is in crisis.

So we need a money system. But is this the way to run one? The money system which should managed to be a service to society has been run like a casino and the result has been chaos. What should be run for the public good, is run for private gain and now the result is chaos. And guess who is having to pick up the bill? The taxpayer is.

As they say - no taxation without representation. If the public is going to pay for the system then the public (i.e. some collective arrangement) should be controlling the system in the public interest.

Bankers regulating bankers

That sounds fine but what would that mean in practice? In practice it means that bankers who had changed (or lost) their jobs would be re-employed by the state to run the show in the difficult period, when things are going badly. They will be paid for by the taxpayers - until the banking system had been cleaned up and put back together again - and then the banks would be passed
back to the private sector. In the jargon the banks that are insolvent would be allowed to fail, the bits of them that could still make money would be merged with a smaller number of stronger banks who would be further strengthened by taxpayer funded money to "re-capitalise" them and then they would be floated off back into the private sector. Given the losses that the banks might make this would be very expensive for the taxpayer and may mean cuts in other government spending.

Will these banks then be regulated so that it doesn't happen again? Well, for a time they will be "well regulated". They always have been after a crash - when they barely need regulating anyway because the whole market is ultra cautious about lending in any case.

Then what happens? Well, look at the history:

Holy Roman Empire currency 1622; Tulips 1636; South Sea Scheme 1720; Northern Europe 1763; East India Company 1772; Emerging markets 1809-1838; Railways 1847-1873; Commodities 1890-1920; Great Crash of 1929; Bretton Woods collapse of 1973; Savings and Loan Collapse 1980; Third World Debt 1982; Black Monday 1987; Junk Bonds 1988; Japanese bubble 1990s; US Bond Crash 1994; Mexican
Debt Crisis 1995; Asian Crisis 1997; Russian Crisis 1998; Long Term Capital Management Crisis 1998; Dotcom crash 2000; Sept 11 2001 Disruption; Argentine Crisis 2002 and now the credit crunch beginning from August 2007....

Would it surprise you to know that after each of these crisis there was a tightening up of regulation so that it didn't happen again? In any case, who are the bankers doing the regulation. Nick Leeson, the man who broke the Barings Bank by his reckless trading has some insider knowledge on that.

According to Leeson alongside the "best brains" in the trading rooms, competing fiercely and taking risks, there are also " the grey men of the back office.... They do the paperwork behind the traders' deals and run the regulatory systems. It is their job to monitor the markets and ensure checks and balances are properly applied. These bankers are invariably not up to it. The front end of the business is far more profitable. The brightest and best are seduced by the lure of big bonuses, leaving the third-raters and burn-outs to take safe desk jobs in staid institutions such as the Bank of England."


It is these "third raters" who protect us from emotionally and ethically immature youngsters, straight out of university whose self esteem is based on how much money they spend. They have been investigated by a professor of organisational ethics at the Cass Business School, Roger Steare. When he undertook integrity tests on more than 700 financial services executives in several major firms and he came to the conclusion that "There is a systemic deficit in ethical values within the banking industry. This will not change by hanging a few people out to dry,".

The results of his tests indicated that as a group, they score lower than average in honesty, loyalty and self-discipline, he said. He compared traders to "mercenary hired guns", who regularly switch firms to maximise earnings. http://news.bbc.co.uk/1/hi/business/7207563.stm

Put Humpty Dumpty back on the Wall and Peak Oil will knock him off again

So putting humpty dumpty back together again, which is the current agenda, is not going to get us very far. Indeed, if we remember peak oil has not gone away, then it is difficult to see how humpty dumpty can be put together again for very long. Let's say, "optimistically" that the banking system were mended and put back into operation for say sometime between 2010 and 2012.
This will be just in time for when the International Energy Agency expects to be an even more serious oil supply crunch - as if we didn't have one already.

Now the point about energy descent and a debt based money system is that they don't mix. A debt based money system requires growth to survive or it gets into serious problems. This is because it is only practical to lend money into existence, which is what the banks do, if the loans can be repaid with interest but if the economy cannot expand then there is no additional output that the banking system can share in when it claims its interest payments.

Thus energy descent, which involves a fall in material production (though not necessarily a fall in the quality of life if we can develop other dimensions of our existence through the Transition Movement) is a no no for the banking system. It follows that an energy crunch will create another credit crunch.

Relocalised production arrangements need local currencies

Nevertheless we will need a money system that is able to function when the material production system is in retreat and that will have to be one that is not backed by debt. What's more we will need a money system that is in tune with the energy descent process which is in large part a process of re-localisation.

Ecnomic activity will more and more be about sustainable arrangements to provide the essential needs of particular communities in particular places. This re-localisation ideally means local or perhaps regional currencies which can run alongside and complement national currencies. Because such local currencies can only be spent in the locality they represent a commitment to, and encouragement of, local exchange relationships. This means that you are not using bucket loads of carbon energy transporting goods from the other end of the globe. It means that you can cut out the financial and energy expense of all those long logistical supply chains that the supermarket economy runs upon. It means that things are on a smaller scale - and power relationships are more equal.

Democracizing money creation at the local level

The other reason for local currencies is that they are created, managed and run by people that you can know personally, people that you meet in the street, people who live close to you, that you can really hold account-able. Developing local currencies also gives people experience in money matters and makes them less beholden to and in awe of the national and international money markets. It means that when the national and international money system goes into crisis there will be a movement of ordinary people out there who will not be overawed by the bankers who have been re-employed in different roles in the national state to put humpty dumpty back together again. There will be a movement that will be able to speak with experience and knowledge about how non debt based money can run because they have been running such systems at local level. People who have developed money with public and community well being as its core value.

Developing these currencies is currently a major task in hand. It is not at all a distraction from the problems of peak oil and climate change. It is totally consistent with dealing with these problems.

Brian Davey
6/7th October 2008

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